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, 1997
Commission File Number 1-13388
- -------------------------------------------------------------------------------
GUIDANT CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1931722
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
111 MONUMENT CIRCLE, 29TH FLOOR
INDIANAPOLIS, INDIANA 46204
--------------------- -----
(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
------------------- ----------------------
Common Stock New York Stock Exchange
Pacific Exchange, Inc.
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Exchange, Inc.
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
----- ----
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. [ ]
The aggregate market value of voting stock of the registrant held by
non-affiliates as of March 2, 1998 (Common Stock) was approximately
$10.7 billion.
The number of shares of Common Stock outstanding as of March 2, 1998:
CLASS NUMBER OF SHARES OUTSTANDING
Common 150,835,789
Portions of the following documents have been incorporated by reference into
this report:
DOCUMENT PARTS INTO WHICH INCORPORATED
Registrant's Annual Report to Shareholders Parts I, II and IV
for fiscal year ended December 31, 1997
Registrant's Proxy Statement for the Annual Part III
Meeting of Shareholders to be held May 18, 1998
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 cardiac
and vascular surgery ("CVS"). In CRM, the Company is a worldwide
leader in automatic implantable cardioverter defibrillator ("AICD")
systems used in the detection and treatment of abnormally fast heart
rhythms. 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. During the fourth quarter of 1997, the Company's Minimally
Invasive Systems Group was renamed the Cardiac & Vascular Surgery
Group to reflect management's strategic redirection of this business.
The Company's net sales for the year ended December 31, 1997 were
$1,328.2 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, 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 continues to pursue a strategy that includes the
potential acquisition of 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.
- --------------
*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.
2
Cardiac Rhythm Management
In the CRM market, implantable device systems are used to detect
and treat abnormally fast, 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 abnormally 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, 1997, 1996 and 1995, were 50%, 55% and 49%,
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.
The Company's tachy products offer multiple therapeutic options
(tiered- therapy). 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.
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.
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 stent systems, coronary dilatation catheters, guide wires,
atherectomy catheters, 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, 1997, 1996
and 1995 were 45%, 40% and 48%, 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
3
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
generally requiring another intervention within six months of the
initial procedure. A number of other technologies have evolved to
reduce the occurrence of this condition, 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 October 1997, the Company received approval to market the ACS RX
MULTI-LINK Coronary Stent System 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.
In May 1997, the Company acquired the assets of Neocardia, LLC.
("Neocardia"), a privately held development-stage company for an
initial price of $57.4 million. Under the acquisition agreement, the
Company could pay a total amount of as much as $77.0 million in cash,
plus subsequent additional bonus and royalty payments contingent upon
achieving certain product development and sales goals. Neocardia,
which currently does not have any products available for commercial
sale, has pioneered the use of radiation therapy to reduce the
occurrence of restenosis. The Company has recently commenced
clinical studies in this area. However, no assurance can be given
that the Company will obtain the regulatory approvals necessary for
commercial marketing.
Cardiac and Vascular Surgery
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 procedure time and better patient outcomes. In May
1996, the Company announced that the strategic focus for its
minimally invasive surgery business would be on cardiovascular
applications and, in December 1997, the business group was renamed
the Cardiac & Vascular Surgery Group. The primary customers for the
Company's CVS products are cardiac and vascular surgeons. Sales of
the Company's CVS products, as a percentage of the Company's total
consolidated net sales for the years ended December 31, 1997, 1996
and 1995, were 5%, 5% and 3%, respectively. These
4
percentages include other minimally invasive surgery products sold by
the Company with a focus on laparoscopic market opportunities in the field
of general surgery. Certain of these devices were developed for and
manufactured under original equipment manufacturer (OEM) distribution
arrangements.
In December 1997, the Company completed its acquisition of
EndoVascular Technologies, Inc. ("EVT"). EVT designs, develops and
manufactures minimally invasive systems to repair diseased or damaged
vascular structures. EVT is currently developing a product, the
ANCURE system, to provide a catheter-based delivery and implantation
of a specialized vascular prosthesis to repair abdominal aortic
aneurysms which would represent a less invasive alternative to the
open surgical procedure performed today. The ANCURE system is
approved for marketing in Europe and Australia and is currently in
Phase II clinical trials in the United States. However, no assurance
can be given that the Company will obtain the regulatory approvals
necessary for commercial marketing in the United States.
The Company believes that CVS product systems may significantly
decrease the patient's postoperative pain, hospital stay and
recovery period by reducing the resulting trauma caused by more
invasive techniques.
5
Products
Tachy Products
The Company offers a broad array of Tachy products, including
complex devices and systems offering multiple therapeutic options as
set forth in the following chart:
Category Description Product Name Date of Commercial Release
- -------- ----------- ------------ --------------------------
First
Inter-
U.S. national
Release Release
-------- ----------
Tiered- AICDs that provide VENTAK AV II DR (1) Sept. 1997
Therapy low and high energy VENTAK MINI III Jan. 1998 Oct. 1997
shock therapy, Brady VENTAK AV II DDD Dec. 1997 Sept. 1997
pacing and VENTAK AV DDD July 1997 Nov. 1996
antitachycardia VENTAK MINI II+ July 1996 June 1996
pacing. VENTAK MINI II July 1996 June 1996
VENTAK MINI+HC May 1996 Dec. 1995
VENTAK MINI HC May 1996 Dec. 1995
VENTAK MINI + Jan. 1996 Dec. 1995
VENTAK MINI Jan. 1996 Dec. 1995
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.
- --------------
(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.
6
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:
Category Description Product Name Date of Commercial Release
- -------- ----------- ------------ --------------------------
First
Inter-
U.S. national
Release Release
--------- -----------
Single Pacemakers that pace VIGOR SSI March 1995 May 1993
Chamber (SSI) one chamber of the VISTA VVI Apr. 1988 Dec. 1987
heart, typically the
ventricle, at a
programmed rate.
Single Pacemakers that pace VIGOR SR June 1995 May 1993
Chamber one chamber of the
Adaptive-Rate heart, and incorporate
(SSIR) a sensor that modifies
the pacing rate in
response to physical
activity.
Dual Chamber Pacemakers that pace VIGOR DDD Oct. 1994 May 1993
(DDD) both chambers of the VISTA DDD June 1990 Oct. 1989
heart, thereby
improving heart
synchronization and
cardiac output.
Dual Chamber Pacemakers that VIGOR DR June 1995 May 1993
Adaptive-Rate pace both chambers
(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 a SELUTE Atrial (1) June 1996
Leads vein into the heart, SWEET TIP RX (1) June 1996
which allow energy
to be transmitted to
and from the
implanted pacemaker.
- ---------------------
(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.
7
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 as set forth in the following
chart:
Date of U.S.
Commercial
Category Description Product Name Release
- -------- ----------- ------------ -----------
Stents Stents are ACS MULTI-LINK RX DUET (1)
implantable metal ACS RX MULTI-LINK Oct. 1997
devices that are ACS RX MULTI-LINK HP Feb. 1998
permanently
deployed to provide
a "mechanical" way
to keep an artery
open.
Rapid Exchange RX coronary ACS RX ROCKET Nov. 1997
("RX") dilatation catheters ACS RX COMET VP Feb. 1997
Coronary allow for easy exchange ACS RX COMET Nov. 1996
Dilatation of the catheter RX ELIPSE Oct. 1993
Catheter without removing the
original guide wire.
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.
Over-the-Wire OTW coronary dilatation ACS Tx2000 VP April 1997
("OTW") catheters are ACS Tx2000 Nov. 1996
Coronary delivered over a
Dilatation separate guide wire to
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.
8
Vascular Intervention Products (continued)
Date of U.S.
Commercial
Category Description Product Name Release
- -------- ----------- ------------- ----------
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.
Guide wires Individual ACS HI-TORQUE ALL STAR Sept. 1997
guide wires are ACS HI-TORQUE BALANCE
inserted through MIDDLEWEIGHT Aug. 1997
coronary and ACS HI-TORQUE IRON MAN Feb. 1997
peripheral vessels HI-TORQUE BALANCE Oct. 1994
before the dilatation ACS HI-TORQUE EXTRA S'PORT Sept. 1994
catheter, facilitating HI-TORQUE EXTRA SUPPORT Feb. 1992
the placement of the HI-TORQUE TRAVERSE Nov. 1991
dilatation catheter DOC Feb. 1988
or atherectomy HI-TORQUE FLOPPY II June 1986
catheter.
Accessories Accessories are INDEFLATOR 20/30 Sept. 1996
products that ACS ANCHOR Apr. 1996
facilitate the delivery TOURGUIDE Dec. 1995
or operation of a INDEFLATOR 20/20 March 1990
device.
Imaging Imaging systems that SONICATH (2) Dec. 1996
allow for an MICRORAIL (2) Dec. 1996
ultrasound scan MICROVIEW (2) Dec. 1996
of the coronary ULTRACROSS (2) Dec. 1996
arteries.
- ------------
(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.
9
CVS Products
The Company currently markets the VASOVIEW balloon dissection
system, a broad product offering for minimally invasive access to,
and removal of, the saphenous vein. The saphenous vein is used in
coronary artery bypass graft surgery ("CABG"). The Company also
markets a cardiac stabilizer which enables immobilization of the
anastomotic site on a beating heart during CABG procedures. In
addition, as a result of the Company's acquisition of EVT, the
Company markets the ANCURE system in Europe and Australia. The
ANCURE system is a catheter-based product that delivers and implants
a specialized vascular prosthesis to repair abdominal aortic
aneurysms. The Company also markets a number of other minimally
invasive surgery products for access, retraction and fixation,
focusing on laparoscopic market opportunities in general surgery.
These products include the ORIGIN TACKER fixation device.
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 CVS 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 1997.
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 products
under a predictable procedural cost program.
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
1997, 68% 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 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.
10
International
In 1997, 32% 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 believes that its
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; and Dorado, Puerto Rico.
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, the Quality System Regulation
requirements (regulations adopted by the United States Food and Drug
Administration ("FDA") in October, 1996 which replace the
requirements previously known as Good Manufacturing Practices) and
ISO 9001 and EN46001 international quality system standards
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.
11
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.
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.
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 the following registered trademarks that are
referred to herein: ACS, ACS EDGE, ACS RX COMET, ACS RX LIFESTREAM,
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, ORIGIN, PRx, RX ELIPSE, SELUTE,
SLALOM PLUS, VENTAK, VIGOR and VISTA. The following are trademarks
of the Company: ACS ANCHOR, ACS HI-TORQUE ALL STAR, ACS HI-TORQUE
BALANCE MIDDLEWEIGHT, ACS HI-TORQUE EXTRA S'PORT, ACS HI-TORQUE IRON
MAN, ACS MULTI-LINK RX DUET, ACS OTW LIFESTREAM, ACS OTW MULTI-LINK,
ACS RX MULTI-LINK, ACS RX MULTI-LINK HP, ACS RX FLOWTRACK, ACS RX
PERFUSION, ACS RX ROCKET, ACS Tx 2000, ACS Tx 2000 VP, ANCURE,
ATHEROCATH-BANTAM, INDEFLATOR PLUS 20, INDEFLATOR 20/30, ORIGIN
TACKER, SCA-EX, SWEET TIP RX, TOURGUIDE, VASOVIEW, VENTAK AV and
VENTAK MINI.
12
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
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.), and Sulzer Intermedics,
Inc. (Sulzer Brothers Ltd.). In the Tachy market, the Company
competes primarily with Medtronic, Inc. and Ventritex, a division of
Pacesetter, Inc. (St. Jude Medical, 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.), Arterial Vascular
Engineering, Inc. and Medtronic, Inc. With respect to CVS devices,
the principal competitors of the Company are the United States
Surgical Corporation, Ethicon Endo-Surgery, Inc. (Johnson & Johnson),
Medtronic, Inc. and Boston Scientific Corporation. 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 from
the FDA or other authorities of alleged deficiencies in the Company's
compliance with applicable regulatory requirements. These include
FDA warning letters and adverse inspection reports. To date, the
Company has been able to address or correct such deficiencies to the
satisfaction of the FDA or other authorities 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 or advisory notices 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.
The Company's medical devices introduced in the United States
market 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. Alternatively,
the Company may seek United States market clearance through a Product
Development Protocol approved by the FDA. Establishing and
completing a Product Development Protocol, or obtaining a PMA or
supplemental PMA, can take up to several years and can involve
preclinical studies and clinical testing. In order to perform
clinical testing in the United States on an unapproved product, the
Company is also required to obtain an investigational device
exemption from the FDA. 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.
13
While the FDA Modernization Act of 1997, when fully implemented,
is expected to inject more predictability into the product review
process, streamline post-market surveillance, and promote the global
harmonization of regulatory procedures, the process of obtaining such
clearances can be onerous and costly. 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 promoting a medical device before
marketing clearance has been received or promoting an approved device
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 to certain countries 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 exports and make the
records available to the FDA for inspection, if required.
Health Care Cost Containment and Third-Party Reimbursement
During the past several years, the major third-party payers 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 in an attempt 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 payers may deny reimbursement if they determine that a
device was not used in accordance with cost-effective treatment
14
methods as determined by the payer, 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. For example, the
Japanese Ministry of Health and Welfare recently announced its
intentions to cut reimbursement levels for medical devices effective
in April 1998. 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 payers 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 or advisory notice 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 Brussels, Belgium.
The Company's research and development staff is focused on product
design and development, quality, clinical research and
15
regulatory compliance. To pursue primary research efforts, the Company
has developed alliances with several leading research institutions and
universities. 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, ISO 9002, EN46001 and EN46002 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
and EN46001 require 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. These certifications require that these facilities
undergo periodic reexamination.
16
Executive Officers of the Company
Name Position Age
- ---- -------- ---
James M. Cornelius Chairman of the Board of Directors 54
and Director
Ronald W. Dollens President, Chief Executive Officer 51
and Director
J.B. King Vice President, General Counsel, 68
Secretary and Director
James R. Baumgardt President, Western Hemisphere Sales 50
Keith E. Brauer Vice President, Finance and 49
Chief Financial Officer
A. Jay Graf President, Cardiac Rhythm Management 50
Group
Ginger L. Howard President, Vascular Intervention Group 42
Cynthia L. Lucchese Treasurer 37
Roger Marchetti Corporate Controller and 40
Chief Accounting Officer
Richard M. van Oostrom President of Operations, Europe, 53
Middle East and Africa
F. Thomas (Jay) Watkins, III President, Cardiac and Vascular 45
Surgery Group
Joseph A. Yahner Vice President, Human Resources 50
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, Chubb Corporation, 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.
17
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 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.
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 is also 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 LLP 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.
18
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 Isotis B.V. and 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 Cardiac and Vascular Surgery 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.
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, 1997, the Company had approximately 5100 full-
time employees, including approximately 560 employees outside the
United States. 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. The Exchange Offer was completed in
September 1995.
19
Financial Information Relating to Classes of Products
Financial information relating to classes of products, set forth in
the Company's 1997 Annual Report to Shareholders under "Management's
Discussion and Analysis of Results of Operations and Financial Condition,"
at page 19, 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 1997 Annual Report to
Shareholders at page 36 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, 1997, the Company owned or leased the
following principal facilities:
Approximate Leased or
Location Type of Facility Square Feet Owned
- -------- ---------------- ----------- -------
Basingstoke, UK Administration 24,000 Leased
Brussels, Belgium Administration and CRM research 17,000 Leased
Dorado, PR CRM manufacturing and 54,000 Owned
administration
Indianapolis, IN Administration 18,000 Leased
Menlo Park, CA CVS manufacturing, research and 122,000 Leased
development, administration,
sales and marketing and warehouse
Santa Clara, CA VI manufacturing, research and 370,000 Owned
development, administration,
and sales and marketing
St. Paul, MN CRM manufacturing, research and 360,000 Owned
development, administration and
sales and marketing
St. Paul, MN CRM lead development and 100,000 Leased
administration
St. Paul, MN CRM packaging, shipping and 25,000 Leased
warehouse
20
Temecula, CA VI manufacturing; CRM 500,000 Owned
research and development
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
The Company is currently a party to various legal actions which
have occurred in the normal course of its business. The litigation
includes disputes over intellectual property, product liability,
employment litigation and general commercial matters.
