<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
Commission File Number 1-13388
GUIDANT CORPORATION
(Exact name of Registrant as specified in its charter)
INDIANA 35-1931722
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 MONUMENT CIRCLE, 29TH FLOOR
INDIANAPOLIS, INDIANA 46204-5129
(Address of principal executive offices)
Registrant's telephone number, including area code: (317) 971-2000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
The number of shares of common stock outstanding as of July 17, 1998:
Class Number of Shares Outstanding
----- ----------------------------
Common 150,797,575
1
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
GUIDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per-share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, JUNE 30,___
-------------------- --------------------
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net sales.................................... $ 487.8 $ 281.8 $ 958.1 548.2
Cost of products sold........................ 110.0 73.0 217.4 139.8
------- ------- ------- ------
Gross profit.............................. 377.8 208.8 740.7 408.4
Research and development..................... 65.8 46.0 127.8 92.0
Purchased research and development........... 28.7 57.4 28.7 57.4
Sales, marketing, and administrative......... 141.1 90.4 276.2 175.8
------- ------- ------- ------
235.6 193.8 432.7 325.2
------- ------- ------- ------
Income from operations.................... 142.2 15.0 308.0 83.2
Other income (expenses):
Interest, net............................. (3.5) (5.0) (6.9) (9.9)
Royalties, net............................ (11.2) 4.9 (20.4) 9.4
Amortization.............................. (4.6) (3.8) (8.3) (7.9)
Litigation settlement charge.............. -- -- (60.0) --
Other, net................................ (1.2) (1.6) (5.2) (1.9)
------- ------- ------- ------
(20.5) (5.5) (100.8) (10.3)
------- ------- ------- ------
Income before income taxes................... 121.7 9.5 207.2 72.9
Income taxes................................. 43.0 5.2 73.2 30.0
------- ------- ------- ------
Net income................................... $ 78.7 $ 4.3 $ 134.0 $ 42.9
======= ======= ======= ======
Earnings per share........................... $ 0.53 $ 0.03 $ 0.91 $ 0.29
======= ======= ======= ======
Earnings per share-assuming dilution......... $ 0.52 $ 0.03 $ 0.89 $ 0.29
======= ======= ======= ======
Dividends paid per share..................... $0.0125 $0.0125 $ 0.025 $ 0.025
======= ======= ======= ======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(unaudited)
<S> <C> <C>
Assets
CURRENT ASSETS
Cash and cash equivalents................... $ 35.3 $ 17.7
Short-term investments...................... -- 13.3
Accounts receivable, net of allowances
of $13.8(1998) and $9.2 (1997)........... 376.8 371.7
Other receivables........................... 8.1 10.9
Inventories................................. 128.3 120.8
Deferred income taxes....................... 71.3 65.7
Prepaid expenses............................ 18.3 25.0
------ ------
Total Current Assets..................... 638.1 625.1
OTHER ASSETS
Goodwill, net of allowances
of $101.7 (1998) and $95.1 (1997)........ 176.9 182.0
Other intangible assets, net of allowances
of $13.5 (1998) and $11.4 (1997)......... 46.4 6.5
Investments................................. 46.5 46.2
Deferred income taxes....................... 25.6 16.7
Sundry...................................... 24.8 22.4
Property and equipment...................... 592.3 568.7
Less accumulated depreciation............... 244.7 242.6
------ ------
Property and equipment, net................. 347.6 326.1
------ ------
$1,305.9 $1,225.0
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- -------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable...................... $ 61.5 $ 51.7
Employee compensation................. 90.2 109.9
Other liabilities..................... 119.7 126.9
Income taxes payable.................. 21.0 40.6
Current portion of long-term debt..... 123.7 212.2
-------- ---------
Total Current Liabilities.......... 416.1 541.3
NONCURRENT LIABILITIES
Long-term debt........................ 160.0 80.0
Other................................. 25.4 21.9
-------- ---------
185.4 101.9
Commitments and contingencies......... -- --
SHAREHOLDERS' EQUITY
Common stock-no par value:
Authorized shares: 500,000,000 (1998)
250,000,000 (1997)
Issued shares: 150,924,000 192.5 192.5
Additional paid-in capital............ 200.2 211.1
Retained earnings..................... 392.9 262.5
Deferred cost, ESOP................... (43.4) (45.8)
Treasury stock, at cost:
Shares: 102,847 (1998)...........
178,021 (1997)........... (7.1) (10.8)
Unrealized gain on investments, net... 3.4 4.2
Cumulative currency translation adjustments (34.1) (31.9)
-------- ---------
704.4 581.8
-------- ---------
$ 1,305.9 $1,225.0
========== =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In millions)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
June 30,
--------
1998 1997
------ ------
(unaudited)
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income............................................... $134.0 $ 42.9
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation............................................. 24.6 24.3
Amortization of intangible assets........................ 8.3 7.9
Change in deferred income taxes.......................... (13.5) 2.8
Other noncash expenses, net.............................. 34.3 14.7
------ ------
187.7 92.6
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Receivables, increase.................................... (11.0) (40.1)
Inventories, increase.................................... (18.0) (15.0)
Prepaid expenses, decrease............................... 6.4 0.7
Accounts payable and accrued expenses, decrease.......... (9.7) (1.8)
Income taxes payable, decrease........................... (13.7) (2.2)
Other liabilities, (decrease) increase................... (3.1) 0.6
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 138.6 34.8
INVESTING ACTIVITIES:
Additions of property and equipment, net................. (49.5) (37.2)
Purchases of available-for-sale securities............... (0.7) (4.5)
Sale/maturity of available-for-sale securities........... 13.1 12.8
Additions of other assets, net........................... (47.5) (4.1)
------- -------
NET CASH USED FOR INVESTING ACTIVITIES..................... (84.6) (33.0)
FINANCING ACTIVITIES:
(Decrease)/increase in borrowings........................ (7.4) 18.8
Dividends................................................ (3.7) (3.6)
Purchases of common stock and other capital
transactions............................................ (25.1) (7.8)
------- -------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES....... (36.2) 7.4
Effect of Exchange Rate Changes on Cash.................... (0.2) (0.4)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................. 17.6 8.8
Cash and Cash Equivalents at Beginning of Period........... 17.7 4.0
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................. $ 35.3 $ 12.8
======= =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions)
(unaudited)
NOTE 1 - GENERAL INFORMATION
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; (ii) vascular intervention;
and (iii) cardiac and vascular surgery. Guidant is a global company with
principal operations in the United States, Western Europe, and Japan. The
Company generally distributes its products through a direct sales force in the
United States and a combination of direct sales representatives and independent
distributors in international markets.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
necessary for a fair presentation of results of operations, financial position,
and cash flows in conformity with generally accepted accounting principles. In
the opinion of management, the consolidated financial statements reflect all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation of the Company's results for the periods presented. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, expenses, and
related disclosures at the date of the financial statements and during the
reporting period. Actual results could differ from these estimates.
For further information, refer to the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
NOTE 3 - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- -------------
<S> <C> <C>
Finished products $ 59.2 $ 52.6
Work in process 33.5 35.0
Raw materials and supplies 35.6 33.2
------ ------
$128.3 $120.8
====== ======
</TABLE>
6
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - ACQUISITIONS AND INTELLECTUAL PROPERTY AGREEMENT
On April 27, 1998, the conditions which require the payment of the additional
consideration for the asset acquisition of NeoCardia, LLC. were met. As a
result, the Company recorded a charge of $28.7 million in the second quarter of
1998 which was treated as purchased research and development expense. See Note 4
to the Company's consolidated financial statements for the year ended December
31, 1997.
On April 4, 1998, the Company entered into an agreement with C.R. Bard, Inc.
(Bard), that grants Guidant paid-up licenses to certain patents and settles two
patent infringement lawsuits. The agreement also grants Bard licenses to certain
non-stent Guidant patents. As a result of this agreement, Guidant recorded a
pre-tax charge of $60 million against 1998 first quarter earnings. An additional
$40 million was capitalized in other intangible assets and will be amortized
over the remaining useful life of the patent, which is in excess of ten years.
NOTE 5 - EARNINGS PER SHARE
The following table sets forth the computation of earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30,____ JUNE 30, __
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net income $ 78.7 $ 4.3 $ 134.0 $ 42.9
======= ======= ======= =======
Weighted-average common shares outstanding 147.30 147.19 147.28 147.06
Effect of employee stock options 3.65 2.39 3.58 2.23
------- ------- ------- -------
Weighted-average common shares outstanding 150.95 149.58 150.86 149.29
======= ======= ======= =======
and assumed conversion
Earnings per share $ 0.53 $ 0.03 $ 0.91 $ 0.29
======= ======= ======= =======
Earnings per share assuming dilution $ 0.52 $ 0.03 $ 0.89 $ 0.29
======= ======= ======= =======
</TABLE>
7
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income, which establishes new rules
for the reporting and display of comprehensive income and its components.
Statement 130 requires companies to report, in addition to net income, the net
effect of other components of comprehensive income including unrealized gains or
losses on available-for-sale securities and foreign currency translation
adjustments. These items have been historically reported in shareholders'
equity. During the second quarter of 1998 and 1997, total comprehensive income
(loss) amounted to $77.5 and $(0.4), respectively, based on the adjustments
referred to in the preceding sentence. Total comprehensive income for the six
months ended June 30, 1998 and 1997, was $130.2 and $27.6, respectively.
Adoption of this disclosure standard had no effect on the Company's reported
results of operations or financial position.
NOTE 7 - 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 attorney 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 October 3, 1997, Cordis Corporation (Cordis), a subsidiary of Johnson and
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
8
<PAGE>
GUIDANT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - CONTINGENCIES (CONTINUED)
injunction in this lawsuit seeking to prevent the Company from selling the ACS
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. On
July 17, 1998, the court denied the motion. 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. On
April 9, 1998, the Court heard oral arguments on Cordis' motion for a
preliminary injunction. In the lawsuit, Cordis is seeking injunctive relief,
monetary damages, and attorney fees.
On June 4,1998, Cordis filed another suit against the Company alleging that the
sale of the ACS MULTI-LINK Coronary Stent infringes two patents of Cordis.
Cordis is seeking injunctive relief and monetary damages.
The Company is a party to certain other legal actions arising in the ordinary
course of its business. While it is not possible to predict or determine the
outcome of the legal actions brought against it, 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
the 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.
9
<PAGE>
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Guidant Corporation (Guidant or the Company), an Indiana corporation, is a
global 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 defibrillator (AICD) systems. The Company also designs,
manufactures, and markets a full line of implantable pacemaker systems used in
the treatment of slow or irregular arrhythmias. In VI, the Company is a
worldwide leader in minimally invasive procedures used for opening blocked
coronary arteries. In addition, the Company develops, manufactures, and markets
products for use in minimally invasive cardiac and vascular surgeries.
10
<PAGE>
The following tables are summaries of the Company's net sales and major costs
and expenses excluding the impact of special charges:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, _____ June 30, ____
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in millions)
(unaudited)
<S> <C> <C> <C> <C>
Cardiac rhythm management $ 215.1 $ 164.4 $ 400.5 $ 313.4
Vascular intervention 256.4 101.1 523.4 201.9
Cardiac & vascular surgery 16.3 16.3 34.2 32.9
-------- -------- -------- --------
Total net sales $ 487.8 $ 281.8 $ 958.1 $ 548.2
Cost of products sold 110.0 73.0 217.4 139.8
-------- -------- -------- --------
Gross profit 377.8 208.8 740.7 408.4
Research and development 65.8 46.0 127.8 92.0
Sales, marketing, and administrative 141.1 90.4 276.2 175.8
-------- -------- -------- --------
206.9 136.4 404.0 267.8
Income from operations excluding $ 170.9 $ 72.4 $ 336.7 $ 140.6
======== ======== ======== ========
special charges/(1)/
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENT OF NET SALES
-------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, _____ JUNE 30, ____
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cardiac rhythm management 44.1% 58.3% 41.8% 57.2%
Vascular intervention 52.6 35.9 54.6 36.8
Cardiac & vascular surgery 3.3 5.8 3.6 6.0
----- ----- ----- -----
Total net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 22.6 25.9 22.7 25.5
----- ----- ----- -----
Gross profit 77.4 74.1 77.3 74.5
Research and development 13.5 16.3 13.3 16.8
Sales, marketing, and administrative 28.9 32.1 28.8 32.1
----- ----- ----- -----
42.4 48.4 42.1 48.9
Income from operations excluding 35.0% 25.7% 35.2% 25.6%
===== ===== ===== =====
special charges(1)
</TABLE>
/(1)/ Excludes purchased research and development charges of $28.7 million in
1998 and $57.4 million in 1997 which represents the appraised value of in-
process research and development recognized in conjunction with the asset
acquisition of NeoCardia,LLC.
11
<PAGE>
OPERATING RESULTS - THREE AND SIX MONTHS ENDED JUNE 30, 1998
The Company had worldwide net sales of $487.8 million for the three months ended
June 30, 1998, reflecting an increase of $206.0 million or 73% over the same
period in 1997. Significant growth in unit volume of 79% was partially offset by
net sales price declines of 3%, which includes changes in worldwide product mix,
and unfavorable fluctuations in foreign currency exchange rates of 3%.
The Company had worldwide net sales of $958.1 million for the six months ended
June 30, 1998, reflecting an increase of $409.9 million or 75% over the six
months ended June 30, 1997. Growth in unit volume of 83% was also partially
offset by net sales price declines of 5%, including changes in worldwide product
mix, and unfavorable fluctuations in foreign currency exchange rates of 3%.
Net sales of VI products of $256.4 million, grew $155.3 million or 154% for the
three months ended June 30, 1998, as compared to the same period in 1997. Net
sales of VI products for the six months ended June 30, 1998, were $523.4
million, an increase of $321.5 million or 159% over the comparable period in
1997. This growth in VI sales was primarily due to the continued enthusiastic
market-acceptance of the ACS RX MULTI-LINK Coronary Stent System, which was
released in the United States in October 1997. Worldwide coronary stent sales
during the second quarters of 1998 and 1997, were $176.4 million and $20.6
million, respectively. Sales of these products during the first half of 1998
were $360.1 million compared to $39.1 million during the first half of 1997. As
competitors continue to enter the coronary stent market, management believes
that sales growth of the ACS RX MULTI-LINK Coronary Stent System will not
continue at this rate. In the United States, Guidant's coronary stents are
largely sold through broad customer agreements involving a wide variety of the
Company's vascular interventional products. As interventional system sales and
pricing have grown in popularity, individual product line sales figures are
becoming less relevant. In the second quarter, over half of the VI sales in the
United States were part of a system. International sales of coronary stents also
contributed to the Company's sales growth, due primarily to the February 1998
receipt of approval from Japan's Ministry of Health and Welfare for
reimbursement of the ACS RX MULTI-LINK Coronary Stent System and the launch of
the ACS MULTI-LINK RX DUET Coronary Stent System in Europe in March 1998. The
ACS MULTI-LINK RX DUET System, the Company's next generation coronary stent, was
designed specifically to deliver, deploy, and post-dilate the stent with lower
delivery profiles, enhanced radiopacity, increased radial strength and
flexibility. During the quarter, the Company experienced pricing pressure on
certain vascular interventional products. The Company believes that pricing
pressures may continue in the future.
CRM experienced record sales of $215.1 million during the second quarter of
1998, an increase of $50.7 million or 30.8% from the second quarter of 1997. Net
sales of CRM products for the six months ended June 30, 1998, were $400.5
12
<PAGE>
million, an increase of $87.1 million or 27.8% over the same period in 1997.
AICD systems again led the sales growth with the VENTAK AV II DR, market
released in Europe in November 1997 and in the United States in March 1998; the
VENTAK AV II DDD, market released in the United States in February 1998
(hereinafter referred to collectively as VENTAK AV II); and strong worldwide
sales of the VENTAK MINI III, released to the U.S. market in January 1998 also
contributed to the sales growth. The VENTAK AV II DR, the world's first
implantable defibrillator system to incorporate dual-chamber adaptive-rate
pacing capability, includes comprehensive therapy and diagnostic options to
detect and treat tachyarrhythmias, including antitachycardia pacing,
cardioversion, and defibrillation. The VENTAK MINI III, the Company's newest in
a series of downsized AICDs, is a full featured device that includes single-
chamber bradycardia pacing therapy. The device possesses a range of sensing,
detection, and diagnostic capabilities required for treating complex
arrhythmias.
The Company's pacemaker products also contributed to sales growth during the
period, particularly in the United States where sales of these products
increased 23% and 19% for the three and six month periods ended June 30, 1998,
from the same periods in 1997. In May 1998, the Company announced the United
States market release of the CPI DISCOVERY and CPI MERIDIAN devices. These
systems were released in Europe in March of this year. The new pacemaker
families include single and dual-chamber models featuring adaptive-rate pacing
designed to match pacing rates to the patient's activity level. These pacemaker
systems include advanced diagnostics designed to provide information that allows
the physician to efficiently manage patient therapy decisions and advanced
software interfaces for more efficient programming and routine follow up.
Management believes that sales growth of AICD systems is partially driven by the
results of two new studies. Both the Cardiac Arrest Study Hamburg (CASH) and the
Canadian Implantable Defibrillator Study (CIDS) support the findings of previous
studies, Antiarrhythmics Vs. Implantable Automatic Defibrillators (AVID) and
Multicenter Automatic Defibrillator Implantation Trial (MADIT), that implantable
cardioverter defibrillators are superior to conventional drug treatment and
should continue to be an important therapy option.
Net sales of CVS products for the three months ended June 30, 1998, were $16.3
million, which is level with the same period in the previous year. Net
sales of CVS products for the six months ended June 30, 1998, were $34.2
million, an increase of $1.3 million or 4.0% over the comparable period in 1997.
Sales growth occurred in the United States and was driven primarily by the
VASOVIEW Balloon Dissection system.
13
<PAGE>
The Company experienced sales growth both in the United States and international
markets. Net sales in the United States increased 116% to $370.0 million, while
international net sales increased 6.6% to $117.8 million for the second quarter
of 1998 compared to the second quarter of 1997. For the six months ended June
30, 1998, U.S. net sales increased 117% to $728.0 million and international net
sales increased 7.8% to $230.1 million, as compared to the six months ended June
30, 1997. U.S. net sales growth was primarily due to sales of vascular
interventional systems, including the ACS RX MULTI-LINK Coronary Stent, VENTAK
AV II, and VENTAK MINI III. International net sales growth was primarily driven
by the ACS RX MULTI-LINK Coronary Stent System in Japan, ACS MULTI-LINK RX DUET
Coronary Stent System, ACS RX ROCKET, VENTAK MINI III, and VENTAK AV II. An
unfavorable foreign currency exchange rate impact, due to the strengthening U.S.
dollar, reduced net sales during the quarter by $7.6 million compared to the
same period in 1997 and by $14.7 million for the six months ended June 30, 1998,
as compared to 1997. 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 was $110.0 million for the three months ended June 30,
1998, and represented 22.6% of net sales versus 25.9% for the same period last
year. Cost of products sold for the six months ended June 30, 1998 was $217.4
million or 22.7% of net sales. For the six months ended June 30, 1997, cost of
products sold was $139.8 million or 25.5% of net sales. This reduction in cost
of products sold as a percentage of net sales was due primarily to increased
manufacturing volume and favorable mix impact in product sales along with
continued progress in manufacturing efficiencies.
The Company continued its commitment to achieving long-term growth by investing
significant resources in research and development. Research and development
expenses of $65.8 million increased $19.8 million or 43.0% during the second
quarter of 1998 compared to the same period in 1997. For the six months ended
June 30, 1998, research and development expenses increased $35.8 million or
38.9%. Increased research and development spending during this period resulted
primarily from: (i) new product development costs related to future generations
of AICDs, pacemakers, and programmers; (ii) development of radiation therapy
devices for coronary restenosis; (iii) development of stent technology; (iv)
clinical evaluation of implantable device systems for treatment of congestive
heart failure; (v) PMA preparation activities and increased personnel costs
related to the development of the Company's endovascular grafting systems for
the minimally invasive repair of abdominal aortic aneurysms (AAA); and (vi)
increased performance-based compensation.