The Company currently has a number of disputes with Boston Scientific
Corporation ("BSC") and its subsidiary, SciMed Life Systems, Inc. ("SciMed").
These include the following:
A. In a lawsuit originally filed on May 31, 1994, in the
Northern District of California, SciMed alleges that the
ACS RX ELIPSE coronary dilatation catheter infringes a
patent owned by SciMed. In the lawsuit, SciMed is seeking
injunctive relief and monetary damages.
B. On October 10, 1995, ACS filed suit against SciMed
alleging that the SciMed Express Plus and Express Plus II
coronary dilatation catheters infringe certain patents of
ACS. In addition, on March 12, 1996, ACS filed a separate
lawsuit alleging that these products infringe another
patent of ACS. These lawsuits were filed in the Northern
District of California and ACS is seeking injunctive relief
and monetary damages.
C. On December 15, 1995, BSC and SciMed 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 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. On October 27,
1997, the Court granted ACS' motion to dismiss the lawsuit.
BSC has appealed.
D. On March 12, 1996, ACS filed suit against SciMed in
the Northern District of California alleging that SciMed's
Trio/Bandit line of coronary dilatation catheters infringes
a patent of ACS. In the lawsuit, ACS is seeking injunctive
relief and monetary damages.
E. On June 10, 1997, SciMed filed suit against ACS in the
Northern District Court of California. The Complaint
alleges that the ACS RX COMET coronary dilatation catheter
infringes a patent owned by SciMed. The lawsuit seeks
monetary and injunctive relief. Previously, on
21
May 1, 1997, SciMed formally requested an arbitration as
to whether the ACS RX COMET coronary dilatation catheter is
covered under a Settlement Agreement entered into between
ACS and SciMed (the "Settlement Agreement"). ACS' motion
to dismiss the litigation without prejudice pending outcome
of the arbitration was granted. Arbitration is currently
scheduled to begin on May 11, 1998.
F. On July 31, 1997, SciMed notified ACS by letter that
it believes that ACS' rapid exchange stent delivery systems
infringe one of its German patents. Similarly, on October
21, 1997, SciMed notified ACS by letter that it believes
that the ACS RX ROCKET coronary dilatation catheter
infringes the same patent. ACS informed SciMed that ACS
believes that both of these products are covered by the
Settlement Agreement. As a result, SciMed instituted an
arbitration under the Settlement Agreement. Both of these
disputes have been consolidated for purposes of an
arbitration hearing, currently scheduled to begin on May
11, 1998.
G. On September 17, 1997, ACS filed suit against SciMed
and BSC in the Northern District of California alleging
that the SciMed Rebel rapid exchange coronary dilatation
catheter infringes certain patents of ACS. In the lawsuit,
ACS is seeking injunctive relief and monetary damages.
The Company currently has a number of disputes with Medtronic, Inc.
("Medtronic"), including the following:
A. On October 10, 1995, ACS filed suit against Medtronic
alleging that the Medtronic Falcon coronary dilatation
catheter infringes certain patents of ACS. On March 12,
1996, ACS filed another suit against Medtronic alleging
that the Medtronic Falcon coronary dilatation catheter
infringes another patent owned by ACS. Both of these
lawsuits were filed in the Northern District of California.
In the lawsuits, ACS is seeking injunctive relief and
monetary damages.
B. On November 6, 1997, Medtronic filed suit against ACS
in the United States District Court for Minnesota alleging
that the ACS MULTI-LINK coronary stent infringes a patent
owned by Medtronic. In the lawsuit, Medtronic is seeking
injunctive relief and monetary damages.
The Company currently has a number of disputes with Johnson & Johnson
("J&J") and its subsidiary, Cordis Corporation ("Cordis"), including the
following:
A. On August 26, 1997, J&J and Expandable Grafts
Partnership ("EGP") filed suit against the Company's
subsidiary Guidant Canada Corporation in the Federal Court
of Canada alleging that the sale of the ACS MULTI-LINK
coronary stent in Canada infringes a patent licensed to J&J
by EGP. In the lawsuit, J&J and EGP seek injunctive relief
and monetary damages.
B. On October 3, 1997, Cordis filed suit against the
Company and ACS, in the District Court for the District of
Delaware alleging that the sale of the ACS MULTI-LINK
coronary stent by ACS infringes certain patents licensed to
Cordis. In addition, on October 8, 1997, Cordis filed a
motion for a preliminary injunction in this lawsuit seeking
to prevent ACS from selling the ACS MULTI-LINK coronary
stent other than in certain limited circumstances and
subject to certain conditions. On October 22, 1997, the
complaint was amended to include BSC and Arterial Vascular
Engineering, Inc. ("AVE") as co-defendants. The complaint
was re-filed on February 6, 1998 to include EGP as a
plaintiff. A hearing on the motion for a preliminary
injunction was held in February 1998. No decision has been
made by the Court on this motion. In the lawsuit, Cordis
is seeking injunctive relief and monetary damages.
22
C. On December 2, 1997, Cordis filed suit against Guidant
and ACS in the United States District Court for the
District of Delaware alleging that the ACS RX ROCKET
coronary dilatation catheter infringes patents owned by
Cordis. Cordis has also filed a motion for a preliminary
injunction, which is currently scheduled for a hearing
beginning on April 9, 1998. In the lawsuit, Cordis is
seeking injunctive relief, monetary damages and attorney
fees. A separate lawsuit was also filed against the
Company in December 1997 in The Netherlands alleging
infringement of the European equivalents of these patents.
The Company currently has a number of disputes with General Surgical
Innovations, Inc. ("GSI"), including the following:
A. On May 28, 1996, Origin filed suit against GSI in the
Northern District of California alleging that GSI's
Spacemaker balloon products infringe a patent of Origin.
In the lawsuit, Origin is seeking injunctive relief and
monetary damages.
B. On June 4, 1996, GSI filed suit against Origin in the
Northern District of California alleging that Origin's
Preperitoneal Distention Balloon Systems infringe a patent
owned by GSI. GSI is seeking injunctive relief and
monetary damages.
C. On September 24, 1997, GSI filed suit against Origin
in the Northern District of California alleging that
Origin's VASOVIEW Balloon Dissection System infringes a
patent owned by GSI. GSI is seeking injunctive relief and
unspecified monetary damages.
The Company currently has a number of disputes with AVE, including the
following:
A. On December 24, 1997, ACS filed suit against AVE in
the United States District Court for the Northern District
of California alleging infringement of three patents of
ACS. In the lawsuit, ACS is seeking injunctive relief and
monetary damages.
B. On February 18, 1998, AVE filed suit against ACS in
the District Court of Delaware alleging that the sale of
the ACS MULTI-LINK Coronary Stent infringes certain patents
licensed to AVE. The lawsuit also alleges misappropriation
of trade secrets and breach of a confidentiality agreement
by ACS. In the lawsuit, AVE is seeking injunctive relief,
monetary damages, and to invalidate certain ACS stent
patents.
The Company currently has a number of disputes with St. Jude Medical,
Inc. ("St. Jude"), including the following:
A. On May 3, 1996, Pacesetter, Inc. ("Pacesetter"), a
subsidiary of St. Jude, filed a lawsuit against CPI which
is currently pending in the United States District Court
for Minnesota. The complaint, as subsequently amended,
alleges infringement of certain Pacesetter patents by
certain CPI pacemaker models and programmers for pacemakers
and defibrillators. The lawsuit seeks injunctive relief,
unspecified monetary damages, and an award of attorneys'
fees.
B. On November 26, 1996, the Company and its
subsidiaries, CPI and Guidant Sales Corporation ("GSC"),
and Lilly filed suit (the "State Court Case") against St.
Jude, Pacesetter, Ventritex, Inc. ("Ventritex") and certain
entities affiliated with Telectronics Holdings Ltd.
("Telectronics Parties") in the Marion Superior Court,
State of Indiana, alleging (among other things) that a
license agreement entered into in 1994 among CPI, Lilly and
the Telectronics Parties ("Telectronics Agreement") did not
transfer to Pacesetter when Pacesetter purchased certain
assets of the Telectronics Parties in
23
1996. The lawsuit seeks declaratory and injunctive relief
to prevent and invalidate the purported transfer of the
Telectronics Agreement to Pacesetter.
C. On November 26, 1996, CPI, GSC and Lilly filed suit
against St. Jude, Pacesetter and Ventritex in the United
States District Court for the Southern District of Indiana
alleging that upon consummation of the merger of Ventritex
and Pacesetter, the continued manufacture, use or sale of
certain Ventritex products would infringe certain patents
of CPI and Lilly. The lawsuit seeks declaratory and
injunctive relief and monetary damages.
D. On December 24, 1996, the Telectronics Parties and
Pacesetter filed suit against the Company, CPI, GSC and
Lilly in the United States District Court for the District
of Minnesota alleging that the claims made in the State
Court Case are subject to an arbitration provision in the
Telectronics Agreement. In the lawsuit, the Telectronics
Parties and Pacesetter are seeking declaratory and
injunctive relief and an award of costs. In February 1997,
the District Court ruled against the Telectronics Parties
and Pacesetter and held that the dispute was not subject to
the arbitration provision. The Telectronics Parties and
Pacesetter have appealed the Court's ruling to the United
States Court of Appeals for the Eighth Circuit.
On May 15, 1995, Intermedics, Inc., a division of Sulzermedica
USA, Inc. ("Intermedics"), filed a lawsuit against CPI which is
currently pending in the United States District Court for Minnesota.
The complaint alleges infringement of certain Intermedics patents by
CPI's VENTAK MINI and PRx defibrillator models and certain VIGOR and
EXCEL pacemaker models. (The EXCEL models are not currently
manufactured or sold by CPI). Intermedics is seeking injunctive
relief and monetary damages. CPI has filed counterclaims alleging
that certain of its patents are infringed by the Intermedics Res-Q
defibrillator products and certain Intermedics pacemaker products.
On May 3, 1996, Angeion Corporation filed a lawsuit against CPI
which is currently pending in the United States District Court for
Minnesota. The complaint, as subsequently amended, alleges
infringement of certain Angeion defibrillator patents by CPI's VENTAK
and PRx defibrillator models. The lawsuit seeks injunctive relief,
unspecified monetary damages, and an award of attorneys' fees.
On June 6, 1997, C.R. Bard, Inc. filed suit against the Company
and ACS in the U. S. District Court, District of Delaware. The
Complaint alleges that certain unspecified ACS dilatation catheters
infringe two patents owned by Bard. Bard is seeking monetary and
injunctive relief.
In March 1995, Sam F. Liprie filed suit against Omnitron
International, Inc. ("Omnitron") and Neocardia LLC. in the 215th
District Court of Harris County, Texas. In the Complaint, Mr.
Liprie, a former employee of Omnitron, alleges that he has exclusive
rights to certain unspecified developments made at Omnitron relating
to the treatment of restenosis with radiation. In March 1997, U.S.
Surgical Corporation was joined in the lawsuit and has also claimed
it has exclusive rights to this technology through Mr. Liprie. The
Company acquired certain assets from Omnitron/Neocardia on May 7,
1997. The exclusive right to use certain of these assets is the
subject of this litigation. On July 3, 1997, the Company and its
subsidiary, ACS Delaware Corporation, were joined in the litigation.
The trial is currently scheduled to begin in August 1998. The
lawsuit seeks monetary damages and injunctive relief.
In addition, the Company is currently involved in a number of
other patent related actions, including patent interferences,
European patent oppositions and patent reexamination proceedings.
24
While it is not possible to predict or determine the outcome of
the legal actions brought against it, or to provide an estimate of
the losses, if any, that may arise, the Company believes 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. However, an adverse outcome in certain of these cases
could have a material adverse effect on the Company.
Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, 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 Exchange, Inc. ("PCX").
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
1997 Annual Report to Shareholders under "Notes to Consolidated
Financial Statements--Selected Quarterly Information (Unaudited)," at
page 38 is incorporated herein by reference.
During each quarter of 1997 and 1996, the Company paid a
quarterly cash dividend of $0.0125 per share of the Company's common
stock, as adjusted for the Company's two-for-one stock split which
occurred in September 1997. 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 2, 1998, the approximate number of record holders of
the Company's common stock was 4,071.
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 1997 Annual Report to
Shareholders under "Selected Consolidated Financial Data," at page
18, 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 1997 Annual
Report to Shareholders under "Operating Results" (pages 19-23),
"Liquidity and Financial Condition" (pages 23-24), and "Regulatory
and Other Matters" (pages 24-25), is incorporated herein by
reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information related to quantitative and qualitative disclosures
about market risk, set forth in the Company's 1997 Annual Report to
Shareholders under "Management's Discussion and Analysis of Results
of Operations and Financial
25
Condition -- Liquidity and Financial Condition" (pages 23-24), 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
1997 Annual Report to Shareholders at pages 26-29 (Consolidated
Statements of Income, Consolidated Balance Sheets, Consolidated
Statements of Shareholders' Equity and Consolidated Statements of
Cash Flows), and pages 30-38 (Notes to Consolidated Financial
Statements) and the Report of Independent Auditors set forth in the
Company's 1997 Annual Report to Shareholders at page 39, are
incorporated herein by reference.
Information on quarterly results of operations, set forth in the
Company's 1997 Annual Report to Shareholders under "Notes to
Consolidated Financial Statements--Selected Quarterly Information
(Unaudited)," at page 38, is incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 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 18, 1998, 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 17-
19 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 18, 1998, 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 18, 1998, 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
Information relating to a transaction with an executive officer
of the Company, set forth in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on May 18, 1998, under
"Election of Directors -- Transaction with Executive Officer," is
incorporated herein by reference.
26
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 1997 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, 1997, 1996 and 1995 (page 26)
Consolidated Balance Sheets--December 31, 1997 and
1996 (page 27)
Consolidated Statements of Shareholders' Equity--
Years Ended December 31, 1997, 1996 and 1995 (page
28)
Consolidated Statements of Cash Flows--Years Ended
December 31, 1997, 1996 and 1995 (page 29)
Notes to Consolidated Financial Statements (pages
30-38)
(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.
27
(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)
28
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. (3) #
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. (4)
10.36 Guidant Corporation Change in Control Plan for Select
Employees. (5)
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. (6)
10.38 Agreement and Plan of Merger, dated as of October 5, 1997, as
amended November 14, 1997, among the Company, Ski Acquisition
Corp. and EndoVascular Technologies, Inc. (7)
11.1 Computation of Earnings Per Share. *
13.1 Annual Report to Shareholders for the year ended December 31,
1997 (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. *
27.2 Restated Financial Data Schedule. *
27.3 Restated Financial Data Schedule. *
27.4 Restated Financial Data Schedule. *
27.5 Restated Financial Data Schedule. *
27.6 Restated Financial Data Schedule. *
27.7 Restated 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 December 31, 1996.
(4) 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.
(5) 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.
(6) 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.
(7) Incorporated herein by reference to the identical exhibit
filed as part of the Company's Registration Statement on Form
S-4, File No. 333-06363.
* Filed herewith.
# Management compensation plan.
29
(b) Reports on Form 8-K
On December 30, 1997, the Company filed a Report on Form 8-K
reporting the completion of the Company's acquisition of
EndoVascular Technologies, Inc. The Report included the
Company's quarterly Consolidated Statements of Income restated
for the acquisition of EndoVascular Technologies, Inc. for the
three months ended September 30, 1997 and 1996, June 30, 1997
and 1996, March 31, 1997 and 1996, for the nine months ended
September 30, 1997 and 1996, for the three months ended December
31, 1996, and for the year ended December 31, 1996 and
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 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 16, 1998
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 16, 1998
- ------------------------ and Director (principal
James M. Cornelius executive officer)
s/Ronald W. Dollens President, Chief Executive March 16, 1998
- ----------------------- Officer and Director
Ronald W. Dollens (principal executive officer)
s/Keith E. Brauer Vice President, Finance and March 16, 1998
- ----------------------- Chief Financial Officer
Keith E. Brauer (principal financial officer)
s/Roger Marchetti Corporate Controller and March 16, 1998
- ----------------------- Chief Accounting Officer
Roger Marchetti (principal accounting officer)
s/Kim B. Clark, Ph.D. Director March 16, 1998
- -----------------------
Kim B. Clark, Ph.D.
s/Maurice A. Cox, Jr. Director March 16, 1998
- -----------------------
Maurice A. Cox, Jr.
30
s/Enrique C. Falla Director March 16, 1998
- -----------------------
Enrique C. Falla
s/J.B. King Director March 16, 1998
- -----------------------
J.B. King
s/Susan B. King Director March 16, 1998
- -----------------------
Susan B. King
s/J. Kevin Moore Director March 16, 1998
- -----------------------
J. Kevin Moore
s/Mark Novitch, M.D. Director March 16, 1998
- -----------------------
Mark Novitch, M.D.
s/Eugene L. Step Director March 16, 1998
- -----------------------
Eugene L. Step
s/Ruedi E. Wager Director March 16, 1998
- -----------------------
Ruedi E. Wager, Ph.D.
31
Guidant Corporation and Subsidiaries
Schedule II. Valuation and Qualifying Accounts
(in millions)
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
- ----------- ---------- ----------- ------------- ------
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 2.3 (0.6) 7.4
----- ----- ------- -----
Totals $12.0 $31.9 $(13.5) $30.4
===== ===== ======= =====
Year Ended December 31, 1997
Allowance for inventory
obsolescence $23.0 $14.7 $(11.9) $25.8
Allowance for doubtful
accounts 7.4 5.4 (3.6) 9.2
----- ----- ------- -----
Totals $30.4 $20.1 $(15.5) $35.0
===== ===== ======= =====
(1) Write-offs of obsolete units or uncollectible accounts.
F-1
Exhibit List
13.1 Annual Report to Shareholders for the Year Ended
December 31, 1997 (portions incorporated by reference)
21.1 List of Subsidiaries
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
27.3 Restated Financial Data Schedule
27.4 Restated Financial Data Schedule
27.5 Restated Financial Data Schedule
27.6 Restated Financial Data Schedule
27.7 Restated Financial Data Schedule
99.1 Factors Possibly Affecting Future Operating Results
Exhibit 13.1
Annual Report to Shareholders
for the Year Ended December 31, 1997
(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, 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Operations:
Net sales:
Cardiac rhythm management $669.6 $574.6 $452.4 $378.6 $336.5
Vascular intervention 591.4 425.6 447.9 464.5 451.6
Cardiac & vascular surgery 67.2 49.5 31.0 19.3 6.6
----- ----- ----- ----- ----
Total net sales 1,328.2 1,049.7 931.3 862.4 794.7
Cost of products sold 320.8 315.9(1) 283.4 270.9 236.2
------- ------- ----- ----- -----
Gross profit 1,007.4 733.8(1) 647.9 591.5 558.5
Research and development 208.3 164.6 142.8 138.3 132.6
Purchased research and development(2) 57.4 -- -- -- --
Sales, marketing, and administrative 439.7 328.4 292.8 269.8 255.8
Other - special(3) 22.6 -- -- -- 81.5
---- ----- ---- ----- ----
Income from operations 279.4 240.8(1) 212.3 183.4 88.6
Other expenses, net 30.6(4) 104.8(5) 50.8 35.4 5.7
Net income $145.3(6) $ 52.3(7) $ 92.8 $ 84.2 $ 46.5
Earnings per share $ 0.99(6) $ 0.36(7) $ 0.64
Earnings per share - assuming dilution $ 0.97(6) $ 0.35(7) $ 0.63
Pro forma net income(8) $ 68.3
Pro forma earnings per share(8) $ 0.47
Cash dividends declared per share $ 0.05 $ 0.05 $ 0.025 --
Weighted average shares outstanding 147.15 146.73 145.75 145.50(8)
- -----------------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995 1994 1993
Financial Position:
Working capital $ 83.8(9) $127.6 $119.7 $134.1 $153.8
Current ratio 1.2:1(9) 1.4:1 1.4:1 1.4:1 1.7:1
Capital expenditures, net 76.8 63.6 64.9 51.8 43.7
Total assets 1,225.0 1,024.9 1,069.1 1,122.5 1,300.4
Borrowings 292.2 363.5 455.0 473.0 --
Borrowings as a percentage
of total capitalization 33.4% 43.8% 53.6% 62.6% --
Shareholders' equity 581.8 466.9 394.4 282.6(10) 1,059.6
Book value per share $ 3.95 $ 3.18 $ 2.71 $ 1.94
Other Data:
Net sales per employee $239,500 $207,300 $183,000 $162,300 $153,000
Income from operations
per employee 64,800(12) 53,200(11) 41,700 34,500 32,800
Effective income tax rate(13) 35.3% 38.4%(11) 40.5% 40.9% 39.8%
Full-time employee equivalents 6,017 5,076 5,053 5,127 5,502
Common shareholders of record 3,873 3,185 3,139 106
</TABLE>
(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 products sold was
$287.1 million, gross profit was $762.6 million, and income
from operations was $269.6 million.
(2) In conjunction with the asset acquisition of NeoCardia,
LLC., the initial purchase price of $57.4 million, which
represented the appraised value of in-process research and
development, was charged to expense.
(3) Represents merger-related costs of $11.1 million in
connection with the acquisition of EVT and a special
contribution to the Guidant Foundation, Inc., of $11.5
million in 1997, and restructuring charges in 1993.
(4) Includes a one-time gain of $23.2 million on the sale of the
Company's equity investment in Gynecare, Inc., and a
corporate legal reserve of $11.5 million recorded in the
fourth quarter of 1997.
(5) Includes the impact of impairment charges on atherectomy-
related goodwill and other intangible assets of $66.9 million.
Without the effect of these special charges, other expenses
were $37.9 million for the year ended December 31, 1996.
(6) In addition to the special items mentioned in (3) and (4)
above, reported net income includes a cumulative effect of a
change in accounting principle of ($4.7 million), net of
tax, recorded by the Company pursuant to its adoption of
EITF consensus on Issue 97-13. See Note 3 to Consolidated
Financial Statements. Excluding the effect of these special
items, net income was $197.4 million, earnings per share was
$1.34, and earnings per share-assuming dilution was $1.32
for the year ended December 31, 1997.
(7) Excluding the effect of the aforementioned special
obsolescence and impairment charges, net income, earnings
per share, and earnings per share assuming dilution were
$136.4 million, $0.93, and $0.92, respectively, for the year
ended December 31, 1996.
(8) Pursuant to the formation of Guidant, its Initial Public
Offering (IPO), and resultant transfer of assets from Eli
Lilly and Company (Lilly), the Company reported 1994 earnings
on a pro forma basis, which give effect to the following
transactions as if they occurred on January 1, 1994:
(i) borrowings under certain credit agreements, (ii)
dividends to Lilly, and (iii) receipt of IPO proceeds.
(9) The decline in working capital and current ratio primarily
resulted from the classification of $212.2 million of the
Company's commercial paper and bank borrowings as a current
liability.
(10) The decline in shareholders' equity from December 31, 1993,
to December 31, 1994, was primarily attributable to
dividends to Lilly. See (8) above.
(11) Excludes impact of the aforementioned special obsolescence
and impairment charges recorded in the second quarter of
1996.
(12) Excludes impact of the aforementioned purchased research and
development charge, merger-related costs, and special
contribution to the Guidant Foundation, Inc., in 1997.
(13) The effective income tax rate excludes the impact of EVT's
nondeductible losses.
This schedule gives retroactive effect to the Company's
acquisition of EndoVascular Technologies, Inc., (EVT) which was
completed in the fourth quarter of 1997. In addition, per-share
data and weighted average shares outstanding have been adjusted
for all years to reflect the two-for-one stock split in 1997.
18
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Guidant Corporation (Guidant or the Company), an Indiana
corporation, is a multinational company that designs, develops,
manufactures, and markets a broad range of innovative, high-
quality therapeutic devices for use in: (i) cardiac rhythm
management (CRM), (ii) vascular intervention (VI), and (iii)
cardiac and vascular surgery (CVS). In CRM, the Company is a
worldwide leader in automatic implantable cardioverter
defribrillator (AICD) systems. The Company also designs,
manufactures, and markets a full line of implantable pacemaker
systems used in the treatement 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 focusing on laparoscopic market opportunities in
cardiovascular, vascular, and general surgeries. During the
fourth quarter of 1997, the Company's Minimally Invasive Systems
group was renamed the Cardiac and Vascular Surgery Group to
reflect management's strategic redirection of this business.
This previously announced strategy has resulted in a number of
new products, including the VASOVIEW system for endoscopic
vessel harvesting and the acquisition of EndoVascular
Technologies, Inc., a leader in minimally invasive approaches to
repair abdominal aortic aneurysms (AAA).
Cardiovascular disease is the leading cause of death in the
United States. Guidant's business strategy is to design,
develop, manufacture, and market innovative, high-quality
therapeutic products principally for use in treating
cardiovascular and vascular diseases and performing minimally
invasive surgical procedures, which result in improved quality
of patient care and reduced treatment costs. In implementing
this strategy, the Company focuses on the following three areas,
which it believes are critical to its future success: (i)
global product innovation, (ii) economic partnerships with
customers worldwide, and (iii) organizational excellence.
The Company was formed after Eli Lilly and Company (Lilly)
transferred its ownership interests in several businesses in its
Medical Devices and Diagnostics Division to Guidant. The
Company consummated an initial public offering (IPO) of its
common stock in December 1994. Lilly, whose beneficial
ownership was reduced to approximately 80% after the IPO,
disposed of its remaining ownership interest in September 1995
by means of a tax-free split-off, an exchange offer pursuant to
which Lilly shareholders were given the opportunity to exchange
their Lilly common stock for Guidant's common stock. The
consummation of this exchange offer resulted in Lilly
distributing all of its Guidant common stock to Lilly
shareholders.
Mergers and Acquisitions
In May 1997, Guidant acquired the assets of NeoCardia, LLC., a
privately held development-stage company for an initial price of
$57.4 million. Under the acquisition agreement, the Company
could pay a total amount of as much as $77.0 million in cash,
plus subsequent additional bonus and royalty payments contingent
upon achieving certain product development and sales goals.
NeoCardia, which currently does not have any products available
for commercial sale, is pioneering the use of radiation therapy
for the treatment of restenosis. The Company has financed the
acquisition with its existing credit lines. The results of
NeoCardia's operations have been included in Guidant's
consolidated results of operations from the date of acquisition.
On December 19, 1997, the Company completed its merger with
EndoVascular Technologies, Inc., (EVT) in a tax-free stock-for-
stock transaction. EVT, based in Menlo Park, California, is a
leader in the development of methods and devices for minimally
invasive repair of diseased or damaged vascular structures,
particularly AAA. EVT has developed an endovascular grafting
system to provide catheter-based delivery and implantation of a
specialized sutureless prosthesis to repair life-threatening
AAAs without major surgery. The Company believes that EVT's
endovascular procedures for AAA repair offers significant
advantages over conventional AAA surgery. EVT's products, the
Tube, Bifurcated, and Aortoiliac ANCURE systems, are currently
undergoing clinical trials in the United States. This business
combination, accounted for under the pooling of interests
method, was effected through the exchange of 0.3154 shares of
Guidant common stock for each share of EVT common stock.
Approximately 2.7 million shares of Guidant common stock were
issued in connection with the EVT merger. The consolidated
financial statements give retroactive effect to this business
combination.
Operating Results -- 1997
The Company had worldwide net sales of $1,328.2 million for the
year ended December 31, 1997, reflecting an increase of $278.5
million or 27% over 1996. Growth in unit volume of 39%
increased net sales, while net sales price declines and
fluctuations in foreign currency exchange rates decreased net
sales 8% and 4%, respectively. The effect of changes in
product mix are included in the net sales price decline.
Net sales of VI products for the year ended December 31, 1997,
were $591.4 million, an increase of $165.8 million or 39.0% from
1996. This growth in VI sales occurred in the fourth quarter of
1997 and was primarily due to the enthusiastic market-acceptance
of the ACS RX MULTI-LINK Coronary Stent System, which was
released in the United Sates in October 1997. Net sales of VI
products for the three months ended December 31, 1997, increased
$188.8 million or 180% from the same period in 1996. Net sales
of the ACS RX MULTI-LINK Coronary Stent System were in excess of
$200 million in the fourth quarter of 1997. The ACS RX MULTI-
LINK Coronary Stent System, available in Europe since late 1995,
is marketed on a rapid exchange platform and has been approved
for use in de novo (first time) and restenotic arteries. As
competitors continue to enter the coronary stent market, there
can be no assurances that sales of the ACS RX MULTI-LINK
Coronary Stent System will continue at the fourth quarter's
rate. The Company also experienced significant sales growth in
rapid exchange coronary dilatation catheters, primarily due to
the ACS RX ROCKET, released in the United States in November
1997 and in international markets in June 1997; the ACS RX COMET
VP, released in the United States in February 1997; the ACS RX
COMET, released in international markets in June 1996 and in the
United States in November 1996; and international sales of the
ACS RX MULTI-LINK Coronary Stent System. The ACS RX ROCKET
Coronary Dilatation Catheter is an innovative rapid exchange
catheter that enables physicians to treat multiple lesions
during angioplasty, perform pre-stent placements, or use in
conjunction with other interventional technologies. Sales
growth during the year was partially offset by unit volume
declines in perfusion and over-the-wire coronary dilatation and
atherectomy catheters, and by lower net average selling prices
of most coronary dilatation catheters and guide wires in the
United States and Europe. These lower net average selling
prices include the impact of
19
The following tables are summaries of the Company's net sales and major costs
and expenses, excluding the impact of special charges:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Net sales:
Cardiac rhythm management $669.6 $574.6 $452.4
Vascular intervention 591.4 425.6 447.9
Cardiac & vascular surgery 67.2 49.5 31.0
------- ------- -----
Total net sales 1,328.2 1,049.7 931.3
Cost of products sold 320.8 287.1(1) 283.4
------- ------ -----
Gross profit 1,007.4 762.6(1) 647.9
Research and development 208.3(2) 164.6 142.8
Sales, marketing, and administrative 439.7(3)(4) 328.4 292.8
------ ----- -----
648.0 493.0 435.6
------ ----- -----
Income from operations excluding special charges $359.4(5) $269.6(1)(5) $212.3
====== ====== ======
As a Percent of Net Sales 1997 1996 1995
---- ---- ----
Net sales:
Cardiac rhythm management 50.4% 54.7% 48.6%
Vascular intervention 44.5 40.6 48.1
Cardiac & vascular surgery 5.1 4.7 3.3
----- ----- -----
Total net sales 100.0% 100.0% 100.0%
Cost of products sold 24.2 27.4(1) 30.4
---- ---- ----
Gross profit 75.8 72.6(1) 69.6
Research and development 15.7(2) 15.7 15.3
Sales, marketing, and administrative 33.0(3)(4) 31.2 31.5
---- ---- ----
48.7 46.9 46.8
---- ---- ----
Income from operations excluding special charges 27.1%(5) 25.7% (1)(5) 22.8%
==== ==== ====
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Excludes 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. Reported cost
of products sold and gross profit for 1996 were $315.9
million and $733.8 million, respectively.