14
<PAGE>
On April 27, 1998, the conditions which require the payment of the additional
consideration for the asset acquisition of NeoCardia, LLC. were met. As a
result, the Company recorded a pre-tax charge of $28.7 million in the second
quarter of 1998 which was treated as purchased research and development expense
consistent with the treatment of the original acquisition cost.
Sales, marketing, and administrative expenses grew at a rate less than sales,
and were up $50.7 million or 56.1% for the second quarter of 1998 compared to
the same period in 1997. For the six months ended June 30, 1998, sales,
marketing, and administrative expenses increased $100.4 million or 57.1% in
comparison to the same period in the prior year. This increase was due to: i)
variable selling expenses, such as commissions and bonuses, associated with the
growth in sales; (ii) promotional expenses related to the release of new
products; (iii) costs related to the implementation of direct operations in
certain markets; (iv) increased investment in the U.S. field-sales force; (v)
increased allowances for uncollectible accounts; (vi) additional spending at CVS
associated with the ramp up of business activities related to products for the
treatment of AAA; and (vii) increased legal costs associated with various
litigation.
Income from operations of $142.2 million represented 29.1% of net sales during
the second quarter of 1998 compared to 5.3% during the same period in 1997.
Excluding the impact of purchased research and development charges in 1998 and
1997, income from operations would have been $170.9 million and $72.4 million
for the three months ended June 30, 1998, and 1997, respectively. This
represents growth in income from operations of 136% and resulted from sales
growth combined with increased gross profit and controlled growth in operating
expenses. Income from operations for the six months ended June 30, 1998, and
1997, was $336.7 million and $140.6 million, respectively, excluding the
purchased research and development charges in both years, representing growth of
139% which was due to the same factors described above.
On April 4, 1998, the Company entered into an agreement with C.R. Bard, Inc.
(Bard) that grants the Company paid-up licenses to certain patents and settles
two patent infringement lawsuits. As a result, the Company recognized a non-
recurring, pre-tax charge of $60 million ($38.8 million after tax) against 1998
first quarter earnings in other expenses. An additional $40 million was
capitalized and will be amortized over the remaining estimated useful life of
the patent.
For the three months ended June 30, 1998, the Company had net other expenses of
$20.5 million compared to $5.5 million for the same period in the prior year.
Net other expenses for the six months ended June 30, 1998, without the
aforementioned charge, were $40.8 million compared to $10.3 million during the
same period in
15
<PAGE>
1997. These increases were due primarily to decreased royalty income on certain
vascular intervention technology patents and increased royalty expenses on
coronary stents, rapid exchange coronary dilatation catheters, and AICDs.
Charges associated with certain obsolete engineering, manufacturing, and support
equipment also contributed to the increase in other expenses.
The Company's effective income tax rate was 35.3% for the three and six months
ended June 30, 1998. Without considering the effect of special charges, the
effective income tax rate for each of the same periods in 1997 was 39.2%. This
decline in the effective income tax rate was primarily due to the realization of
benefits from certain tax losses. Management believes the Company's effective
income tax rate will remain at or near the current level throughout the year.
Net income for the three months ended June 30, 1998 and 1997, was $78.7 million
and $4.3 million, respectively. Earnings per share-assuming dilution was $0.52
and $0.03, respectively. Excluding the aforementioned purchased research and
development charges from both periods, net income would have been $97.3 million
during the second quarter of 1998, compared to $40.7 million in the second
quarter of 1997, which represents growth of 139%. Growth in operating income and
the reduced effective income tax rate were the drivers behind this growth in net
income. Earnings per share-assuming dilution, exclusive of the above charges,
was $0.64 for the three months ended June 30, 1998, and $0.27 for the same
period in 1997.
For the six months ended June 30, 1998, net income would have been $191.4
million and earnings per share-assuming dilution would have been $1.27 without
the aforementioned special charges. Net income for the six months ended June 30,
1997, excluding the impact of the special charge, would have been $79.3 million
and $0.53 per share-assuming dilution.
LIQUIDITY AND FINANCIAL CONDITION
The Company generated cash flows which were more than sufficient to fund
operations in the first half of 1998. Cash and cash equivalents increased to
$35.3 million at June 30, 1998, from $17.7 million at December 31, 1997. For the
six months ended June 30, 1998, cash provided by operating activities was $138.6
million compared to $34.8 million for the same period in 1997. This increase in
cash provided by operating activities was primarily due to the Company's
improved net income.
16
<PAGE>
Working capital of $222.0 million at June 30, 1998, increased by $138.2 million
from the prior year end level. This increase was primarily due to a reduction
of the current portion of long-term debt. The current ratio at June 30, 1998,
was 1.5:1 compared to 1.2:1 at December 31, 1997. The Company believes its cash
from operations is sufficient to fund essentially all future working capital
needs and discretionary operating spending requirements.
Net cash used for investing activities totaled $84.6 million for the six months
ended June 30, 1998, compared to $33.0 million for the same period in 1997. The
most significant use of cash for investing activities related to $40 million of
intangibles acquired as part of the Company's settlement with Bard in 1998. Net
additions of property and equipment of $49.5 million for the six months ended
June 30, 1998, compared to $37.2 million for the same period in 1997, were also
a significant use of cash for investing activities during both periods.
Net cash used for financing activities totaled $36.2 million for the six months
ended June 30, 1998. Cash provided by operating activities was used to pay down
debt in 1998, however, this decline in borrowings was partially offset by the
additional commercial paper issued for the aforementioned $100 million payment
to Bard. For the six months ended June 30, 1997, financing activities increased
cash by $7.4 million. The Company paid $57.4 million in 1997 for the
acquisition of NeoCardia through the issuance of commercial paper.
At June 30, 1998, the Company had outstanding borrowings of $283.7 million
through the issuance of commercial paper and bank borrowings at a weighted
average interest rate of 5.55%. The commercial paper borrowings are supported
by a credit facility aggregating $600 million that permits borrowings through
January 8, 2001. This credit facility, under which there are currently no
outstanding borrowings, carries a variable market rate of interest. The Company
expects that a minimum of approximately $160 million of borrowings will remain
outstanding through the next twelve months and, accordingly, has classified this
portion of borrowings as long-term at June 30, 1998. This represents an
increase in long-term debt of $80 million from December 31, 1997, which is
related to the aforementioned agreement reached with Bard in the second quarter
of 1998.
The Company expects its cash from operations to be adequate to meet its
obligations to make interest payments on its debt and other anticipated
operating cash needs including planned capital expenditures which are expected
to be approximately $130 million in 1998. The increase over 1997 spending is due
in part to the Company's recently announced investment in a manufacturing
facility in Ireland.
The Company has recognized net deferred tax assets aggregating $96.9 million at
June 30, 1998, and $82.4 million at December 31, 1997. The assets relate
principally to the establishment of inventory and product related loss reserves
17
<PAGE>
and purchased research and development. In view of the consistent profitability
of its past operations, the Company believes that all these assets will be
substantially recovered and that no significant additional valuation allowances
are necessary.
Other Matters
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 compatibility 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 any 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 reports on Forms 10-Q and 10-K, including Exhibit
99.1, filed with the Securities and Exchange Commission.
18
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On May 4, 1998, the United States Court of Appeals for the Eighth Circuit (the
"Eighth Circuit") vacated and remanded a judgment previously entered by the
United States District Court for the District of Minnesota (the "Minnesota
District Court") in a lawsuit filed by certain entities affiliated with
Telectronics Holdings, Ltd. (the "Telectronics Parties") and Pacesetter, Inc.
("Pacesetter") against the Company, two of the Company's subsidiaries (Cardiac
Pacemakers, Inc. ("CPI") and Guidant Sales Corporation ("GSC")) and Eli Lilly
and Company ("Lilly"). The Telectronics Parties and Pacesetter filed suit in
the Minnesota District Court on December 24, 1996, seeking to compel arbitration
of the disputes set forth in a separate lawsuit filed by the Company, CPI, GSC,
and Lilly against the Telectronics Parties, Pacesetter, St. Jude Medical, Inc.
("St. Jude"), and Ventritex, Inc. ("Ventritex") in Indiana state court on
November 26, 1996 (the "State Court Case"). In February 1997, the Minnesota
District Court ruled that the disputes in the State Court Case were not subject
to arbitration. In vacating and remanding that decision, the Eighth Circuit
held that an arbitrator (rather than a court) should decide whether the disputes
set forth in the State Court Case are subject to arbitration. On July 8, 1998,
the Minnesota District Court entered an Order referring the matter to
arbitration, subject to the qualification that "the arbitrator shall determine
what role, if any, Pacesetter should have in the arbitration proceeding." The
Telectronics Parties and the Company have begun the procedures for selecting an
arbitrator. On July 12, 1998, the Company, CPI, GSC, and Lilly requested a
voluntary stay of the State Court Case pending completion of the arbitration,
which was granted on June 19, 1998. On June 8, 1998, the United States District
Court for the Southern District of Indiana also entered an Order staying
proceedings (with certain exceptions) in a related patent infringement action
filed by CPI, GSC, and Lilly against St. Jude, Pacesetter, and Ventritex.
On June 4, 1998, Cordis Corporation ("Cordis") filed suit against the Company
and its subsidiary, Advanced Cardiovascular Systems, Inc. ("ACS"), in the
District Court for the Eastern District of Virginia alleging that the sale of
the ACS MULTI-LINK Coronary Stent by ACS infringes two patents of Cordis. In
the lawsuit, Cordis is seeking injunctive relief and monetary damages.
19
<PAGE>
Item 4. Submission of Matters to a Vote of Security-Holders.
(a) The Company's Annual Meeting of Shareholders was held on May 18, 1998.
(b) At the meeting, the following directors were re-elected to three year
terms:
K. B. Clark
M. A. Cox, Jr.
R. W. Dollens
E. C. Falla
In addition, the following directors continue in office for terms ending in the
year indicated:
J. M. Cornelius - 2000
J. B. King - 1999
S. B. King - 1999
J. K. Moore - 1999
M. Novitch - 2000
E. L. Step - 2000
R. E. Wager - 1999
(c) The following matters were voted on at the meeting:
Election of Directors:
<TABLE>
<CAPTION>
Name For Withheld
---- --- --------
<S> <C> <C>
K. B. Clark 132,856,120 1,395,991
M. A. Cox, Jr. 132,873,970 1,378,141
R. W. Dollens 132,805,189 1,446,922
E. C. Falla 132,859,459 1,392,652
</TABLE>
Approval of the Guidant Corporation 1998 Stock Plan:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C>
83,819,343 39,924,788 261,317 10,246,663
</TABLE>
20
<PAGE>
Approval of Amendment to the Company's Amended and Restated Articles of
Incorporation:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
125,363,891 8,627,212 261,008
</TABLE>
Ratification of appointment of Ernst & Young LLP as Independent Auditors:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
133,833,148 325,388 93,575
</TABLE>
Item 5. Other Information.
The Securities and Exchange Commission (the "SEC") recently amended Rule
14a-4, which governs the use by the Company of discretionary voting authority
with respect to shareholder proposals. SEC Rule 14a-4(c)(1) provides that, if
the proponent of a shareholder proposal fails to notify the Company at least 45
days prior to the month and day of mailing the prior year's proxy statement, the
proxies of the Company's management would be permitted to use their
discretionary authority at the Company's next annual meeting of shareholders if
the proposal were raised at the meeting without any discussion of the matter in
the proxy statement. For purposes of the Company's 1999 Annual Meeting of
Shareholders, this deadline is February 7, 1999.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following documents are filed as exhibits to this Report:
3.1 Amended Articles of Incorporation
10.1 Guidant Corporation 1998 Stock Plan
27.1 Financial Data Schedule
99.1 Factors Possibly Affecting
Future Operating Results.
(b) Reports on Form 8-K. During the quarter for which this Report on Form
10-Q is filed, the Registrant filed no Report on Form 8-K.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
GUIDANT CORPORATION
-------------------
(Registrant)
Date July 30, 1998 /s/ Keith E. Brauer
----------------------------
Keith E. Brauer
Vice President, Finance and
Chief Financial Officer
Date July 30, 1998 /s/ Roger Marchetti
----------------------------
Roger Marchetti
Corporate Controller and
Chief Accounting Officer
22
<PAGE>
Exhibit List
3.1 Amended Articles of Incorporation
10.1 Guidant Corporation 1998 Stock Plan
27.1 Financial Data Schedule
99.1 Factors Possibly Affecting
Future Operating Results.
23
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
(As Amended May 18, 1998)
GUIDANT CORPORATION
(an Indiana corporation)
1. The name of the Corporation is Guidant Corporation.
2. The street address of the principal office of the Corporation is 307
East McCarty Street, Indianapolis, Indiana, 46285, and the name and post-office
address of its Resident Agent in charge of such office is Mr. J. B. King, 307
East McCarty Street, Indianapolis, Indiana, 46225.
3. The total number of authorized shares is 550,000,000.
4. The designation of the different classes of shares of the Corporation,
and the number of shares of each class, are as follows:
(a) Common Stock consisting of 500,000,000 shares. Except as
otherwise required by law and subject to the rights of holders of Preferred
Stock, the Common Stock shall have unlimited voting rights and each
outstanding share of Common Stock shall, when validly issued by the
Corporation, entitle the record holder thereof to one vote at all
shareholders' meetings on all matters submitted to a vote of the
shareholders of the Corporation. In the event of any liquidation,
dissolution or winding-up of the Corporation, either voluntary or
involuntary, after payment shall have been made to the holders of the
Preferred Stock of the full amount to which they shall be entitled, the
holders of the Common Stock shall be entitled, to share ratably according
to the number of shares of Common Stock held by them, in all remaining
assets of the Corporation available for distribution to its shareholders.
(b) Preferred Stock, consisting of 50,000,000 shares, which may be
issued in such series and which shall possess such relative rights,
preferences, qualifications, limitations or restrictions as established by
amendment to these Articles of Incorporation adopted by the Board of
Directors without need for shareholder approval, which is vested to the
fullest extent permitted by law with authority to fix the relative rights,
preferences,
<PAGE>
qualifications, limitations or restrictions for each series of such class
of shares established by it, including, without limitation of the
generality of the foregoing, the following:
(1) The series, if any, of preferred to be issued and manner of
its differentiation from other series of Preferred Stock;
(2) The number of shares which shall initially constitute each
series;
(3) The rate or rates and the time or times at which dividends
and other distributions on the shares of each series shall be paid,
the relationship or priority of such dividends to those payable on
Common Stock or to other series of Preferred Stock, and whether or not
any such dividends shall be cumulative;
(4) The amount payable on the shares of each series in the event
of the voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the Corporation, and the relative priorities, if
any, to be accorded such payments in liquidation;
(5) The terms and conditions upon which either the Corporation
may exercise a right to redeem shares of each series or upon which the
holder of such shares may exercise a right to require redemption of
such shareholder's Preferred Stock, including any premiums or
penalties applicable to exercise of such rights;
(6) Whether or not a sinking fund shall be created for the
redemption of the shares of a series, and the terms and conditions of
any such fund;
(7) Whether any shares shall have no voting rights or full or
limited voting rights;
(8) Rights, if any, to convert any shares of Preferred Stock
either into shares of Common Stock or into other series of Preferred
Stock and the prices, premiums or penalties, ratios and other terms
applicable to any such conversion;
(9) Restrictions on acquisition, rights of first refusal or
other limitations on transfer as may be
2
<PAGE>
applicable to any series, including any series intended to be offered
to a special class or group, such as corporate employees; and
(10) Any other relative rights, preferences, limitations,
qualifications or restrictions on the Preferred Stock or any series of
such shares.
(c) A total of 1,500,000 shares of the 50,000,000 shares of
authorized Preferred Stock are designated as "Series A Participating Preferred
Stock" (the "Series A Preferred Stock"), which shall possess the rights,
preferences, qualifications, limitations, and restrictions set forth below:
(1) The holders of shares of Series A Preferred Stock shall have
the following rights to dividends and distributions:
(i) The holders of shares of Series A Preferred Stock shall
be entitled to receive, when, as and if declared by the Board of Directors out
of funds legally available for the purpose, quarterly dividends payable in cash
on the first day of April, July, October and January in each year (each such
date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of Series A Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (i) $.05 or (ii)
subject to the provision for adjustment hereinafter set forth, 100 times the
aggregate per share amount of all cash dividends, and 100 times the aggregate
per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend or distribution payable in shares of Common
Stock (by reclassification or otherwise), declared on the Common Stock, without
par value of the Corporation (the "Common Stock") since the immediately
preceding Quarterly Dividend Payment Date or, with respect to the first
Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of share of Series A Preferred Stock. If on any Quarterly Dividend
Payment Date the Corporation's Articles of Incorporation shall limit the amount
of dividends which may be paid on the Series A Preferred Stock to an amount less
than that provided above, such dividends will accrue and be paid in the maximum
permissible amount and the short-fall from the amount provided above shall be a
cumulative dividend requirement and be carried forward to subsequent Quarterly
Dividend Payment Dates.
3
<PAGE>
(ii) In the event the Corporation shall at any time declare or pay
any dividend on Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event under the second preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(iii) When, as and if the Corporation shall declare a dividend or
distribution on the Common Stock (other than a dividend payable in shares of
Common Stock), the Corporation shall at the same time declare a dividend or
distribution on the Series A Preferred Stock as provided in this Subsection
4(c)(1) and no such dividend or distribution on the Common Stock shall be paid
or set aside for payment on the Common Stock unless such dividend or
distribution on the Series A Preferred Stock shall be simultaneously paid or set
aside for payment; provided that, in the event no dividend or distribution shall
have been declared on the Common Stock during the period between any Quarterly
Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a
dividend, of $.05 per share on the Series A Preferred Stock shall nevertheless
be payable, when, as and if declared by the Board of Directors, on such
subsequent Quarterly Dividend Payment Date.
(iv) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the date of issue of such shares of
Series A Preferred Stock, unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders
of shares of Series A Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in which event such dividends
shall begin to accrue and be cumulative from such Quarterly Dividend Payment
Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on
the shares of Series A Preferred Stock in an amount less than the total amount
of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the
4
<PAGE>
determination of holders of shares of Series A Preferred Stock entitled to
receive payment of dividend or distribution declared thereon, which record date
shall be no more than 60 days prior to the relevant Quarterly Dividend Payment
Date.
(2) The holders of shares of Series A Preferred Stock shall have
the following voting rights:
(i) The holders of outstanding Series A Preferred Stock shall
be entitled to vote as a class for the election of two (2) directors if the
Corporation shall fail for six quarters to pay the dividend payable with respect
to such shares pursuant to paragraph (a) hereof. Such limited voting rights may
be exercised at the next annual meeting of shareholders following the failure to
pay a dividend for the sixth quarter and at each succeeding annual meeting of
shareholders until payment of all such preferred dividends which are in arrears
has been made or provided for (the "Dividend Date"), at which time the right to
vote for election of two directors conferred upon the holders of the outstanding
Series A Preferred Stock shall cease. Each of such two directors shall be
elected to one of the three classes of directors so that the three classes shall
be as equal in number as may be feasible and shall be elected to hold office for
a term expiring at the earlier of (i) the expiration of the term of the class to
which he or she is elected or (ii) the Dividend Date. In addition to the
conditional right to vote for election of two directors, any proposal to amend
the relative rights and privileges of shares of Series A Preferred Stock
(including those conferred by this Paragraph 4(c)(2)(i) upon which the holders
of such Series A Preferred Stock are entitled by the provisions of the Indiana
Business Corporation Law to vote upon as a class shall require, instead of a
vote of the holders of a majority of such shares, the affirmative vote of the
holders of two-thirds (2/3) of such shares.