(2) Excludes a purchased research and development charge of
$57.4 million which represented the appraised value of
in-process research and development recorded in
conjunction with the asset acquisition of NeoCardia,
LLC., in the second quarter of 1997.
(3) Does not include a special contribution to the Guidant
Foundation, Inc., of $11.5 million.
(4) Does not include $11.1 million transaction and integration
costs related to the Company's merger with EVT.
(5) Including the aforementioned special charges, reported
income from operations was $279.4 million and 21.0% of
net sales in 1997 and $240.8 million and 22.9% of net
sales in 1996.
product mix changes due to sales growth of rapid exchange
catheters which have a lower average selling price than
perfusion catheters. The Company believes that, in addition to
this shift in product mix, net average selling prices for
coronary dilatation catheters in the market may continue to
decline.
Net sales of CRM products for 1997 were $669.6 million, an
increase of $95.0 million or 16.5% over 1996. CRM net sales for
the fourth quarter of 1997 of $183.3 million increased $31.4
million or 20.7% from the same period in 1996. The Company
again experienced record sales during the quarter in automatic
implantable cardioverter defibrillator (AICD) systems. Sales
growth was led by the VENTAK AV, market released in the United
States in July 1997 and in Europe in November 1996; strong
worldwide sales of the VENTAK MINI II advanced, tiered-therapy
AICD, released in the United States in July 1996; and, to a
lesser degree, the VENTAK AV II DR which was recently market
released in Europe. The VENTAK AV II DR is the world's first
implantable defibrillator system to incorporate dual-chamber
adaptive-rate pacing capability. The VENTAK AV product family's
exclusive Atrial View feature allows it to distinguish
ventricular rhythms that are life threatening from less
dangerous atrial arrhythmias. The Company's adaptive-rate
pacemaker products also contributed to sales growth during the
year, particularly in the United States, where sales of
pacemaker systems during 1997 increased 12% from 1996.
Management believes that sales growth in AICD systems is
partially driven by studies which demonstrate the relative
superiority of implantable defibrillators to drug therapy. In
December 1996, the New England Journal of Medicine published the
findings of the Multicenter Automatic Defibrillator Implantation
Trial (MADIT). This study, the first large, randomized clinical
trial comparing AICDs with conventional antiarrhythmic drug
therapy, was terminated early because of the significant
improvement in survival rates of patients with AICDs.
Currently, the Company is the only AICD manufacturer to have
United States Food and Drug Administration (FDA) approval to
expand its product labeling to cover patients identified by
MADIT. In addition, the National Institutes of Health halted
the Antiarrhythmic vs. Implantable Defibrillators (AVID) study
in April 1997, also citing significantly increased patient
survival with implantable defibrillators over conventional drug
therapy.
Net sales of CVS products for the year ended December 31, 1997,
were $67.2 million, an increase of
20
$17.7 million or 35.8% over 1996. CVS sales for the fourth
quarter of 1997 increased 28.8% to $18.8 million compared to the
same period in 1996. Sales growth occurred in both United
States and international markets and was primarily driven by the
ORIGIN TACKER endoscopic fixation device; custom configurations
which incorporate this device along with other CVS products;
and, to some degree, the VASOVIEW Balloon Dissection system,
market released in September 1996. The VASOVIEW system provides
physicians with a novel, less invasive technique for the
endoscopic harvesting of the sapheneous vein.
Also contributing to sales growth in CVS were sales of EVT's
endovascular grafting systems, the Tube, Bifurcated, and
Aortoiliac ANCURE systems for endovascular repair of AAA. Such
sales increased to $3.3 million in 1997, from $1.2 million in
1996. All three of these products are in clinical trials in the
United States and, as a result, revenue is only recognized upon
the successful implantation of an EndoGraft prosthesis. The
Aortoiliac ANCURE system utilizes an endovascular prosthesis
that is a hybrid between the Company's Tube and Bifurcated
systems.
The Company experienced sales growth both in the United States
and international markets during 1997. The Company's United
States net sales increased 40.5% to $902.9 million, while
international net sales grew 4.5% to $425.3 million for the year
ended December 31, 1997, as compared to 1996. United States net
sales growth was primarily due to sales of the ACS RX MULTI-LINK
Coronary Stent System, VENTAK AV, VENTAK MINI II, ACS RX ROCKET,
ACS RX COMET, and ORIGIN TACKER and related custom
configurations. International net sales growth was primarily
driven by the ACS RX MULTI-LINK Coronary Stent System, VENTAK
MINI II, VENTAK AV II DR, and VENTAK AV. Sales of the ACS RX
COMET in Europe and Japan, and ACS RX ROCKET in Europe also
contributed to the international sales growth. An unfavorable
foreign currency exchange rate impact, caused by the
strengthening United States dollar, reduced net sales by
approximately $41.0 million for the year ended December 31,
1997, compared to 1996. This negative impact on gross profit
was partially offset by gains from foreign exchange derivative
contracts, which were recorded in cost of products sold.
Cost of products sold increased 1.6% to $320.8 million for the
year ended December 31, 1997, and represented 24.2% of net sales
versus 30.1% during 1996. Cost of products sold without the
effect of special noncash obsolescence charges of $28.8 million
would have been $287.1 million or 27.4% of net sales in 1996.
During the fourth quarter of 1997, the Company recorded
obsolescence charges of approximately $9.4 million on its older-
generation CRM programmer-recorder-monitors, primarily due to
customer acceptance of the newer-generation Model 2901
Programmer-Recorder-Monitor. This charge was offset by: (i)
gains in 1997 of $17.8 million realized on the foreign exchange
hedges referred to above, (ii) cost savings realized from
significantly increased manufacturing volume during the year,
(iii) continued improvement in productivity and manufacturing
efficiencies in all businesses, and (iv) a refinement in the
Company's method of accounting for unrealized profit in
inventory at its international affiliate locations of
approximately $6.2 million. Management believes cost of
products sold as a percentage of net sales in 1998 will be in
the 24%-26% range.
The acquisition of NeoCardia was accounted for under the
purchase method. As a result, the Company recorded a pre-tax
charge of $57.4 million relating to the appraised value of the
in-process research and development. Substantially all of the
possible aforementioned additional acquisition cost, when
determined, will also be treated as purchased research and
development expense.
The Company continued its commitment to achieving long-term
growth and serving its global customers by investing significant
resources in research and development. Research and development
expenses of $208.3 million for the year ended December 31, 1997,
excluding the aforementioned purchased research and development
charge, increased $43.7 million or 26.5% from 1996 and, as a
percentage of net sales, was 15.7% in both 1997 and 1996.
Increased research and development spending resulted primarily
from: (i) new product development costs related to future
generations of AICDs, pacemakers, and programmers; (ii)
increased performance-based compensation; (iii) development of
stent technology for other parts of the vascular anatomy, such
as carotid arteries; (iv) development of radiation therapy
devices for coronary restenosis; (v) clinical evaluation of
implantable device systems for the treatment of congestive heart
failure; (vi) expedited PMA preparation activities and increased
clinical trial costs related to the Company's endovascular
grafting systems; and (vii) other cardiovascular product
development in CVS. Management believes research and
development as a percentage of net sales in 1998 will continue
to be in the 15%-16% range.
Sales, marketing, and administrative expenses, exclusive of
special charges, of $439.7 million increased $111.3 million or
33.9% for the year ended December 31, 1997, in comparison to
1996. This increase was due to: (i) variable selling expenses,
such as commissions and bonuses, associated with the growth in
sales; (ii) increased legal costs associated with various
litigation; (iii) increased investment in the United States
field-sales force; (iv) expenses incurred in preparation for the
October 1997 launch of the ACS RX MULTI-LINK Coronary Stent
System in the United States; (v) implementation of EVT European
operations and increased personnel costs associated with the
ramp up of business activities at EVT; and (vi) a charge of $4.0
million associated with the termination of a third-party
distributor.
During the fourth quarter of 1997, the Company recorded $11.1
million of special charges related to its merger with EVT.
These charges include $4.2 million in transaction costs and $6.9
million of estimated costs, such as distributor buyouts and
unwinding various contractual commitments, to be incurred in the
integration of the operations of EVT with Guidant.
Also during the fourth quarter, the Company recorded a gain of
$23.2 million in connection with the sale of the Company's
equity interest in Gynecare, Inc., which was acquired by Johnson
& Johnson in a tax-free stock-for-stock merger. The Company
held a 30% interest in Gynecare, an enterprise engaged in the
development of minimally invasive medical devices for the
treatment of uterine disorders. This gain was recorded in other
income. The Company recorded a special charge representing the
contribution of $11.5 million of the common stock received from
the Gynecare transaction to the Guidant Foundation, Inc., the
Company's primary vehicle for community, educational, and other
charitable giving.
Income from operations for the years ended December 31, 1997 and
1996, were $279.4 million and $240.8 million, respectively.
Excluding the impact of the aforementioned purchased research
and development charge, the special contribution to the Guidant
Foundation, Inc., merger-related special charges in 1997, and
special obsolescence charges in 1996, income from operations
would have been $359.4 million or 27.1% of net sales and $269.6
million or 25.7% of net sales for 1997 and 1996,
21
respectively. This growth in adjusted income from operations of
33.3%, was due to net sales growth combined with lower manufacturing
costs, partially offset by increased research and development, and
increased sales, marketing, and administrative spending.
The Company had net other expenses of $30.6 million and $104.8
million for the years ended December 31, 1997 and 1996,
respectively. Partially offsetting the aforementioned gain on
its investment in Gynecare, the Company recorded charges of
$11.5 million during the fourth quarter related to various
litigation activities. Without the effect of the securities
gain and litigation charges recorded in the fourth quarter, net
other expenses would have been $42.3 million for the year ended
December 31, 1997. Included in net other expenses for the year
ended December 31, 1996, are noncash impairment charges of $66.9
million taken by the Company against its atherectomy-related
goodwill and other intangible assets. Without the effect of
this special charge, net other expenses would have been $37.9
million in 1996. This increase in adjusted net other expenses
in 1997 was primarily due to increased net royalties on coronary
stents, rapid exchange coronary dilatation catheters, and AICDs;
and charges associated with the disposal of certain manufacturing
equipment, partially offset by reduced amortization expenses
resulting from lower intangible assets following the aforementioned
impairment charges and lower interest expense.
The Company reduced its effective income tax rate in 1997 to
39.7% from 61.5% in 1996. Without considering the effect of the
special charges and the acquisition of EVT in 1997 and 1996, the
effective income tax rates for the years ended December 31, 1997
and 1996, were 35.3% and 38.4%, respectively. This decline in
the adjusted effective income tax rate was primarily due to: (i)
increased income tax benefits in certain international
locations, (ii) increased research and development income tax
credits, (iii) reduced state income taxes, and (iv) the reduced
impact of nondeductible expenses. Management believes the
Company's effective income tax rate will remain at or near the
current level throughout the next year.
In November 1997, the Financial Accounting Standards Board's
Emerging Issues Task Force (EITF) issued their consensus on
Issue 97-13, Accounting for Costs Incurred in Connection with a
Consulting Contract or an Internal Project that Combines
Business Process Reengineering and Information Technology
Transformation. In implementing its strategy of global product
innovation, creating economic partnerships with customers, and
organizational excellence, the Company has invested significant
resources in business process reengineering since its IPO and
subsequent split-off from Lilly. ETIF Issue 97-13 requires
companies to expense as incurred third-party consulting costs
associated with business process reengineering that are part of
a broader systems implementation project. This change in
accounting principle resulted in a pretax cumulative effect
charge of $7.3 million ($4.7 million after tax; $0.03 per share).
For the years ended December 31, 1997 and 1996, the Company
reported net income of $145.3 million and $52.3 million,
respectively. Excluding the aforementioned special charges and
other items in both 1997 and 1996, net income would have been
$197.4 million and $136.4 million in 1997 and 1996,
respectively. This growth in adjusted net income of 45% was due
to growth in income from operations, along with slower growth in
net other expenses and a lower effective income tax rate.
The Company has implemented Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings per Share, which requires
presentation of both basic and diluted earnings per share (EPS)
on the face of the income statement. Basic EPS is based upon
the weighted average number of common shares outstanding during
the period. Diluted EPS reflects the potential dilution if
stock options were exercised and converted into common stock.
Reported basic earnings per share for 1997 and 1996 were $0.99
and $0.36, respectively. Excluding the aforementioned special
charges and other items in both years, basic earnings per share
were $1.34 in 1997 and $0.93 in 1996. Reported diluted earnings
per share for 1997 and 1996 were $0.97 and $0.35, respectively.
Excluding the aforementioned special charges and other items in
both years, diluted earnings per share were $1.32 in 1997 and
$0.92 in 1996, representing an increase of 43%.
Operating Results -- 1996
The Company had worldwide net sales of $1,049.7 million for the
year ended December 31, 1996, reflecting an increase of $118.4
million or 13% over 1995. Growth in unit volume of 13% and net
sales price increases of 2% were offset by a 2% unfavorable
impact of foreign currency exchange rates.
Net sales of VI 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, 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, 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. Atherectomy
sales declines were primarily due to increasing usage of
coronary stents.
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, 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, 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 CVS products for 1996 were $49.5 million, an
increase of $18.5 million or 59.7% over 1995. CVS 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
CVS products; and,
22
to some degree, the VASOVIEW Balloon Dissection system, market
released in May 1996.
In 1996, the Company began recognizing revenue on sales of its
ANCURE systems used in clinical trials. Sales of approximately
$1.2 million, were almost entirely made up of the Tube and
Bifurcated ANCURE systems.
The Company experienced sales growth both in the United States
and international markets during 1996. Net sales in the United
States increased 6.6% to $642.8 million, and international net
sales increased 24.0% to $406.9 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 products sold increased 11.5% to $315.9 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 1996 and 1997 as a result of unanticipated demand.
Cost of products sold without the effect of the special
obsolescence charges in 1996 would have been 27.4% of net sales
compared to 30.4% in 1995. This reduction in cost of products
sold as a percentage of net sales was primarily due to: (i)
enhanced manufacturing efficiencies in CRM and VI, (ii) reduced
manufacturing costs of newer generation CRM and VI products, and
(iii) increased manufacturing volume.
Research and development expenses, which increased $21.8 million
or 15.3% in 1996 compared to 1995, represented 15.7% and 15.3%
of net sales in 1996 and 1995, respectively. 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 RX MULTI-LINK Coronary
Stent Systems, (ii) increased personnel, materials, and clinical
costs primarily related to expanded clinical trials of the
Company's endovascular grafting systems and the expansion of
EVT's facilities, (iii) the development of the VENTAK AV AICD
system, which had its first implants in September 1996 and its
European market release in November 1996, (iv) the clinical
evaluation of implantable device systems for the treatment of
congestive heart failure, and (v) the development of future
generations of pacemaker products.
Sales, marketing, and administrative expenses grew 12.2% 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; the creation of a sales and marketing
organization at EVT; 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 $240.8 million represented a
13.4% 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 $57.3
million or 27.0% 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.
In 1996, the Company had net other expenses of $104.8 million as
compared to $50.8 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
in 1996. 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 Vascular Intervention, Inc., in 1989, prior to the
formation of Guidant. Without these noncash impairment charges,
net other expenses were $37.9 million in 1996. This decrease of
$12.9 million or 25.4% was primarily due to the following: (i)
lower net interest expenses due to the decline in outstanding
borrowings and lower interest rates during 1996 and an increase
in the average cash balance at EVT, (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 61.5% in 1996. The Company's effective income tax rate,
without considering the effect of the impairment charges
discussed above and the acquisition of EVT, 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.