(ii) except as specified in Paragraph 4(c)(2)(i) above, the
holders of Series A Preferred Stock shall not be entitled to any vote on any
matter, including questions of merger, consolidation, and the sale of all or
substantially all of the assets of the Corporation.
(3) The Corporation shall be subject to the following
restrictions:
(i) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in Section
4(c)(1) are in arrears, thereafter
5
<PAGE>
and until all accrued and unpaid dividends and distributions, whether or not
declared, on shares of Series A Preferred Stock outstanding shall have been paid
in full, the Corporation shall not
a. declare or pay dividends on, make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock;
b. declare or pay dividends on or make any other distributions on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such shares are then
entitled;
c. except as permitted by Subparagraph 4(c)(3)(i)(d), redeem or
purchase or otherwise acquire for consideration shares of any stock ranking
on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise acquire shares of
any such parity stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series A Preferred Stock; or
d. purchase or otherwise acquire for consideration any shares of
Series A Preferred Stock, or any shares of stock ranking on a parity with
the Series A Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board of Directors)
to all holders of such shares upon such terms as the Board of Directors,
after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among
the respective series or classes, provided that the Corporation may at any
time purchase or otherwise acquire share of any such parity stock in
exchange for shares of any stock of the Corporation ranking junior
6
<PAGE>
(either as to dividends or upon dissolution, liquidation or winding up) to
the Series A Preferred Stock.
(ii) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under Paragraph
4(c)(3)(i), purchase or otherwise acquire shares at such time and in such
manner.
(iii) The Corporation shall not issue any shares of Series A
Preferred Stock except upon exercise of Rights issued pursuant to that certain
Rights Agreement dated as of October 17, 1994 between the Corporation and Bank
One, Indianapolis, NA, a copy of which is on file with the Secretary of the
Corporation at its principal executive office and shall be made available to
shareholders of record without charge upon written request therefor addressed to
said Secretary. Notwithstanding the foregoing sentence, nothing contained herein
shall prohibit or restrict the Corporation from issuing for any purpose any
series of preferred stock with rights and privileges similar to or different
from those of the Series A Preferred Stock.
(4) Any shares of Series A Preferred Stock purchased or otherwise
acquired by the Corporation in any manner whatsoever shall be retired and
canceled promptly after the acquisition thereof. All such shares shall upon
their cancellation without designation as to series, become authorized but
unissued shares of preferred stock and may be reissued as part of a new series
of preferred stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
(5) Upon any voluntary liquidation, dissolution or winding upon of the
Corporation, no distribution shall be made (i) to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock unless, prior thereto, the holders
of shares of Series A Preferred Stock shall have received, subject to adjustment
as hereinafter provided, an aggregate amount equal to (a) $100 per share, plus
an amount equal to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment or (b) if greater, an
aggregate amount per share, subject to the provision for adjustment hereinafter
set forth, equal to 100 times the aggregate amount to be distributed per share
to holders of Common Stock plus an amount equal to accrued and unpaid
7
<PAGE>
dividends and distributions thereon, whether or not declared, to the date of
such payment, or (ii) to the holders of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except distributions made ratably on the Series A Preferred
Stock and all other such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up, disregarding for this purpose the amounts referred to
in clause (i)(b) of this Subsection 4(c)(5). In the event the Corporation shall
at any time declare or pay any dividend or make any distribution on Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
aggregate amount to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event under the provision in clause (i) of
the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(6) In case the Corporation shall enter into any consolidation,
merger, combination or other transaction in which the shares of Common Stock are
exchanged for or changed into other stock or securities, cash and/or any other
property, then in any such case proper provision shall be made so that the
shares of Series A Preferred Stock shall at the same time be similarly exchanged
or changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
The Corporation shall not consummate any such consolidation, merger, combination
or other transaction unless prior thereto the Corporation and the other party or
parties to such transaction shall have so provided in any agreement relating
thereto. In the event the Corporation shall at any time declare or pay any
dividend on Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount set
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forth in the preceding sentence with respect to the exchange or change of shares
of Series A Preferred Stock shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(7) The shares of Series A Preferred Stock shall not be redeemable.
Notwithstanding the foregoing sentence, the Corporation may acquire shares of
Series A Preferred Stock in any other manner permitted by law, hereby and the
Articles of Incorporation of the Corporation, as from time to time amended.
(8) The Articles of Incorporation of the Corporation shall not be
amended in any manner which would increase or decrease the aggregate number of
authorized shares of Series A Preferred Stock or alter or change the powers,
preferences or special rights of the shares of Series A Preferred Stock so as to
affect them adversely without the affirmative vote of the holders of two-thirds
or more of the outstanding shares of Series A Preferred Stock, voting together
as a single class.
5. The following provisions are inserted for the management of the
business and for the conduct of the affairs of the Corporation, and it is
expressly provided that the same are intended to be in furtherance, and not in
limitation or exclusion of, the powers conferred by statute:
(a) The initial number of directors of the Corporation shall be
eight. The number of directors may be specified by or fixed in accordance
with the By-laws of the Corporation at any number; provided, however, such
number shall not be less than 7 nor more than 19. In the absence of a By-
law provision specifying or fixing the number of directors, the number
shall be eight.
(b) The Board of Directors shall be divided into three classes,
with the term of office of one class expiring each year. Three directors of
the first class shall be elected to hold office for a term expiring at the
1995 annual meeting, three directors of the second class shall be elected
to hold office for a term expiring at the 1996 annual meeting, and two
directors of the third class shall be elected to hold office for a term
expiring at the 1997 annual meeting. Commencing with the annual meeting of
shareholders in 1995, each class of directors whose term
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shall then expire shall be elected to hold office for a three-year term. In
the case of any vacancy on the Board of Directors, including a vacancy
created by an increase in the number of directors, the vacancy shall be
filled by election of the Board of Directors with the director so elected
to serve for the remainder of the term of the director being replaced or,
in the case of an additional director, for the remainder of the term of the
class to which the director has been assigned. All directors shall continue
in office until the election and qualification of their respective
successors in office. When the number of directors is changed, any newly
created directorships or any decrease in directorships shall be so assigned
among the classes by a majority of the directors then in office, though
less than a quorum, as to make all classes as nearly equal in number as
possible. No decrease in the number of directors shall have the effect of
shortening the term of any incumbent director. Election of directors need
not be by written ballot unless the By-Laws so provide.
(c) Any director or directors may be removed from office at any time,
with or without cause, by the affirmative vote of at least 80% of the votes
entitled to be cast by holders of all the outstanding shares of Voting
Stock (as defined in Article 6 hereof), voting together as a single class.
(d) Notwithstanding any other provision of these Articles of
Incorporation or of law which might otherwise permit a lesser vote or no
vote, but in addition to any affirmative vote of the holders of any
particular class of Voting Stock required by law or these Articles of
Incorporation, the affirmative vote of at least 80% of the votes entitled
to be cast by holders of all the outstanding shares of Voting Stock, voting
together as a single class, shall be required to alter, amend or repeal
this Article.
(e) The Board of Directors, by a majority vote of the actual number of
directors elected and qualified from time to time shall have the exclusive
power to make, alter, amend or repeal the By-laws of the Corporation. The
shareholders of the Corporation shall have no power to make, alter, or
repeal the By-laws of the Corporation.
(f)(1) A conflict of interest transaction is a transaction with the
Corporation in which a director of the Corporation has a direct or indirect
interest. A conflict
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of interest transaction is not voidable by the Corporation solely because
of the Director's interest in the transaction if any one (1) of the
following is true:
(i) The material facts of the transaction and the
Director's interest were disclosed or known to the Board of
Directors or a committee of the Board of Directors and the Board
of Directors or committee authorized, approved, or ratified the
transaction.
(ii) The material facts of the transaction and the
Director's interest were disclosed or known to the shareholders
entitled to vote and they authorized, approved, or ratified the
transaction.
(iii) The transaction was fair to the Corporation.
(2) For purposes of Subsection 5(f)(1), a Director of the
Corporation has an indirect interest in a transaction if:
(i) Another entity in which the Director has a material
financial interest or in which the Director is a general partner
is a party to the transaction; or
(ii) Another entity, of which the Director is a director,
officer, or trustee, is a party to the transaction and the
transaction is, or is required to be, considered by the Board of
Directors of the Corporation.
(3) For purposes of Paragraph 5(f)(1)(i), a conflict of interest
transaction is authorized, approved, or ratified if it receives the
affirmative vote of a majority of the Directors on the Board of
Directors (or on the committee) who have no direct or indirect
interest in the transaction, but a transaction may not be authorized,
approved, or ratified under this Section by a single Director. If a
majority of the Directors who have no direct or indirect interest in
the transaction vote to authorize, approve, or ratify the transaction,
a quorum shall be deemed present for the purpose of taking action
under this
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Section. The presence of, or a vote cast by, a Director with a direct
or indirect interest in the transaction does not affect the validity
of any action taken under Paragraph 5(f)(1), if the transaction is
otherwise authorized, approved, or ratified as provided in such
Subsection.
(4) For purposes of Paragraph 5(f)(1)(ii), a conflict of
interest transaction is authorized, approved, or ratified if it
receives the affirmative vote of the holders of shares representing a
majority of the votes entitled to be cast. Shares owned by or voted
under the control of a Director who has a direct or indirect interest
in the transaction, and shares owned by or voted under the control of
an entity described in Subsection 5(f)(2), may be counted in such a
vote of shareholders.
(g) Any contract, transaction or act of the Corporation or of the
Board of Directors which shall be authorized, approved or ratified by a
majority of a quorum of the shareholders entitled to vote at any annual
meeting or at any special meeting called for that purpose, or by such vote
as may be required by any provision of these Articles of Incorporation, or
by any applicable statute, shall be as valid and binding as if such
contract, transaction or act had been authorized, approved or ratified by
every shareholder of the Corporation.
(h)(1) Every Eligible Person shall be indemnified by the Corporation
to the fullest extent permitted by the Indiana Business Corporation
Law, as the same exists or may hereafter be amended (but, in the case
of any such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than the law
permitted prior to such amendment) ("IBCL"), against all Liability and
reasonable Expense that may be incurred by him or her in connection
with or resulting from any Claim.