Net income for 1996 was $52.3 million compared to $92.8 million
in 1995. Earnings per share of $0.36 for 1996 decreased
approximately 44% in comparison to 1995 earnings per share of
$0.64. 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 $136.4
million and earnings per share would have been $0.93 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.
Liquidity and Financial Condition
The Company continued to strengthen its financial condition in
1997 and generated cash flows which were more than sufficient to
fund operations. Cash and cash equivalents increased to $17.7
million at December 31, 1997, from $4.1 million a year earlier,
while total borrowings declined approximately $70 million and
shareholders' equity increased 25%. For the year ended December 31,
1997, net cash provided by operating activities was $200.4 million
compared to $149.2 million in 1996, largely driven by higher net
income. Working capital was $83.8 million at December 31, 1997, a
$43.8 million decrease from the prior year-end level. The current
ratio at December 31, 1997 was 1.2:1 compared to 1.4:1 at
December 31, 1996. The declines in working capital
23
and the current ratio were primarily due to increased employee
compensation liabilities and various other reserves recorded by
the Company in the fourth quarter, and classification of the
majority of the Company's borrowings as a current liability,
offset by an increase in trade receivables resulting primarily
from the fourth quarter sales growth of the ACS RX MULTI-LINK
Coronary Stent System. The Company believes its cash from
operations is sufficient to fund essentially all future working
capital needs and discretionary spending requirements.
Net cash used for investing activities totaled $84.4 million for
the year ended December 31, 1997, compared to $72.1 million for
in 1996. The most significant use of cash for investing
activities related to net additions of property and equipment of
$76.8 million in 1997 compared to $63.6 million in 1996.
Net cash used for financing activities totaled $101.9 million in
1997 compared to $78.3 million in 1996. The increase in cash
used for financing activities was due to increased purchases of
the Company's common stock pursuant to its systematic share
repurchase program, and the inclusion in 1996 of proceeds from
the IPO of EVT. The share repurchase program is intended to
partially offset dilution resulting from the issuance of stock
under the Company's stock and other employee benefit plans.
The Company's capital structure consists of equity and interest-
bearing debt. At December 31, 1997, the Company had outstanding
borrowings of $292.2 million through the issuance of commercial
paper and bank borrowings at a weighted-average interest rate of
6.69%. 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 33.4% at December 31, 1997, compared
with 43.8% at December 31, 1996. The weighted-average interest
rate on debt outstanding at year end was impacted by short-term
market factors near the end of December. The portion of
outstanding borrowings impacted by these factors had maturities
of 5 days or less. The Company expects that a minimum of
approximately $80 million of borrowings will remain outstanding
through the next twelve months and, accordingly, has classified
this portion of borrowings as long-term at December 31, 1997.
The Company expects its cash from operations to be adequate to
meet its obligations to make interest payments on its debt and
other anticipated cash needs, including capital expenditures
which are expected to be approximately $85.0 million in 1998.
During the third quarter of 1997, the Company's Board of Directors
declared a two-for-one stock split which was effected in the form
of a 100% stock dividend. The stock split resulted in the issuance
of approximately 74.1 million additional common shares.
The Company has recognized net deferred tax assets aggregating
$82.4 million at December 31, 1997, and $61.9 million at
December 31, 1996. The assets relate principally to the
establishment of inventory and product-related loss reserves,
and, in 1997, purchased research and development costs. In view
of the consistent profitability of its past operations, the
Company believes that all these assets will be recovered and that
no significant additional valuation allowances are necessary.
Due to the global nature of its operations, the Company conducts
its business in various foreign currencies (primarily the
currencies of Western Europe and the Japanese yen) and, as a
result, is subject to the exposures that arise from foreign
exchange rate movements. Such exposures arise from transactions
denominated in foreign currencies, primarily intercompany loans
and export intercompany purchases of inventory, as well as from
the translation of results of operations from outside the United
States. These exposures subject the Company's results of
operations primarily to the adverse impact of a strengthening
United States dollar. The Company is also exposed to interest
rate changes.
The Company's risk-management objectives are to reduce earnings
volatility and protect the Company's cash flows from the impact
of fluctuating foreign currencies and interest rates. In the
normal course of business, the Company follows established
policies and procedures in its management of these exposures.
Simple derivative instruments, including foreign currency
forward contracts and 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 to allow management to
focus on core business issues and challenges. 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. The
Company does not enter into foreign currency or interest rate
transactions for speculative purposes. The Company's risk-
management activities were successful in reducing the net impact
of currency fluctuations to an immaterial level despite adverse
market conditions.
The fair value of all foreign currency derivative contracts
outstanding at December 31, 1997, was $3.1 million. An analysis
has been prepared to estimate the sensitivity of the fair value
of all derivative foreign exchange contracts to hypothetical 10%
favorable and unfavorable changes in spot exchange rates at
December 31, 1997. Premiums paid for purchased options are
included in the fair value. The results of the estimation,
which may vary from actual results, are as follows:
Fair Value
of Derivatives
--------------
10% adverse rate movement $(17.4)
At year end rates 3.1
10% favorable rate movement 30.4
Any gains and losses of fair value on derivative contracts would
be largely offset by losses and gains on underlying transactions
or anticipated transactions. These offsetting gains and losses
are not reflected in the above table. An analysis of the impact
on the Company's interest rate sensitive financial instruments
of a hypothetical 10% change in short-term interest rates
compared to interest rates at year end shows no significant
impact on expected 1998 earnings.
Regulatory and Other Matters
Government and private sector programs limiting healthcare costs,
including coverage policies, price regulation, competitive pricing, and
various types of managed-care arrangements, exist in the United States
and in several countries where the Company does business, and further
restrictions are possible. These policies and programs require healthcare
providers to put increased emphasis on the delivery of more cost-effective
medical therapies. Although management believes the Company is well
24
positioned to respond to this worldwide trend toward cost
containment, uncertainty as to the outcome of current and
prospective legislative and regulatory initiatives and ongoing
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 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. While the FDA Modernization Act of 1997, when
fully implemented, is expected to inject more predictability
into the product review process, streamline post-market
surveillance, and promote the global harmonization of regulatory
procedures, the process of obtaining such clearances can be
onerous and costly, and there can be no assurance that all
clearances sought by the Company will be granted on a timely
basis, if at all.
In recent years, many hospitals and other customers of medical
device manufacturers have consolidated into large purchasing
groups to enhance purchasing power and become more cost-
effective in the delivery of healthcare. To offer a broader
range of products to large purchasers, the medical device
industry also has been consolidating rapidly. Transactions with
these purchasing groups are often more significant, more
complex, and involve more long-term contracts than in the past.
While this enhanced purchasing power may further 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 significant
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 essential to the
manufacture of Company products have indicated a desire to
withdraw from or not sell to 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 outcome of the legal actions brought against it,
or to provide an estimate of the losses, if any, that may arise,
the Company believes the costs associated with such actions will
not have a material adverse effect on its consolidated financial
position or liquidity, but could possibly be material to its
consolidated results of operations.
Many computer systems experience problems handling dates beyond
the year 1999. Therefore, some computer hardware and software
will need to be modified prior to the year 2000 in order to
remain functional. The Company is assessing the internal
readiness of its computer systems and the compatability of its
products sold to customers for handling the year 2000. In addition,
the Company is assessing the readiness of third-parties (e.g.,
customers and suppliers) which interact with the Company's systems.
The Company plans to devote the necessary resources to resolve all
significant year 2000 issues in a timely manner. Costs associated
with the year 2000 assessment and correction of problems noted are
expensed as incurred. Based on management's current assessment, it
does not believe that the cost of such actions will have a material
effect on the Company's results of operations or financial condition,
in part because for most of its business processes, the Company recently
implemented an enterprise-wide system that is year 2000 functional.
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.
25
GUIDANT CORPORATION and Subsidiaries
Consolidated Statements of Income
(In millions, except per-share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31, 1997 1996 1995
--------------------------------------
Net sales $1,328.2 $1,049.7 $931.3
Cost of products sold 320.8 315.9 283.4
----- ----- -----
Gross profit 1,007.4 733.8 647.9
Research and development 208.3 164.6 142.8
Purchased research and development 57.4 -- --
Sales, marketing, and administrative 439.7 328.4 292.8
Merger-related costs 11.1 -- --
Foundation contribution 11.5 -- --
----- ----- ------
Income from operations 279.4 240.8 212.3
Other income(expenses):
Interest, net (19.5) (23.0) (29.4)
Royalties, net 2.3 10.0 6.8
Amortization (15.5) (20.8) (23.1)
Other, net 2.1 (4.1) (5.1)
Impairment charges -- (66.9) --
----- ----- ------
(30.6) (104.8) (50.8)
----- ----- ------
Income before income taxes and cumulative effect
of change in accounting principle 248.8 136.0 161.5
Income taxes 98.8 83.7 68.7
----- ----- ------
Income before cumulative effect of change
in accounting principle 150.0 52.3 92.8
Cumulative effect of change in accounting
principle, net of income taxes (4.7) -- --
------ ----- -----
Net income $145.3 $52.3 $92.8
====== ===== =====
Earnings per share:
Income before cumulative effect of change in
accounting principle $1.02 $0.36 $0.64
Cumulative effect of change in accounting principle (0.03) -- --
----- ----- ------
Earnings per share $0.99 $0.36 $0.64
===== ===== =====
Earnings per share - assuming dilution:
Income before cumulative effect of change in
accounting principle $1.00 $0.35 $0.63
Cumulative effect of change in accounting principle (0.03) -- --
----- ----- ------
Earnings per share - assuming dilution $0.97 $0.35 $0.63
===== ===== =====
See notes to consolidated financial statements.
</TABLE>
26
GUIDANT CORPORATION and Subsidiaries
Consolidated Balance Sheets
(Dollars in millions)
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, 1997 1996
-----------------------
Assets
Current Assets
Cash and cash equivalents $17.7 $ 4.1
Short-term investments 13.3 15.3
Accounts receivable, net of allowances
of $9.2 (1997) and $7.4 (1996) 371.7 212.9
Other receivables 10.9 17.8
Inventories 120.8 102.8
Deferred income taxes 65.7 62.1
Prepaid expenses 25.0 22.9
----- -----
Total Current Assets 625.1 437.9
Other Assets
Goodwill and other intangible assets,
net of allowances of $106.5 (1997)
and $90.9 (1996) 188.5 206.4
Deferred income taxes 16.7 --
Investments 46.2 41.3
Sundry 22.4 16.4
----- -----
273.8 264.1
Property and equipment, net 326.1 322.9
----- -----
$1,225.0 $1,024.9
======= =======
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 51.7 $ 22.6
Employee compensation 109.9 77.5
Other liabilities 126.9 77.6
Income taxes payable 40.6 2.6
Current portion of long-term debt 212.2 130.0
----- -----
Total Current Liabilities 541.3 310.3
Noncurrent Liabilities
Long-term debt 80.0 233.5
Other 21.9 14.2
----- -----
101.9 247.7
Commitments and contingencies -- --
Shareholders' Equity
Common stock, no par value;
Authorized shares: 250,000,000
Issued shares: 1997 - 150,924,000
1996 - 150,857,500 192.5 192.5
Additional paid-in capital 211.1 206.7
Retained earnings 262.5 124.5
Deferred cost, ESOP (45.8) (51.2)
Treasury stock, at cost:
Shares: 1997 - 178,021
1996 - 66,763 (10.8) (3.3)
Unrealized gain on investments, net 4.2 9.4
Cumulative translation adjustments (31.9) (11.7)
----- -----
581.8 466.9
----- -----
$1,225.0 $1,024.9
======= =======
See notes to consolidated financial statements.
</TABLE>
27
GUIDANT CORPORATION and Subsidiaries
Consolidated Statements of Shareholders' Equity
(Dollars in millions, except share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Preferred Stock Common Stock
Issued Shares Amount Issued Shares Amount
------------- ------- ------------- -----
December 31, 1994 1,614,300 $ - 143,957,400 $ 192.5
Net income
Issuance of common stock under
stock option plan 61,000
Cash dividends ($0.025 per share)
Capital contributions from
Lilly, net
Repurchase of common stock (900)
Shares issued to ESOP 4,494,000
ESOP transactions
Currency translation adjustments
------------- ------- ------------- -----
December 31, 1995 1,614,300 - 148,511,500 192.5
Net income
Conversion of preferred stock
to common stock (1,614,300) 1,614,300
Issuance of common stock 669,700
Cash dividends ($0.05 per share)
Repurchase of common stock
ESOP transactions
Unrealized gain on investments,
net of taxes
Currency translation adjustments
Other 62,000
------------- ------- ------------- -----
December 31, 1996 -- -- 150,857,500 192.5
Net income
Issuance of common stock under
employee stock plans 66,500
Cash dividends ($0.05 per share)
Repurchase of common stock
ESOP transactions
Unrealized loss on investments,
net of taxes
Tax benefit realized upon
exercise of stock options
Currency translation adjustments
------------- ------- ------------- ------
December 31, 1997 -- $ -- 150,924,000 $192.5
============= ======= ============= ======
See notes to consolidated financial statements.
</TABLE>
GUIDANT CORPORATION and Subsidiaries
Consolidated Statements of Shareholders' Equity
(Dollars in millions, except share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Additional Retained
Paid-In Earnings Deferred Cost, ESOP
Capital (Deficit) Shares Amount
------------- --------- --------------------
December 31, 1994 $ 98.4 $ (9.8)
Net income 92.8
Issuance of common stock under
stock option plan 0.3
Cash dividends ($0.025 per share) (3.6)
Capital contributions from
Lilly, net 21.5
Repurchase of common stock
Shares issued to ESOP 60.0 (4,494,000) $(60.0)
ESOP transactions 0.8 202,000 2.7
Currency translation adjustments
------------- -------- ------------- ------
December 31, 1995 181.0 79.4 (4,292,000) (57.3)
Net income 52.3
Conversion of preferred stock
to common stock
Issuance of common stock 21.9
Cash dividends ($0.05 per share) (7.2)
Repurchase of common stock
ESOP transactions 5.7 458,000 6.1
Unrealized gain on investments,
net of taxes
Currency translation adjustments
Other (1.9)
------------- -------- ------------- -----
December 31, 1996 206.7 124.5 (3,834,000) (51.2)
Net income 145.3
Issuance of common stock under
employee stock plans (8.0)
Cash dividends ($0.05 per share) (7.3)
Repurchase of common stock
ESOP transactions 10.4 399,000 5.4
Unrealized loss on investments,
net of taxes
Tax benefit realized upon
exercise of stock options 2.0
Currency translation adjustments
------------- -------- ------------- -------
December 31, 1997 $ 211.1 $ 262.5 (3,435,000) $(45.8)
============= ======== ============= =======
See notes to consolidated financial statements.
</TABLE>
GUIDANT CORPORATION and Subsidiaries
Consolidated Statements of Shareholders' Equity
(Dollars in millions, except share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Unrealized Cumulative
Treasury Gain (Loss) on Translation
Stock Investments Adjustments Total
----------- -------------- ------------- ------
December 31, 1994 $ 1.5 $ 282.6
Net income 92.8
Issuance of common stock under 0.3
stock option plan
Cash dividends
($0.025 per share) (3.6)
Capital contributions from
Lilly, net 21.5
Repurchase of common stock -
Shares issued to ESOP -
ESOP transactions 3.5
Currency translation adjustments (2.7) (2.7)
----------- -------------- ------------- -------
December 31, 1995 (1.2) 394.4
Net income 52.3
Conversion of preferred stock
to common stock -
Issuance of common stock 21.9
Cash dividends ($0.05 per share) (7.2)
Repurchase of common stock $ (4.0) (4.0)
ESOP transactions 11.8
Unrealized gain on investments,
net of taxes $ 9.4 9.4
Currency translation adjustments (10.5) (10.5)
Other 0.7 (1.2)
----------- -------------- ------------ -------
December 31, 1996 (3.3) 9.4 (11.7) 466.9
Net income 145.3
Issuance of common stock under
employee stock plans 23.2 15.2
Cash dividends ($0.05 per share) (7.3)
Repurchase of common stock (30.7) (30.7)
ESOP transactions 15.8
Unrealized loss on investments,
net of taxes (5.2) (5.2)
Tax benefit realized upon
exercise of stock options 2.0
Currency translation adjustments (20.2) (20.2)
----------- -------------- ------------ -------
December 31, 1997 $ (10.8) $ 4.2 $ (31.9) $ 581.8
=========== ============== ============= =======
See notes to consolidated financial statements.
</TABLE>
28
GUIDANT CORPORATION and Subsidiaries
Consolidated Statements of Cash Flows
(In millions)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31, 1997 1996 1995
-----------------------------
Cash Provided by Operating Activities:
Net income $145.3 $52.3 $92.8
Adjustments to Reconcile Net Income to Cash
Provided by Operating Activities:
Depreciation 50.5 45.1 44.9
Amortization of goodwill and other
intangible assets 15.5 20.8 23.1
Provision for inventory
and other losses 24.0 41.4 17.7
Impairment charges -- 66.9 --
Cumulative effect of change in
accounting principle, before tax 7.3 -- --
Other noncash expenses, net 11.7 7.1 10.8
---- ---- ----
254.3 233.6 189.3
Changes in Operating Assets and Liabilities:
Receivables, increase (168.0) (36.7) (32.1)
Inventories, increase (38.2) (13.0) (22.1)
Prepaid expenses, increase (3.3) (7.6) (0.4)
Accounts payable and accrued
liabilities, increase (decrease) 73.9 (10.7) 26.9
Income taxes payable,
increase (decrease) 37.5 (19.3) 9.3
Other liabilities,
increase (decrease) 44.2 2.9 (66.0)
Payables to affiliated
companies, decrease -- -- (39.5)
---- ----- ------
Net Cash Provided by Operating Activities 200.4 149.2 65.4
Investing Activities:
Purchases of available-for-sale
securities (8.7) (32.0) (25.3)
Sale/maturity of
available-for-sale securities 22.9 24.6 32.7
Purchases of
held-to-maturity investments (8.9) (5.6) (4.6)
Additions of property and
equipment, net (76.8) (63.6) (64.9)
(Additions of) deductions from
other assets, net (12.9) 4.5 (8.3)
Acquisitions -- -- (10.8)
---- ----- ------
Net Cash Used for Investing Activities (84.4) (72.1) (81.2)
Financing Activities:
Decrease in borrowings, net (69.5) (89.6) (78.0)
Reduction in long-term borrowings -- -- (18.0)
Capital contribution from Lilly -- -- 11.0
Dividends (7.3) (7.2) (3.6)
Proceeds from sale of
common stock, net -- 21.6 --
Purchase of common stock and other
capital transactions (25.1) (3.1) 0.3
---- ----- ------
Net Cash Used for Financing Activities (101.9) (78.3) (88.3)
Effect of Exchange Rate Changes on Cash (0.5) (0.3) (5.4)
---- ----- ------
Net Increase (Decrease) in Cash
and Cash Equivalents 13.6 (1.5) (109.5)
Cash and Cash Equivalents
at Beginning of Year 4.1 5.6 115.1
---- ----- -----
Cash and Cash Equivalents
at End of Year $17.7 $4.1 $5.6
===== ===== ====
See notes to consolidated financial statements.
</TABLE>
29
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
innovative, high-quality therapeutic medical devices for use in:
(i) cardiac rhythm management (CRM), (ii) vascular intervention
(VI), and (iii) cardiac and vascular surgery (CVS). In CRM,
Guidant is a worldwide leader in automatic implantable
cardioverter defibrillator systems. Guidant also designs,
manufactures, and markets a full line of implantable pacemaker
systems used in the treatment of slow or irregular arrhythmias.
In VI, Guidant is a worldwide leader in minimally invasive
procedures used for opening blocked coronary arteries. In
addition, Guidant develops, manufactures, and markets products
for use in minimally invasive cardiac, vascular, and general
surgery. Guidant is a global company with principal operations
in the United States, Western 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.
Organization: The Company was formed after Eli Lilly and
Company (Lilly) transferred its ownership interests in several
businesses in its Medical Devices and Diagnostics Division to
Guidant. The Company consummated an initial public offering
(IPO) of its common stock in December 1994. Lilly, whose
beneficial ownership was reduced to approximately 80% after the
IPO, disposed of its remaining ownership interest in September
1995 by means of a tax-free split-off. The split-off resulted
in Lilly distributing all of its Guidant common stock to Lilly
shareholders.
Note 2 - Significant Accounting Policies
Principles of Consolidation: The consolidated financial
statements include the accounts of Guidant Corporation and all
of its wholly owned subsidiaries. Significant intercompany
transactions and balances have been eliminated in consolidation.
In addition, the consolidated financial statements give
retroactive effect to the Company's acquisition of EndoVascular
Technologies, Inc., (EVT) on December 19, 1997 (see Note 4),
which was accounted for using the pooling of interests method.
Revenue Recognition: Revenue from the sale of products is
primarily recognized at the time product is shipped to
customers. The Company maintains consigned inventory at customer
locations for certain products. For these products, revenue is
recognized at the time the Company is notified that the device
has been used.
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 year. Assets and liabilities of foreign
operations are translated into United States dollars using the
exchange rates in effect at year end. Foreign currency
transaction gains and losses are included in the consolidated
statements of income as other income (expenses). 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.
Risk Management Contracts: In the normal course of business,
the Company employs a variety of derivative financial
instruments, including foreign currency forward and option
contracts, to manage its exposure to fluctuations in foreign
currency exchange and interest rates. The Company designates and
assigns the financial instruments as hedges for specific assets,
liabilities, or anticipated transactions. When hedged assets or
liabilities are sold or extinguished or the anticipated
transactions being hedged are no longer expected to occur, the
Company recognizes the gain or loss on the designated hedging
financial instruments. The Company classifies its derivative
financial instruments as held or issued for purposes other than
trading. Prepaid option premiums are recorded in other assets.
Gains and losses on hedges of existing assets and liabilities
are included in other income (expenses). Gains and losses from
hedges of firm commitments and anticipated transactions are
classified in the income statement consistent with the
accounting treatment of the items being hedged.
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.
Investments: Investments in marketable equity securities are
accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities, which 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: available-for-sale, held-to-maturity, or trading.
Inventories: Inventories are stated at the lower of cost,
determined by the first-in, first-out method, or market.
Inventories at December 31 consisted of the following:
1997 1996
---- ----
Finished products $52.6 $48.4
Work in process 35.0 28.8
Raw materials and supplies 33.2 25.6
----- -----
$120.8 $102.8
====== ======
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. Goodwill and other
intangible assets are amortized using the straight-line method
over their estimated useful lives, of which periods up to 26
years remain. Management periodically reviews the carrying
amount of goodwill and other intangible assets to assess their
continued recoverability in accordance with Accounting
Principles Board Opinion (APB) No. 17, Intangible Assets. The
determination includes evaluation of factors such as current
market value, future asset utilization, business climate, and
future cash flows expected to result from the use of the related
assets. The Company's policy is to record an impairment loss in
the period when it is determined that the carrying amount of the
asset may not be recoverable.
Long-Lived Assets: 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.
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
30
intended to depreciate the cost of these various assets over
their estimated useful lives. At December 31, property and
equipment consisted of the following:
1997 1996
---- ----
Land $26.5 $ 26.6
Buildings 197.1 193.3
Equipment 313.9 278.4
Construction in progress 31.2 36.1
----- -----
568.7 534.4
Less allowances
for depreciation 242.6 211.5
----- -----
$326.1 $322.9
====== ======
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 for 1995 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: In February 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 128, Earnings per Share.
SFAS No. 128 requires companies to present two earnings per
share (EPS) amounts. It replaces the presentation of primary and
fully diluted EPS with basic and diluted EPS. Basic earnings
per share is computed by dividing net income by the weighted
average common shares outstanding during the year. Diluted
earnings per share represents net income divided by the total of
the weighted average common shares outstanding plus potential
dilutive instruments such as stock options. The effect of stock
options on diluted earnings per share is determined through the
application of the treasury stock method, whereby proceeds
received by the Company based on assumed exercises are
hypothetically used to repurchase the Company's common stock at
the average market price during the period.
Stock Split: In August 1997, the Company's Board of Directors
declared a two-for-one stock split to be effected in the form of
a 100% stock dividend payable to shareholders of record at the
close of business September 2, 1997. Distribution of the
additional shares resulting from the stock split occurred on
September 16, 1997. The stock split resulted in the issuance of
approximately 74.1 million additional shares. Treasury shares
held by the Company were not split. All references in the
accompanying consolidated financial statements to common shares
and per-share amounts for the current and prior periods have
been restated to reflect the stock split.
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.
Reclassifications: Certain prior year amounts in the
consolidated financial statements have been reclassified to
conform with the current year presentation.
Note 3 - New Accounting Pronouncements
In November 1997, the FASB's Emerging Issues Task Force (EITF)
reached a consensus on Issue 97-13, Accounting for Costs
Incurred in Connection with a Consulting Contract or an Internal
Project that Combines Business Process Reengineering and
Information Technology Transformation. EITF 97-13 requires
companies to expense as incurred third-party consulting costs
associated with business process reengineering activities that
are part of a broader systems implementation project. This
change in accounting principle resulted in a pretax cumulative
effect adjustment (charge) of $7.3 million ($4.7 million after
tax; $0.03 per share). Prior to the fourth quarter of 1997,
these costs were capitalized and depreciated over periods of up
to eight years.
In June 1997, SFAS No. 130, Reporting Comprehensive Income, was
issued. The statement must be adopted by the Company in the
first quarter of 1998. Under this statement, the Company will
report in its financial statements, in addition to net income,
comprehensive income and its components including, as
applicable, foreign currency items and unrealized gains and
losses in certain investments in debt and equity securities.
Upon adoption, certain reclassifications will be necessary to
previously reported amounts to achieve the required presentation
of comprehensive income. Implementation of this disclosure
standard will not affect financial position or results of
operations. In addition, management has not yet determined the
manner in which comprehensive income will be displayed.
In June 1997, SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information, was issued. This statement,
which must be adopted by the Company for the year ending
December 31, 1998, establishes standards for reporting
information about operating segments in annual and interim
financial statements. Operating segments are determined
consistent with the way management organizes and evaluates
financial information internally for making decisions and
assessing performance. It also requires related disclosures
about products, geographic areas, and major customers.
Implementation of this disclosure standard will not affect the
Company's financial position or results of operations.
Management has not yet determined the manner in which segment
information will be displayed.
Note 4 - Mergers and Acquisitions
In May 1997, Guidant acquired the assets of NeoCardia, LLC., a
privately held development-stage company for an initial price of
$57.4 million. Under the acquisition agreement, the Company
could pay a total amount of as much as $77.0 million in cash,
plus subsequent additional bonus and royalty payments contingent
upon achieving certain product development and sales goals.
NeoCardia, which currently does not have any products available
for commercial sale, is pioneering the use of radiation therapy
for the treatment of restenosis. This acquisition was financed
by issuing additional commercial paper. The Company intends to
use this acquisition to develop a full line of products for
radiation therapy and has recently commenced clinical studies in
this area. The results of NeoCardia's operations have been
included in the Company's consolidated results of operations
from the date of acquisition.
This acquisition was accounted for by the purchase method. In
conjunction with the acquisition, the Company recorded a pre-tax
charge of $57.4 million related to the appraised value of in-
process research and development
31
that must be expensed under generally accepted accounting
principles. Substantially all of the possible additional
acquisition cost, when determined, will also be treated as
purchased research and development. The operating results from
this acquisition did not have a material pro forma impact on the
Company's operations.
On December 19, 1997, the Company completed its acquisition of
EndoVascular Technologies, Inc., (EVT) in a tax-free stock-for-
stock transaction. EVT, based in Menlo Park, California, is a
leader in the development of methods and devices for minimally
invasive repair of abdominal aortic aneurysms (AAA). EVT has
developed a minimally invasive catheter-based delivery system to
implant a specialized sutureless prosthesis to repair life-
threatening AAAs without major surgery. EVT's products are
currently undergoing clinical trials in the United States.
This business combination, accounted for under the pooling of
interests method, was effected through the exchange of 0.3154
shares of Guidant common stock for each share of EVT common
stock. Approximately 2.7 million shares of Guidant common stock
were issued in connection with the EVT merger. The consolidated
financial statements give retroactive effect to this business
combination. In addition, EVT's outstanding stock options were
converted into options to acquire 0.4 million shares of Guidant
common stock.
Separate and combined net sales and net income (loss) of Guidant
and EVT for 1997, 1996, and 1995 are as follows:
Net sales Net income (loss)
Year ended December 31, 1997:
Guidant $ 1,324.9 $ 176.2
EVT 3.3 (30.9)
-------- ------
Combined $ 1,328.2 $ 145.3
======== ======
Year ended December 31, 1996:
Guidant (as previously reported) $ 1,048.5 $ 65.8
EVT 1.2 (13.5)
-------- ------
Combined $ 1,049.7 $ 52.3
======== ======
Year ended December 31, 1995:
Guidant (as previously reported) $ 931.3 $ 101.1
EVT -- (8.3)
------ ------
Combined $ 931.3 $ 92.8
===== ======
In 1997, the Company recorded costs of $11.1 million in
connection with the acquisition of EVT. These special charges
include $4.2 million in transaction costs, and $6.9 million of
estimated costs to be incurred in integrating the operating
business of EVT with Guidant and its subsidiaries. Estimated
costs include those typical in a merging of operations and
relate to, among other things, rationalization of facilities,
distributor buyouts, and unwinding various contractual
commitments. Adjustments impacting net income and shareholders'
equity resulting from conforming the accounting practices of
Guidant and EVT were not material. There were no material
intercompany transactions.
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 was accounted for by the
purchase method and related goodwill is being amortized using
the straight-line method over seven years.
Note 5 - Special Charges
The Company recorded a charge of $11.5 million during the fourth
quarter of 1997, related to various litigation activities. This
charge was recorded in other expenses.
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
products sold 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.
Note 6 - Stock Plans
Stock Plans: In October 1994 and May 1996, the Board of
Directors and shareholders adopted stock plans (Stock Plans)
pursuant to which the Company periodically 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 employees, including executive officers, and
consultants of the Company. The Stock Plans allow grants of up
to 14,500,000 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 one year from the date of grant.
The majority of 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, 1997, there were approximately 2.5 million
additional shares available for grant under the Stock Plans.
The Company follows the provisions of APB No. 25, Accounting for
Stock Issued to Employees, and related interpretations, in
accounting for its stock options. These rules 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
encourages, but does not require, 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 by SFAS No. 123, the
Company continues to apply the existing accounting rules under
APB No. 25 and provides 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.