(2) Expenses incurred by any Eligible Person with respect to any
Claim shall be advanced by the Corporation prior to final disposition;
provided, however, that, if the IBCL requires, the payment of such
expenses in advance of the final disposition of the proceeding shall
be made only upon delivery to the Corporation of an undertaking to
repay all amounts so
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advanced if it shall ultimately be determined that he or she is not
entitled to be indemnified under Subsection 5(h)(1), or otherwise.
(3) The term "Claim" as used in this Section 5(h) shall include
every pending, threatened, or completed claim, action, suit, or
proceeding and all appeals thereof (whether brought by or in the right
of this Corporation or any other corporation or otherwise), civil,
criminal, administrative, or investigative, formal or informal, in
which an Eligible Person may become involved, as a party or otherwise:
(i) by reason of his or her being or having been an
Eligible Person, or
(ii) by reason of any action taken or not taken by him or
her in his or her capacity as an Eligible Person, whether or not
he or she continued in such capacity at the time such Liability
or Expense shall have been incurred.
(4) The term "Eligible Person" as used in this Section 5(h)
shall mean every person (and the estate, heirs, and personal
representatives of such person) who is or was a Director, officer,
employee, or agent of the Corporation or is or was serving at the
request of the Corporation as a Director, officer, employee, agent, or
fiduciary of another foreign or domestic corporation, partnership,
joint venture, trust, employee benefit plan, or other organization or
entity, whether for profit or not. An Eligible Person shall also be
considered to have been serving an employee benefit plan at the
request of the Corporation if his or her duties to the Corporation
also imposed duties on, or otherwise involved services by, him or her
to the plan or to participants in or beneficiaries of the plan.
(5) The terms "Liability" and "Expense" as used in this Section
5(h) shall include, but shall not be limited to, counsel fees and
disbursements and amounts of judgments, fines, or penalties against
(including excise taxes assessed with respect to an employee benefit
plan), and amounts paid in settlement by or on behalf of an Eligible
Person.
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(6) The rights of indemnification provided in this Section 5(h)
shall be in addition to any rights to which any Eligible Person may
otherwise be entitled. Irrespective of the provisions of this Section
5(h), the Board of Directors may, at any time from time to time, (1)
approve indemnification of any Eligible Person to the full extent
permitted by the provisions of applicable law at the time in effect,
whether on account of past or future transactions, and (2) authorize
the Corporation to purchase and maintain insurance on behalf of any
Eligible Person against any Liability asserted against him or her and
incurred by him or her in any such capacity, or arising out of his or
her status as such, whether or not the Corporation would have the
power to indemnify him or her against such liability.
(7) The provisions of this Section 5(h) shall be deemed to be a
contract between the Corporation and each Eligible Person, and an
Eligible Person's rights hereunder shall not be diminished or
otherwise adversely affected by any repeal, amendment, or modification
of this Section 5(h) that occurs subsequent to such person becoming an
Eligible Person.
(8) The provisions of this Section 5(h) shall be applicable to
Claims made or commenced after the adoption hereof, whether arising
from acts or omissions to act occurring before or after the adoption
hereof.
6. In addition to all other requirements imposed by law and these
Articles of Incorporation, and except as otherwise expressly provided in Section
6(c), none of the actions or transactions listed below shall be effected by the
Corporation, or approved by the Corporation as a shareholder of any majority-
owned subsidiary of the Corporation if, as of the record date for the
determination of the shareholders entitled to vote thereon, any Related Person
(as hereinafter defined) exists, unless the applicable requirements of Sections
(b), (c), (d), (e), and (f) of this Article 6 are satisfied.
(a) The actions or transactions within the scope of this Article 6
are as follows:
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(1) any merger or consolidation of the Corporation or any of its
subsidiaries into or with such Related Person;
(2) any sale, lease, exchange, or other disposition of all or
any substantial part of the assets of the Corporation or any of its
majority-owned subsidiaries to or with such Related Person;
(3) the issuance or delivery of any Voting Stock (as hereinafter
defined) or of voting securities of any of the Corporation's majority-
owned subsidiaries to such Related Person in exchange for cash, other
assets or securities, or a combination thereof;
(4) any voluntary dissolution or liquidation of the Corporation;
(5) any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its subsidiaries, or any
other transaction (whether or not with or otherwise involving a
Related Person) that has the effect, directly or indirectly, of
increasing the proportionate share of any class or series of capital
stock of the Corporation, or any securities convertible into capital
stock of the Corporation or into equity securities of any subsidiary,
that is beneficially owned by any Related Person; or
(6) any agreement, contract, or other arrangement providing for
any one or more of the actions specified in the foregoing Subsections
(1) through (5) of this Section 6(a).
(b) The actions and transactions described in Section 6(a) shall have
been authorized by the affirmative vote of at least 80% of all of the votes
entitled to be cast by holders of the outstanding shares of Voting Stock,
voting together as a single class.
(c) Notwithstanding Section 6(b), the 80% voting requirement shall
not be applicable if any action or transaction specified in Section 6(a) is
approved by the Corporation's Board of Directors and by a majority of the
Continuing Directors.
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(d) Unless approved by a majority of the Continuing Directors, after
becoming a Related Person and prior to consummation of such action or
transaction:
(1) the Related Person shall not have acquired from the
Corporation or any of its subsidiaries any newly issued or treasury
shares of capital stock or any newly issued securities convertible
into capital stock of the Corporation or any of its majority-owned
subsidiaries, directly or indirectly (except upon conversion of
convertible securities acquired by it prior to becoming a Related
Person or as a result of a pro rata stock dividend or stock split or
other distribution of stock to all shareholders pro rata);
(2) the Related Person shall not have received the benefit
directly or indirectly (except proportionately as a shareholder) of
any loans, advances, guarantees, pledges, or other financial
assistance or tax credits provided by the Corporation or any of its
majority owned subsidiaries, or made any major changes in the
Corporation's or any of its majority owned subsidiaries' businesses or
capital structures or reduced the current rate of dividends payable on
the Corporation's capital stock below the rate in effect immediately
prior to the time such Related Person became a Related Person; and
(3) the Related Person shall have taken all required actions
within its power to ensure that the Corporation's Board of Directors
included representation by Continuing Directors at least proportionate
to the voting power of the shareholdings of Voting Stock of the
Corporation's Remaining Public Shareholders (as hereinafter defined),
with a Continuing Director to occupy an additional Board position if a
fractional right to a director results and, in any event, with at
least one Continuing Director to serve on the Board so long as there
are any Remaining Public Shareholders.
(e) A proxy statement responsive to the requirements of the
Securities Exchange Act of 1934, as amended, whether or not the Corporation
is then subject to such requirements, shall be mailed to the shareholders
of the Corporation for the purpose of soliciting shareholder
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approval of such action or transaction and shall contain at the front
thereof, in a prominent place, any recommendations as to the advisability
or inadvisability of the action or transaction which the Continuing
Directors may choose to state and, if deemed advisable by a majority of the
Continuing Directors, the opinion of an investment banking firm selected by
a majority of the Continuing Directors as to the fairness (or not) of the
terms of the action or transaction from a financial point of view to the
Remaining Public Shareholders, such investment banking firm to be paid a
reasonable fee for its services by the Corporation. The requirements of
this Section 6(e) shall not apply to any such action or transaction which
is approved by a majority of the Continuing Directors.
(f) For the purpose of this Article 6:
(1) the term "Related Person" shall mean any other corporation,
person, or entity which beneficially owns or controls, directly or
indirectly, 5% or more of the outstanding shares of Voting Stock, and
any Affiliate or Associate (as those terms are defined in the General
Rules and Regulations under the Securities Exchange Act of 1934) of a
Related Person; provided, however, that the term Related Person shall
--------- -------
not include (a) the Corporation or any of its subsidiaries, (b) any
profit-sharing, employee stock ownership or other employee benefit
plan of the Corporation or of any subsidiary of the Corporation or any
trustee of or fiduciary with respect to any such plan when acting in
such capacity, (c) Eli Lilly and Company or (d) Lilly Endowment, Inc.;
and further provided, that no corporation, person, or entity shall be
------- --------
deemed to be a Related Person solely by reason of being an Affiliate
or Associate of Eli Lilly and Company or Lilly Endowment, Inc.;
(2) a Related Person shall be deemed to own or control, directly
or indirectly, any outstanding shares of Voting Stock owned by it or
any Affiliate or Associate of record or beneficially, including
without limitation shares:
(i) which it has the right to acquire pursuant to any
agreement, or upon exercise of conversion rights, warrants, or
options, or otherwise; or
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(ii) which are beneficially owned, directly or indirectly
(including shares deemed owned through application of Paragraph
6(f)(2)(i)), by any other corporation, person, or other entity
with which it or its Affiliate or Associate has any agreement,
arrangement, or understanding for the purpose of acquiring,
holding, voting, or disposing of Voting Stock, or which is its
Affiliate (other than the Corporation) or Associate (other than
the Corporation);
(3) the term "Voting Stock" shall mean all shares of any
class of capital stock of the Corporation which are entitled to vote
generally in the election of directors;
(4) the term "Continuing Director" shall mean a director who
is not an Affiliate or Associate or representative of a Related Person
and who was a member of the Board of Directors of the Corporation
immediately prior to the time that any Related Person involved in the
proposed action or transaction became a Related Person or a director
who is not an Affiliate or Associate or representative of a Related
Person and who was nominated by a majority of the remaining Continuing
Directors; and
(5) the term "Remaining Public Shareholders" shall mean the
holders of the Corporation's capital stock other than the Related
Person.
(g) A majority of the Continuing Directors of the Corporation shall
have the power and duty to determine for the purposes of this Article 6, on
the basis of information then known to the Continuing Directors, whether
(i) any Related Person exists or is an Affiliate or an Associate of another
and (ii) any proposed sale, lease, exchange, or other disposition of part
of the assets of the Corporation or any majority-owned subsidiary involves
a substantial part of the assets of the Corporation or any of its
subsidiaries. Any such determination by the Continuing Directors shall be
conclusive and binding for all purposes.