32
<TABLE>
<CAPTION>
Stock option activity is summarized below:
<S> <C> <C> <C> <C> <C> <C>
Weighted Average Weighted Average Weighted Average
1997 Exercise Price 1996 Exercise Price 1995 Exercise Price
---- --------------- ---- -------------- ---- --------------
Outstanding at January 1 7,068,858 $16.55 4,404,355 $12.54 1,943,029 $ 7.12
Granted 4,220,574 56.24 2,980,415 22.15 2,778,275 15.84
Exercised (313,233) 14.24 (45,366) 7.73 (60,934) 5.33
Canceled (115,581) 21.59 (270,546) 13.38 (256,015) 8.73
--------- --------- ---------
Outstanding at December 31 10,860,618 $32.01 7,068,858 $16.55 4,404,355 $ 12.54
Exercisable at December 31 3,863,741 $14.19 947,935 $14.76 84,798 $ 3.71
</TABLE>
Exercise prices for stock options outstanding as of December 31, 1997, ranged
from $3.20 to $63.44. The weighted-average remaining contractual life of
stock options outstanding at December 31, 1997, is approximately 9 years.
The per-share weighted-average fair value of stock options
granted in 1997, 1996, and 1995 was $25.30, $16.69, and $12.52,
respectively. The fair value was estimated as of the grant date
using the Black-Scholes option pricing model with the following
weighted-average assumptions:
1997 1996 1995
---- ---- ----
Risk-free interest rate 6.0% 6.5% 5.9%
Dividend yield 0.1% 0.2% 0.3%
Volatility factor 33.2% 32.7% 33.0%
Option 7 years 7 years 7 years
The pro forma impact on income assumes a forfeiture rate of
approximately 10%. Had compensation expense for stock options
granted in 1997, 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 $18.2 million and
$0.12, respectively, in 1997, $7.9 million and $0.05,
respectively, in 1996, and $1.2 million and $0.01, 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.
Prior to 1997, performance award shares were granted to officers
and certain other management and employees of the Company.
These shares were dependent upon, among other things,
achievement of certain performance objectives. The cost of
performance award shares was $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 two-
hundredths of a share of Series A Preferred Stock at an exercise
price of $21.75. The Company may redeem the rights for $0.005
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 7 - Earnings Per Share
The following table sets forth the computation of earnings per share:
1997 1996 1995
---- ---- ----
Income before cumulative effect of
change in accounting principle $150.0 $52.3 $92.8
Cumulative effect of change in
accounting principle (4.7) -- --
---- ---- ----
Net income $145.3 $52.3 $92.8
====== ===== =====
Weighted-average common shares
outstanding 147.15 146.73 145.75
Effect of employee stock options 2.74 1.40 0.88
------ ------ ------
Weighted-average common shares
outstanding and assumed conversions 149.89 148.13 146.63
------ ------ ------
Earnings per share:
Income before cumulative effect of
change in accounting principle $1.02 $0.36 $0.64
Cumulative effect of change in
accounting principle (0.03) -- --
---- ---- ----
Earnings per share $0.99 $0.36 $0.64
===== ====== =====
Earnings per share - assuming dilution:
Income before cumulative effect of
change in accounting principle $1.00 $0.35 $0.63
Cumulative effect of change in
accounting principle (0.03) -- --
---- ---- ----
Earnings per share - assuming dilution $0.97 $0.35 $0.63
===== ===== =====
Note 8 - Borrowings
At December 31, 1997, the Company had outstanding commercial
paper borrowings of $219.4 million and bank borrowings of
$72.8 million at a weighted-average interest rate of 6.69%. The
Company expects that a minimum of approximately $80.0 million of
borrowings will remain outstanding throughout 1998, and,
accordingly, has classified this portion as long-term at
December 31, 1997. The weighted-average interest rate on
borrowings outstanding during 1997 was 5.98%.
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%. At December 31, 1996,
the Company expected that a minimum of approximately $233.5 million of
33
borrowings would remain outstanding throughout 1997, and,
accordingly, 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, 1997, unused committed lines of credit were $600.0
million. Compensating balances and commitment fees are not
material in either year. Interest expense, which is included in
other expenses and approximates cash payments of interest on
borrowings, was $21.5 million, $26.4 million, and $33.1 million
in 1997, 1996, and 1995, respectively.
Note 9 - Transactions with Affiliated Companies
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.
The consolidated financial statements reflect certain 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, which were classified as sales, marketing, and
administrative expenses, were $4.8 million in 1995.
Lilly also charged costs and expenses, related primarily to
personnel and benefits, royalties, and insurance, incurred by
Lilly on behalf of the Company. In 1995, these expenses were
$25.4 million.
Note 10 - Leases
The Company leases various manufacturing and office facilities,
and certain equipment under operating leases. Future minimum
lease commitments are as follows:
1998 $13.3
1999 10.9
2000 8.9
2001 5.6
2002 5.0
Thereafter 7.1
----
$50.8
=====
Rent expenses for all leases, including contingent rentals,
which were not material, amounted to approximately $13.5
million, $11.0 million, and $7.4 million for 1997, 1996, and
1995, respectively.
Note 11 - Income Taxes
Following is the composition of income tax expense(credit):
1997 1996 1995
---- ---- ----
Current:
Federal $93.9 $75.4 $47.8
State 17.6 11.7 6.2
Foreign 4.6 4.8 12.7
---- ---- ----
Total currently payable 116.1 91.9 66.7
Deferred:
Federal (15.0) (7.1) 0.3
State (3.2) (1.6) 3.2
Foreign 0.9 0.5 (1.5)
---- ---- ----
Total deferred tax (benefit) expense (17.3) (8.2) 2.0
---- ---- ----
Income tax expense $98.8 $83.7 $68.7
==== ==== ====
Deferred tax assets and liabilities reflect the future tax
consequences of events that have already been recognized in the
consolidated financial statements or income tax returns. At
December 31, deferred tax assets and liabilities consisted of
the following:
1997 1996
---- ----
Deferred tax assets:
Inventory and product-related reserves $37.1 $43.6
Net operating loss and credit carryforwards 29.3 23.1
Accrued liabilities 36.4 25.0
Purchased research and development 16.1 --
Acquisition of intangible assets 16.1 15.0
---- ----
135.0 106.7
Valuation allowances (33.4) (23.1)
---- ----
Total deferred tax assets 101.6 83.6
Deferred tax liabilities:
Property and equipment (11.4) (11.6)
Long-term equity investments (2.9) (6.1)
Other (4.9) (4.0)
---- ----
Total deferred tax liabilities (19.2) (21.7)
---- ----
Deferred tax assets, net $82.4 $61.9
===== =====
Income taxes paid were $80.7 million, $103.1 million, and $56.2 million
in 1997, 1996, and 1995, respectively. In 1997, income tax benefits
attributable to employee stock option transactions of approximately
$2.0 million, were allocated to shareholders' equity.
34
Following is a reconciliation of the effective income tax rate:
1997 1996 1995
---- ---- ----
United States federal statutory income tax rate 35.0% 35.0% 35.0%
Increase (decrease) in tax rate resulting from:
State income taxes, net of federal tax benefit 3.2 3.5 3.6
Benefit from operations in Puerto Rico (1.2) (2.7) (1.0)
Effect of international operations (0.3) 1.7 1.8
Research credit (1.1) -- --
Effect of impairment charges -- 17.6 --
Nondeductible expenses,
primarily goodwill amortization 2.1 2.7 3.1
Nondeductible EVT losses 4.4 5.5 2.0
Other, net (2.4) (1.8) (2.0)
---- ----- -----
Effective income tax rate 39.7% 61.5% 42.5%
==== ==== ====
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 ($54.5 million at
December 31, 1997) 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, 1997, approximately $70.6 million of federal and
foreign tax losses were available for carryforward. These carryforwards
are subject to valuation allowances and certain restrictions, and
generally expire within a period of one to fifteen years.
Note 12 - 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 plan may elect to contribute, on a before-
tax basis, a certain percent of their annual salary. The
Company matches a portion of these employee contributions with
Guidant common stock. In addition, the Company contributes
Guidant common stock in a fixed percentage of employees' annual
base pay to the plan regardless of whether the employee
contributes to the plan.
The Company established an Employee Stock Ownership Plan (ESOP)
as a funding vehicle for the savings plan. This internally
leveraged ESOP acquired approximately 4.5 million shares of
newly issued Guidant common stock at a cost of approximately
$60.0 million ($13.35 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
ten years, assuming the year-end price per share of Guidant
common stock of $62.25 remains constant). At December 31, 1997,
the ESOP held approximately 1.1 million allocated shares and 3.4
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 charged to expense based on the fair value of the shares
transferred and are treated as outstanding in the computation of
earnings per share. Compensation expense under these plans was
$14.1 million, $13.9 million, and $5.8 million for 1997, 1996,
and 1995, respectively.
Retirement Plan: Prior to 1995, the Company sponsored
noncontributory defined benefit retirement plans which covered
the majority of United States employees. 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 the plan 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.
The Company recognized a net pension credit of $1.0 million
related to the Plan for the years ended December 31, 1997 and
1996. Net pension expense related to the Plan was $2.8 million
for the year ended December 31, 1995.
The funded status and amounts recognized in the consolidated
balance sheets for the Plan at December 31 were as follows:
1997 1996
---- ----
Plan assets at fair value $52.8 $45.6
Actuarial present value of benefit obligations:
Vested benefits (36.7) (34.1)
Nonvested benefits (2.4) (1.9)
----- -----
Accumulated benefit obligation (39.1) (36.0)
Effect of projected future salary increases (9.7) (6.8)
----- -----
Projected benefit obligation (48.8) (42.8)
----- -----
Plan assets in excess of projected
benefit obligation 4.0 2.8
Unrecognized loss, net 0.5 0.4
Unrecognized prior service cost, net 1.9 2.2
----- -----
Prepaid pension cost $ 6.4 $5.4
===== =====
35
The assumptions used to develop net periodic pension expense and
the actuarial present value of projected benefit obligations for
the past three years are shown below in percentage terms:
Discount rate (weighted average) 7.5
Rate of increase in future compensation levels 4.5-8.0
Expected long-term rate of return on plan assets 10.5
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 totaled $2.2 million, $1.9 million, and $1.5
million in 1997, 1996, and 1995, respectively.
Note 13 - Geographic Information
The Company operates in one industry segment the development,
manufacture, and marketing of devices for minimally invasive
medical procedures. Net sales, income before taxes, and assets
by major geographic area are summarized below.
1997 1996 1995
Net sales: ---- ---- ----
United States:
Unaffiliated customers $987.7 $715.3 $672.2
Transfers to other geographic areas 225.1 239.2 183.1
------ ----- -----
1,212.8 954.5 855.3
Unaffiliated customers outside
the United States 340.5 334.4 259.1
Eliminations and transfers (225.1) (239.2) (183.1)
----- ----- -----
$1,328.2 $1,049.7 $931.3
======== ======== ======
Income before income taxes:
United States $211.1 $135.5 $164.8
Other 16.6 9.5 29.4
Eliminations and adjustments 21.1 (9.0) (32.7)
------ ----- -----
$248.8 $136.0 $161.5
======== ======== ======
Assets:
United States $1,231.9 $1,018.9 $1,075.0
Other 201.9 219.2 213.1
Eliminations and adjustments (208.8) (213.2) (219.0)
------- ------- -------
$1,225.0 $1,024.9 $1,069.1
======== ======== ========
Sales between geographic areas are made at transfer prices that,
in general, approximate prices to third-party distributors.
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 $84.8 million, $72.5
million, and $69.0 million for 1997, 1996, and 1995, respectively.
Note 14 - Financial Instruments
In the normal course of business, operations of the Company are
exposed to continuing fluctuations in currency values and short-
term interest rates. These fluctuations can vary the costs of
financing, investing, and operating. The Company's objective is
to reduce earnings volatility associated with these fluctuations
to allow management to focus on core business issues.
Accordingly, 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 Company does not enter into any
derivative transactions for speculative purposes.
The notional amounts of derivatives summarized in the following
paragraphs 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 the currencies of Western Europe and the
Japanese yen). The United States dollar value of transactions
denominated in foreign currencies fluctuates as the United
States dollar strengthens or weakens relative to these foreign
currencies. 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, for
periods consistent with commitments. These contracts also hedge
firm commitments, primarily intercompany loans, payables, and
receivables. While these hedging instruments are subject to
fluctuations in value, such fluctuations are generally offset by
changes in the value of the underlying exposures being hedged.
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:
1997 1996
---- ----
Forward exchange contracts $133.9 $111.9
Purchased foreign currency options $202.9 $217.7
Fair values exceeded the carrying amounts of these instruments
at December 31, 1997, by approximately $3.1 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 and option
36
contracts are calculated using pricing models used widely in
financial markets.
Interest Rate Risk Management: The Company may enter into
interest rate swaps or caps to lower funding costs or reduce
exposures to interest rate fluctuations. There were no interest
rate swaps outstanding during 1997. Under its interest rate
caps, the Company agrees with other parties to exchange, at
specified intervals, the difference between an agreed fixed-rate
and floating-rate interest rate calculated by reference to an
agreed notional amount. Amounts become payable to the Company
only if the floating rate exceeds the fixed rate.
The notional amount of interest rate cap transactions
outstanding at December 31, 1997, was $100.0 million. The fair
value of interest rate cap transactions outstanding at December
31, 1997, was not significant. The impact of interest rate risk-
management activities on income for all periods presented was
not material.
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 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: The gross unrealized gains associated with
available-for-sale securities of $7.6 million and $15.6 million,
were included, net of tax, as a separate component of shareholders'
equity in 1997 and 1996, respectively. There were no sales of
available-for-sale securities in 1997 or 1996. 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 and repurchase agreements
held in Puerto Rico, were $31.0 million and $22.2 million at
December 31, 1997 and 1996, respectively. The carrying values
of these investments approximate their fair values.
In the fourth quarter of 1997, the Company recognized a gain of
$23.2 million on the sale of its investment in Gynecare, Inc.,
which was acquired in a tax-free stock-for-stock exchange. The
Company owned approximately 30% of the common stock of Gynecare
and accounted for this investment under the equity method prior
to the acquisition. The securities received by the Company in
this exchange are classified in current assets as available-for-
sale in accordance with SFAS No. 115. The gain was recorded in
other income and expenses. A special contribution of $11.5
million of these securities was made to the Guidant Foundation,
Inc., and is recognized as expense in operations. The Company
owns no investments that are considered trading securities.
A summary of the Company's available-for-sale securities at
December 31 follows:
1997 1996
Fair Fair
Cost Value Cost Value
---- ----- ---- -----
Short term:
Marketable equity securities $11.6 $12.1 -- --
United States government securities -- -- $ 3.2 $ 3.2
Corporate debt and other 1.2 1.2 12.1 12.1
---- ---- ----- ----
Total $12.8 $13.3 $15.3 $15.3
==== ==== ===== ====
Long term:
Marketable equity securities $ 3.5 $10.6 $ 3.5 $19.1
==== ===== ===== =====
Note 15 - 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 the Company
alleging patent infringement related to certain of the Company's
defibrillator and pacemaker models. Intermedics is seeking injunctive
and monetary relief of an unspecified amount.
On May 3, 1996, Pacesetter, Inc., filed suit against the
Company. The complaint, as subsequently amended, alleges
infringement of certain Pacesetter patents and seeks injunctive
relief, unspecified damages and an award of attorneys' fees.
Also in May 1996, Angeion Corporation filed suit against the
Company. The complaint, as subsequently amended, alleges
infringement of certain Angeion defibrillator patents and seeks
injunctive relief, unspecified monetary damages, and an award of
attorney fees.
On June 6, 1997, C.R. Bard, Inc., (Bard) filed suit against the
Company alleging that certain unspecified dilatation catheters
infringe two patents owned by Bard. Bard is seeking monetary
and injunctive relief.