(h) Nothing contained in this Article 6 shall be construed to relieve
any Related Person or any Affiliate or Associate of any Related Person from
any fiduciary obligation imposed by law.
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(i) The fact that any action or transaction complies with the
provisions of this Article 6 shall not be construed to waive or satisfy any
other requirement of law or these Articles of Incorporation or to impose
any fiduciary duty, obligation, or responsibility on the Board of Directors
or any member thereof, to approve such action or transaction or recommend
its adoption or approval to the shareholders of the Corporation, nor shall
such compliance limit, prohibit, or otherwise restrict in any manner the
Board of Directors, or any member thereof, with respect to evaluations of
or actions and responses taken with respect to such action or transaction.
The Board of Directors of the Corporation, when evaluating any actions or
transactions described in Section 6(a), shall, in connection with the
exercise of its judgment in determining what is in the best interests of
the Corporation and its shareholders, give due consideration to all
relevant factors, including without limitation the effects on shareholders,
employees, suppliers, and customers of the Corporation, and communities in
which offices or other facilities of the Corporation are located, and any
other factors a Director considers pertinent.
(j) Notwithstanding any other provision of these Articles of
Incorporation or of law which might otherwise permit a lesser vote or no
vote, but in addition to any affirmative vote of the holders of any
particular class of Voting Stock required by law or these Articles of
Incorporation, the affirmative vote of the holders of at least 80% of the
votes entitled to be cast by holders of all the outstanding shares of
Voting Stock, voting together as a single class, shall be required to
alter, amend, or repeal this Article 6.
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EXHIBIT 10.1
May, 1998
GUIDANT CORPORATION 1998 STOCK PLAN
The Guidant Corporation 1998 Stock Plan ("1998 Plan") authorizes the
Management Development and Compensation Committee ("Committee") of the Board of
Directors of Guidant Corporation to provide employees and consultants of Guidant
Corporation and its subsidiaries with certain rights to acquire shares of
Guidant Corporation common stock ("Guidant Stock"). The Company believes that
this incentive program will benefit the Company's shareholders by allowing the
Company to attract, motivate, and retain employees and consultants and by
causing employees and consultants, through stock-based incentives, to contribute
materially to the growth and success of the Company. For purposes of the 1998
Plan, the term "Company" shall mean Guidant Corporation and its subsidiaries,
unless the context requires otherwise.
1. ADMINISTRATION.
The 1998 Plan shall be administered and interpreted by the Committee
consisting of not less than three persons appointed by the Board of Directors of
the Company from among its members. A person may serve on the Committee only if
he or she (i) is a nonemployee director as defined in Rule 16b-3(b)(3) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (ii)
satisfies the requirements of an "outside director" for purposes of Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). The
Committee shall determine the fair market value of Guidant Stock for purposes of
the 1998 Plan. The Committee may, subject to the provisions of the 1998 Plan,
from time to time establish such rules and regulations as it deems appropriate
for the proper administration of the Plan. The Committee's decisions shall be
final, conclusive, and binding with respect to the interpretation and
administration of the 1998 Plan and any Grant made under it. Except to the
extent expressly prohibited by the 1998 Plan or applicable law, the Committee
may delegate to one or more of its members, or to one or more agents, such
responsibility or duties as it deems desirable.
2. GRANTS.
Incentives under the 1998 Plan shall consist of incentive stock options,
nonqualified stock options, performance awards, and restricted stock grants
(collectively, "Grants"). All Grants shall be subject to the terms and
conditions set out herein and to such other terms and conditions which are not
<PAGE>
inconsistent with the 1998 Plan as the Committee deems appropriate. The
Committee shall approve the form and provisions of each Grant. Grants under a
particular section of the 1998 Plan need not be uniform and Grants under two or
more sections may be combined in one instrument.
3. ELIGIBILITY FOR GRANTS.
Grants may be made to any employee (including any officer) or consultant of
the Company ("Eligible Person"). The Committee shall select the persons to
receive Grants ("Grantees") from among the Eligible Persons and determine the
number of shares subject to any particular Grant.
4. SHARES AVAILABLE FOR GRANT.
(a) Shares Subject to Issuance or Transfer. Subject to adjustment as
provided in Section 4(b), the aggregate number of shares of Guidant Stock that
may be issued or transferred under the 1998 Plan is 22,500,000; provided,
however, that the aggregate number of such shares that may be issued or
transferred as Restricted Stock Grants under the 1998 Plan is 5,000,000. The
shares may be authorized but unissued shares or treasury shares. The number of
shares available for Grants at any given time shall be 22,500,000 (5,000,000 in
the case of Restricted Stock Grants), reduced by the aggregate of all shares
previously issued or transferred and of shares which may become subject to
issuance or transfer under then-outstanding Grants. Payment in cash in lieu of
shares shall be deemed to be an issuance of the shares for purposes of
determining the number of shares available for Grants under the 1998 Plan as a
whole or to any individual Grantee.
(b) Adjustment Provisions. If any subdivision or combination of shares of
Guidant Stock or any stock dividend, reorganization, recapitalization, or
consolidation or merger with Guidant Corporation as the surviving corporation
occurs, or if additional shares or new or different shares or other securities
of the Company or any other issuer are distributed with respect to the shares of
Guidant Stock through a spin-off, exchange offer, or other extraordinary
distribution, the Committee shall make such adjustments as it determines
appropriate in the number of shares of Guidant Stock that may be issued or
transferred in the future under Sections 4(a), 5(f) and 6(f). The Committee
shall also adjust as it determines appropriate the number of shares and Option
Price in outstanding Grants made before the event.
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5. STOCK OPTIONS.
The Committee may grant options qualifying as incentive stock options under
the Code ("Incentive Stock Options"), and nonqualified options (collectively,
"Stock Options"). The following provisions are applicable to Stock Options:
(a) Option Price. The Committee shall determine the price at which Guidant
Stock may be purchased by the Grantee under a Stock Option ("Option Price")
which, except in the case of substitute grants as described in Section 11(b),
shall be not less than the fair market value of Guidant Stock on the date the
Stock Option is granted (the "Grant Date"). In the Committee's discretion, the
Grant Date of a Stock Option may be established as the date on which Committee
action approving the Stock Option is taken or any later date specified by the
Committee.
(b) Option Exercise Period. The Committee shall determine the option
exercise period of each Stock Option. The period shall not exceed ten years from
the Grant Date.
(c) Exercise of Option. A Grantee may exercise a Stock Option by
delivering a notice of exercise to the Company or its representative as
designated by the Committee, either with or without accompanying payment of the
Option Price. The notice of exercise, once delivered, shall be irrevocable.
(d) Satisfaction of Option Price. The Grantee shall pay or cause to be
paid the Option Price in cash, or with the Committee's permission, by delivering
shares of Guidant Stock already owned by the Grantee and having a fair market
value on the date of exercise equal to the Option Price, or a combination of
cash and shares. In addition, the Committee may permit the exercise of an option
by delivery of written notice, subject to the Company's receipt of a third-party
payment in full in cash for the Option Price prior to the issuance of shares of
Guidant Stock, in the manner and subject to the procedures as may be established
by the Committee. Unless the Committee establishes a shorter period which is set
forth in the Stock Option, the Grantee shall pay the Option Price not later than
30 days after the date of a statement from the Company following exercise
setting forth the Option Price, fair market value of Guidant Stock on the
exercise date, the number of shares of Guidant Stock that may be delivered in
payment of the Option Price, and the amount of withholding tax due, if any. If
the Grantee fails to pay the Option Price within the specified period, the
Committee shall have the right to take whatever action it deems appropriate,
including voiding the option exercise. The Company shall not issue or transfer
shares of Guidant Stock upon
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exercise of a Stock Option until the Option Price and any required withholding
tax are fully paid.
(e) Share Withholding. With respect to any nonqualified option, the
Committee may, in its discretion and subject to such rules as the Committee may
adopt, permit or require the Grantee to satisfy, in whole or in part, any
withholding tax obligation which may arise in connection with the exercise of
the nonqualified option by having the Company withhold shares of Guidant Stock
having a fair market value equal to the amount of the withholding tax.
(f) Limits on Individual Grants. No individual Grantee may be granted
Stock Options under the 1998 Plan for more than 700,000 shares of Guidant Stock
during any one calendar year.
(g) Limits on Incentive Stock Options. The aggregate fair market value of
the stock covered by Incentive Stock Options granted under the 1998 Plan or any
other stock option plan of the Company or any subsidiary or parent of the
Company that become exercisable for the first time by any employee in any
calendar year shall not exceed $100,000. The aggregate fair market value will be
determined at the Grant Date. An Incentive Stock Option shall not be granted to
any Eligible Person who, on the Grant Date, owns stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company or any
subsidiary or parent of the Company.
6. PERFORMANCE AWARDS.
The Committee may grant Performance Awards which shall be denominated at
the time of grant either in shares of Guidant Stock ("Stock Performance Awards")
or in dollar amounts ("Dollar Performance Awards"). Payment under a Stock
Performance Award or a Dollar Performance Award shall be made, at the discretion
of the Committee, in shares of Guidant Stock ("Performance Shares"), or in cash
or in any combination thereof, if the financial performance of the Company or
any subsidiary, division, or other unit of the Company ("Business Unit")
selected by the Committee meets certain financial goals established by the
Committee for the Award Period (as defined below). Performance Awards may be
granted by the Committee in a manner designed to qualify for exemption under
Section 162(m) of the Code ("Section 162(m) Awards") or in a manner that is not
intended to so qualify. The following provisions are applicable to Performance
Awards:
4
<PAGE>
(a) Award Period. The Committee shall determine and include in the Grant
the period of time (which shall be four or more consecutive fiscal quarters) for
which a Performance Award is made ("Award Period"). Grants of Performance Awards
need not be uniform with respect to the length of the Award Period. Award
Periods for different Grants may overlap. A Performance Award may not be granted
for a given Award Period after one half (1/2) or more of such period has
elapsed, except as provided in Section 6(g).