On October 3, 1997, Cordis Corporation (Cordis), a subsidiary of
Johnson & Johnson filed suit against the Company alleging that
the sale of the ACS RX MULTI-LINK Coronary Stent infringes
certain patents licensed to Cordis. In addition, on October 8,
1997, Cordis filed a motion for a preliminary injunction in this
lawsuit seeking to prevent the Company from selling the ACS RX
MULTI-LINK Coronary Stent other than in certain limited
circumstances and subject to certain conditions. On October 21,
1997, Cordis amended its complaint to include Arterial Vascular
Engineering, Inc., Boston Scientific Corporation, and SciMed
Life Systems, Inc., as additional defendants. A hearing on the
motion for a preliminary injunction was held during the week of
February 9, 1998. In the lawsuit, Cordis is seeking injunctive
relief and unspecified monetary damages.
On November 5, 1997, Medtronic, Inc., filed suit against the Company
alleging that the ACS RX MULTI-LINK Coronary Stent infringes a patent
owned by Medtronic. In the lawsuit, Medtronic is seeking injunctive
relief, monetary damages, and attorney fees.
On December 2, 1997, Cordis filed suit against the Company
alleging that the ACS RX ROCKET Coronary Dilatation Catheter
infringes a patent owned by Cordis. In the lawsuit, Cordis is
seeking injunctive relief, monetary damages, and attorney fees.
37
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 outcomes of the legal actions
brought against it, or to provide an estimate of the losses, if
any, that may arise, 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 its consolidated results of operations.
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>
<CAPTION>
Note 16 - Selected Quarterly Information (Unaudited)
The following table summarizes the Company's operating results by quarter:
<S> <C> <C> <C> <C>
1997
------------------------------------------
Fourth Third Second First
------ ----- ------ ------
Net sales:
Cardiac rhythm management $183.3 $172.9 $164.4 $149.0
Vascular intervention 293.7 95.8 101.1 100.8
Cardiac & vascular surgery 18.8 15.5 16.3 16.6
------ ------ ------ ------
Total net sales 495.8 284.2 281.8 266.4
Cost of products sold 110.7 70.3 73.0 66.8
------ ------ ------ ------
Gross profit 385.1 213.9 208.8 199.6
Research and development 66.1 50.2 46.0 46.0
Purchased research and development -- -- 57.4 --
Sales, marketing, and administrative 170.6 93.3 90.4 85.4
Merger-related costs 11.1 -- -- --
Foundation contribution 11.5 -- -- --
------ ------ ------ -----
Income from operations 125.8 70.4 15.0 68.2
Other expenses, net 14.0 6.3 5.5 4.8
Impairment charges -- -- -- --
------ ------ ------ ------
Income (loss) before income taxes
and cumulative effect of change
in accounting principle 111.8 64.1 9.5 63.4
Income taxes 45.0 23.8 5.2 24.8
------ ----- ----- ----
Income before cumulative effect of
change in accounting principle 66.8 40.3 4.3 38.6
Cumulative effect of change in
accounting principle, net (4.7) -- -- --
------ ------ ------ ------
Net income (loss) $62.1 $40.3 $4.3 $38.6
===== ====== ====== ======
Earnings (loss) per share $0.42 $0.27 $0.03 $0.26
Weighted average common shares
outstanding 147.24 147.25 147.19 146.92
Earnings (loss) per share - assuming
dilution $0.41 $0.27 $ 0.03 $0.26
Weighted average common shares
outstanding - assuming dilution 150.63 150.01 149.58 149.00
Cash dividends declared $0.0125 $0.0125 $0.0125 $0.0125
Common stock prices:
High $69.50 $56.56 $44.00 $36.13
Low $48.63 $42.00 $29.25 $26.81
1996
----------------------------------------
Fourth Third Second First
------ ----- ------ ------
Net sales:
Cardiac rhythm management $151.9 $144.7 $144.2 $133.8
Vascular intervention 104.9 104.7 109.1 106.9
Cardiac & vascular surgery 14.6 11.0 12.4 11.5
------ ------ ------ ------
Total net sales 271.4 260.4 265.7 252.2
Cost of products sold 69.0 69.5 100.3 77.1
------ ------ ------ -----
Gross profit 202.4 190.9 165.4 175.1
Research and development 45.5 40.8 39.8 38.5
Purchased research and development -- -- -- --
Sales, marketing, and administrative 88.4 79.2 83.1 77.7
Merger-related costs -- -- -- --
Foundation contribution -- -- -- --
------ ----- ------ ------
Income from operations 68.5 70.9 42.5 58.9
Other expenses, net 4.7 6.5 12.2 14.5
Impairment charges -- -- 66.9 --
------ ------ ------ -----
Income (loss) before income taxes
and cumulative effect of change
in accounting principle 63.8 64.4 (36.6) 44.4
Income taxes 25.6 26.7 12.8 18.6
------ ------ ------ ------
Income before cumulative effect of
change in accounting principle -- -- -- --
Cumulative effect of change in
accounting principle, net -- -- -- --
------ ------ ------ ------
Net income (loss) $38.2 $37.7 $(49.4) $25.8
====== ====== ======= =====
Earnings (loss) per share $0.26 $0.26 $(0.34) $0.18
Weighted average common shares
outstanding 146.91 146.84 146.76 146.40
Earnings (loss) per share - assuming
dilution $0.26 $0.25 $(0.34) $0.17
Weighted average common shares
outstanding - assuming dilution 148.50 148.19 146.76 147.56
Cash dividends declared $0.0125 $0.0125 $0.0125 $0.0125
Common stock prices:
High $28.63 $28.13 $30.69 $27.32
Low $20.00 $23.50 $23.25 $19.75
38
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, 1997 and
1996, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Guidant Corporation and Subsidiaries at December 31, 1997 and
1996, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
As discussed in Note 3 to the financial statements, the Company
changed its method of accounting in 1997 for business process
reengineering costs.
s/Ernst & Young LLP
Indianapolis, Indiana
February 3, 1998
39
</TABLE>
Guidant Corporation and Subsidiaries
Exhibit 21.1 List of Subsidiaries
The following are the subsidiaries
of the Company at December 31, 1997:
State or Jurisdiction
of Incorporation or %
Name Organization Owned
- ---- --------------------- -----
ACS Delaware Corporation Delaware 100
ACS GmbH Germany 100
Advanced Cardiovascular Systems, Inc. California 100
Cardiac Pacemakers, Inc. Minnesota 100
CPI del Caribe, Ltd. Minnesota 100
CPI Delaware, Inc. Delaware 100
EndoVascular Technologies, Inc. Delaware 100
EndoVascular Technologies Europe B.V. Netherlands 100
Guidant Australia Pty Ltd. Australia 100
Guidant B.V. Netherlands 100
Guidant Belgium S.A. Belgium 100
Guidant Beteiligungs GmbH Germany 100
Guidant Canada Corporation Canada 100
Guidant Denmark A.S. Denmark 100
Guidant do Brasil Ltda. Brazil 100
Guidant Europe S.A. Belgium 100
Guidant France S.A. France 100
Guidant GmbH (Austria) Austria 100
Guidant Holdings, Inc. Indiana 100
Guidant Intercontinental Corporation Indiana 100
Guidant International B.V. Netherlands 100
Guidant International Sales, Inc. Barbados 100
Guidant Italia, S.r.l. Italy 100
Guidant Japan K.K.* Japan 100
Guidant Limited (U.K.) England 100
Guidant Nederland B.V. Netherlands 100
Guidant Norway A.S. Norway 100
Guidant S.A. (Spain) Spain 100
Guidant S.A. (Switzerland) Switzerland 100
Guidant Sales Corporation Indiana 100
Guidant Singapore Pte. Ltd. Singapore 100
Guidant Sweden A.B. Sweden 100
Heart Rhythm Technologies Incorporated California 100
Origin Medsystems, Inc. Delaware 100
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 3, 1998, included in the 1997 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 3, 1998,
with respect to the consolidated financial statements of Guidant
Corporation incorporated by reference in the 1997 Annual Report
(Form 10-K) for the year then ended December 31, 1997.
s/Ernst & Young LLP
Indianapolis, Indiana
March 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 17,700
<SECURITIES> 13,300
<RECEIVABLES> 380,900
<ALLOWANCES> 9,200
<INVENTORY> 120,800
<CURRENT-ASSETS> 625,100
<PP&E> 568,700
<DEPRECIATION> 242,600
<TOTAL-ASSETS> 1,225,000
<CURRENT-LIABILITIES> 541,300
<BONDS> 80,000
0<F1>
0<F1>
<COMMON> 192,500
<OTHER-SE> 389,300
<TOTAL-LIABILITY-AND-EQUITY> 1,225,000
<SALES> 1,328,200
<TOTAL-REVENUES> 1,328,200
<CGS> 320,800
<TOTAL-COSTS> 320,800
<OTHER-EXPENSES> 265,700
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 19,500
<INCOME-PRETAX> 248,800
<INCOME-TAX> 98,800
<INCOME-CONTINUING> 150,000
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 4,700
<NET-INCOME> 145,300
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.97
<FN>
<F1>Does not apply.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD TYPE> 9 MOS
<FISCAL YEAR END> DEC-31-1997
<PERIOD END> SEP-30-1997
<CASH> 10,300
<SECURITIES> 5,100
<RECEIVABLES> 267,500
<ALLOWANCES> 7,700
<INVENTORY> 116,900
<CURRENT ASSETS> 486,300
<PP&E> 578,600
<DEPRECIATION> 243,800
<TOTAL ASSETS> 1,099,600
<CURRENT LIABILITIES> 362,400
<BONDS> 187,500
0<F1>
0<F1>
<COMMON> 192,500
<OTHER SE> 345,500
<TOTAL LIABILITY AND EUQITY> 1,099,600
<SALES> 832,400
<TOTAL REVENUES> 832,400
<CGS> 210,100
<TOTAL COSTS> 210,100
<OTHER EXPENSES> 199,600
<LOSS PROVISION> 0<F1>
<INTEREST EXPENSE> 14,800
<INCOME PRETAX> 137,000
<INCOME TAX> 53,800
<INCOME CONTINUING> 83,200
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET INCOME> 83,200
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.56
<FN>
<F1>Does not apply.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD TYPE> 6 MOS
<FISCAL YEAR END> DEC-31-1997
<PERIOD END> JUN-30-1997
<CASH> 12,800
<SECURITIES> 7,000
<RECEIVABLES> 255,800
<ALLOWANCES> 6,600
<INVENTORY> 111,500
<CURRENT ASSETS> 475,600
<PP&E> 564,400
<DEPRECIATION> 231,500
<TOTAL ASSETS> 1,075,800
<CURRENT LIABILITIES> 307,000
<BONDS> 256,200
0<F1>
0<F1>
<COMMON> 192,500
<OTHER SE> 308,300
<TOTAL LIABILITY AND EQUITY> 1,075,800
<SALES> 548,200
<TOTAL REVENUES> 548,200
<CGS> 139,800
<TOTAL COSTS> 139,800
<OTHER EXPENSES> 149,400
<LOSS PROVISION> 0<F1>
<INTEREST EXPENSE> 9,900
<INCOME PRETAX> 72,900
<INCOME TAX> 30,000
<INCOME CONTINUING> 42,900
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET INCOME> 42,900
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
<FN>
<F1> Does not apply.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD TYPE> 3 MOS
<FISCAL YEAR END> DEC-31-1997
<PERIOD END> MAR-31-1997
<CASH> 7,100
<SECURITIES> 12,800
<RECEIVABLES> 236,300
<ALLOWANCES> 7,100
<INVENTORY> 103,500
<CURRENT ASSETS> 455,100
<PP&E> 545,800
<DEPRECIATION> 220,600
<TOTAL ASSETS> 1,043,000
<CURRENT LIABILITIES> 294,300
<BONDS> 233,500
0<F1>
0<F1>
<COMMON> 192,500
<OTHER SE> 307,600
<TOTAL LIABILITY AND EQUITY> 1,043,000
<SALES> 266,400
<TOTAL REVENUES> 266,400
<CGS> 66,800
<TOTAL COSTS> 66,800
<OTHER EXPENSES> 46,000
<LOSS PROVISION> 0<F1>
<INTEREST EXPENSE> 4,900
<INCOME PRETAX> 63,400
<INCOME TAX> 24,800
<INCOME CONTINUING> 38,600
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET INCOME> 38,600
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
<FN>
<F1> Does not apply.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD TYPE> YEAR
<FISCAL YEAR END> DEC-31-1996
<PERIOD END> DEC-31-1996
<CASH> 4,100
<SECURITIES> 15,300
<RECEIVABLES> 220,300
<ALLOWANCES> 7,400
<INVENTORY> 102,800
<CURRENT ASSETS> 437,900
<PP&E> 534,400
<DEPRECIATION> 211,500
<TOTAL ASSETS> 1,024,900
<CURRENT LIABILITIES> 310,300
<BONDS> 233,500
0<F1>
0<F1>
<COMMON> 192,500
<OTHER SE> 274,400
<TOTAL LIABILITY AND EQUITY> 1,024,900
<SALES> 1,049,700
<TOTAL REVENUES> 1,049,700
<CGS> 315,900
<TOTAL COSTS> 315,900
<OTHER EXPENSES> 164,600
<LOSS PROVISION> 0<F1>
<INTEREST EXPENSE> 23,000
<INCOME PRETAX> 136,000
<INCOME TAX> 83,700
<INCOME CONTINUING> 52,300
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET INCOME> 52,300
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.35
<FN>
<F1>Does not apply.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD TYPE> 9 MOS
<FISCAL YEAR END> DEC-31-1996
<PERIOD END> SEP-30-1996
<CASH> 10,300
<SECURITIES> 18,200
<RECEIVABLES> 215,700
<ALLOWANCES> 7,700
<INVENTORY> 102,300
<CURRENT ASSETS> 434,100
<PP&E> 521,200
<DEPRECIATION> 207,000
<TOTAL ASSETS> 1,016,600
<CURRENT LIABILITIES> 569,500
<BONDS> 0<F1>
0<F1>
0<F1>
<COMMON> 192,500
<OTHER SE> 244,400
<TOTAL LIABILITY AND EQUITY> 1,016,600
<SALES> 778,300
<TOTAL REVENUES> 778,300
<CGS> 246,900
<TOTAL COSTS> 246,900
<OTHER EXPENSES> 119,100
<LOSS PROVISION> 0<F1>
<INTEREST EXPENSE> 18,800
<INTEREST PRETAX> 72,200
<INCOME TAX> 58,100
<INCOME CONTINUING> 14,100
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET INCOME> 14,100
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
<FN>
<F1> Does not apply.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD TYPE> 6 MOS
<FISCAL YEAR END> DEC-31-1996
<PERIOD END> JUN-30-1996
<CASH> 4,100
<SECURITIES> 16,900
<RECEIVABLES> 216,600
<ALLOWANCES> 7,600
<INVENTORY> 104,600
<CURRENT ASSETS> 427,700
<PP&E> 534,800
<DEPRECIATION> 226,700
<TOTAL ASSETS> 1,016,200
<CURRENT LIABILITIES> 608,000
<BONDS> 0<F1>
0<F1>
0<F1>
<COMMON> 192,500
<OTHER SE> 206,600
<TOTAL LIABILITY AND EQUITY> 1,016,200
<SALES> 517,900
<TOTAL REVENUES> 517,900
<CGS> 177,400
<TOTAL COSTS> 177,400
<OTHER EXPENSES> 78,300
<LOSS PROVISION> 0<F1>
<INTEREST EXPENSE> 13,300
<INCOME PRETAX> 7,800
<INCOME TAX> 31,400
<INCOME CONTINUING> (23,600)
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET INCOME> (23,600)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
<FN>
<F1> Does not apply.
</FN>
</TABLE>
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 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.
15. The inability of certain of the Company's, or its Suppliers'
or Customers', computer systems to handle dates beyond the year
1999.
16. Factors beyond the control of the Company, including
earthquakes (particularly in light of the fact that the Company
has significant facilities located near major earthquake fault
lines), floods, fires or explosions.