(b) Performance Criteria and Payment. Before a Grant is made, the
Committee shall establish objectives with respect to designated business
performance criteria ("Performance Criteria") that must be met by the Business
Unit during the Award Period as a condition to payment being made under the
Performance Award. The Performance Criteria and the applicable goals with
respect to such criteria shall be set out in the Grant. In the case of Section
162(m) Awards, the Performance Criteria shall be limited to earnings per share,
return on assets, return on shareholders' equity, divisional income, net income,
total shareholder return, stock price goals, cash flow, operating earnings,
return on capital, or economic value added, in each case as may be applied on an
absolute or relative to peer group basis. In the case of non-Section 162(m)
Awards, the Performance Criteria may include any of the foregoing or any other
financial measurement established by the Committee. The Committee shall also set
forth in the Grant the number of Performance Shares or the amount of payment to
be made under a Performance Award if the Performance Criteria are met or
exceeded, including the fixing of a maximum payment, subject to Section 6(f).
(c) Computation of Payment. After an Award Period, the financial
performance of the Business Unit during the period shall be measured against the
Performance Criteria. If the Performance Criteria are not met, no payment shall
be made under a Performance Award. If the Performance Criteria are met or
exceeded, the Committee shall certify that fact in writing prior to payment of
the Performance Award and shall determine the number of Performance Shares or
the amount of payment to be made under a Performance Award in accordance with
the Grant for each Grantee. The Committee, in its sole discretion, may elect to
pay part or all of the Performance Award in cash in lieu of issuing or
transferring Performance Shares. The cash payment shall be based on the fair
market value of Guidant Stock on the date of payment. The Company shall promptly
notify each Grantee of the number of Performance Shares and the amount of cash,
if any, he or she is to receive.
5
<PAGE>
(d) Revisions for Significant Events. At any time before payment is made,
the Committee may revise the Performance Criteria and the computation of payment
if unforeseen events occur during an Award Period which have a substantial
effect on the Performance Criteria and which in the sole discretion of the
Committee make the application of the Performance Criteria unfair unless a
revision is made; provided, however, that any such revision that would result in
an increase in the amount payable under Section 162(m) Awards shall be made only
on a non-discretionary basis upon the occurrence of objective events specified
in the Grant.
(e) Requirement of Employment. To be entitled to receive payment under a
Performance Award, a Grantee who is an employee of the Company must remain in
the employment of the Company through the date of the award payment, except that
the Committee may provide for partial or complete exceptions to this requirement
as it deems equitable in its sole discretion.
(f) Maximum Payment. In case of a Performance Award that is designated as
a Section 162(m) Award, no individual may receive Performance Award payments in
respect of Stock Performance Awards in excess of 30,000 shares of Guidant Stock
in any calendar year or payments in respect of Dollar Performance Awards in
excess of $2,000,000 in any calendar year. For purposes of determining the
maximum payment under this subsection, payment in cash of all or part of a Stock
Performance Award will be deemed an issuance of the number of shares with
respect to which such cash payment is made. No individual may receive both a
Stock Performance Award and a Dollar Performance Award for the same Award
Period.
(g) Section 162(m) Requirements. In the case of a Performance Award that
is designated as a Section 162(m) Award, the Committee shall make all
determinations necessary to establish the Performance Award within 90 days of
the beginning of the Award Period, including, without limitation, the
designation of the Participants to whom Performance Awards are made, the
Performance Criteria applicable to the Grant and the performance goals that
relate to such criteria, and the dollar amounts or number of shares of Guidant
Stock payable upon achieving the applicable performance goals. As and to the
extent required by Section 162(m) of the Code, the terms of a Section 162(m)
Award must state, in terms of an objective formula or standard, the method of
computing the amount of compensation payable under the Performance Award and
must preclude discretion to increase the amount of compensation payable under
the Performance Award.
6
<PAGE>
7. RESTRICTED STOCK GRANTS.
The Committee may issue or transfer shares of Guidant Stock to a Grantee
under a Restricted Stock Grant. Upon the issuance or transfer, the Grantee shall
be entitled to vote the shares and to receive any dividends paid. The following
provisions are applicable to Restricted Stock Grants:
(a) Requirement of Employment. If the employment of a Grantee who is an
employee of the Company terminates during the period designated in the Grant as
the "Restriction Period," the Restricted Stock Grant terminates and the shares
of Guidant Stock must be returned immediately to the Company. However, the
Committee may provide for partial or complete exceptions to this requirement as
it deems equitable.
(b) Restrictions on Transfer and Legend on Stock Certificate. During the
Restriction Period, a Grantee may not sell, assign, transfer, pledge, or
otherwise dispose of the shares of Guidant Stock except to a Successor Grantee
under Section 11(a). Each certificate for shares issued or transferred under a
Restricted Stock Grant shall contain a restricted legend or be held in escrow by
the Company until the expiration of the Restriction Period.
(c) Lapse of Restrictions. All restrictions imposed under the Restricted
Stock Grant shall lapse (i) upon the expiration of the Restriction Period if all
conditions, including those stated in Sections 7(a) and (b) have been met or
(ii) as provided under Section 9(a)(ii). The Grantee shall then be entitled to
delivery of the certificate.
(d) Restriction Period. The Restriction Period shall be at least three
years, except that if the Restricted Stock Grant is performance-based, the
Restriction Period only needs to be at least one year.
8. AMENDMENT AND TERMINATION OF THE 1998 PLAN.
(a) Amendment. The Board may at any time and from time to time and in any
respect, amend or modify the Plan; provided, however, that no amendment or
-------- -------
modification of the 1998 Plan shall be effective without the consent of the
Company's shareholders that would: (i) change the class of Eligible Persons
under the 1998 Plan, (ii) increase the number of shares of Guidant Stock
available for Grants or for Restricted Stock Grants, as provided in Section
4(a), (iii) allow the grant of Stock Options at an exercise price below fair
market value, or (iv) allow the re-pricing of Stock Options. In addition, the
7
<PAGE>
Board may seek the approval of any amendment or modification by the Company's
shareholders to the extent it deems necessary or advisable in its sole
discretion for purposes of compliance with Section 162(m) or Section 422 of the
Code, the listing requirements of the New York Stock Exchange or for any other
purpose. No amendment or modification of the 1998 Plan shall in any manner
affect any outstanding Grant without the consent of the Grantee or the permitted
transferee of the Grant.
(b) Termination of 1998 Plan. The 1998 Plan shall terminate on May 31,
2003, unless terminated earlier by the Board or unless extended by the Board.
(c) Termination and Amendment of Outstanding Grants. A termination or
amendment of the 1998 Plan that occurs after a Grant is made shall not result in
the termination or amendment of the Grant unless the Grantee consents or unless
the Committee acts under Section 11(e). The termination of the 1998 Plan shall
not impair the power and authority of the Committee with respect to outstanding
Grants. Whether or not the 1998 Plan has terminated, an outstanding Grant may be
terminated or amended under Section 11(e) or may be amended (i) by agreement of
the Company and the Grantee consistent with the 1998 Plan or (ii) by action of
the Committee provided that the amendment is consistent with the 1998 Plan and
is found by the Committee not to materially impair the rights of the Grantee
under the Grant.
9. CHANGE OF CONTROL.
(a) Effect on Grants. Unless the Committee shall otherwise expressly
provide in the agreement relating to a Grant, upon the occurrence of a Change of
Control (as defined below):
(i) In the case of Stock Options, each outstanding Stock Option that is
not then fully exercisable shall automatically become fully exercisable;
(ii) The Restriction Period on all outstanding Restricted Stock Grants
shall automatically expire and all restrictions imposed under such Restricted
Stock Grants shall immediately lapse; and
(iii) Each Grantee of a Performance Award for an Award Period that has not
been completed at the time of the Change of Control shall be deemed to have
earned a Performance Award equal to such Grantee's maximum award opportunity
during such Award Period for such Performance Award.
8
<PAGE>
(b) Change of Control. For purposes of the 1998 Plan, a Change of
Control shall mean the happening of any of the following events:
(i) The acquisition by any "person," as that term is used in Sections
13(d) and 14(d) of the Exchange Act (other than (A) the Company, (B) any
subsidiary of the Company, (C) any employee or directors' benefit plan or stock
plan of the Company or a subsidiary of the Company, or any trustee or fiduciary
with respect to any such plan when acting in that capacity, or (D) any person
who acquires such shares pursuant to a transaction or series of transactions
approved prior to such transaction(s) by the Board of Directors of the Company)
of "beneficial ownership" as defined in Rule 13d-3 under the Exchange Act,
directly or indirectly, of 20% or more of the shares of the Company's capital
stock the holders of which have general voting power under ordinary
circumstances to elect at least a majority of the Board of Directors of the
Company (or which would have such voting power but for the application of the
Indiana Control Share Statute) ("Voting Stock");
(ii) the first day on which less than two-thirds of the total membership
of the Board of Directors of the Company shall be Continuing Directors (as that
term is defined in Article 6(f) of the Company's Articles of Incorporation;
(iii) approval by the shareholders of the Company of a merger, share
exchange, or consolidation of the Company (a "Transaction"), other than a
Transaction which would result in the Voting Stock of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the Voting Stock of the Company or such surviving
entity immediately after such Transaction; or
(iv) approval by the shareholders of the Company of a complete
liquidation of the Company or a sale or disposition of all or substantially all
the assets of the Company.
10. ELIGIBLE PERSONS RESIDENT OUTSIDE THE UNITED STATES.
The following provisions shall apply to each Eligible Person who is
resident outside the United States:
(a) Determination of Eligible Locations. The Committee shall determine
whether it is feasible or desirable under local law, custom and practice to make
Grants at each location outside the United States. In making this determination
as of any Grant
9
<PAGE>
Date, the Committee may differentiate among classes of individuals (including
expatriates, third country nationals or international assignees) and locations
within a particular country.
(b) Special Terms Applicable to Grants. In order to facilitate the making
of Grants under this Section 10, the Committee may provide for such special
terms for Grants to Grantees who are foreign nationals or who are employed
outside the United States as the Committee may consider necessary or desirable
to accommodate differences in local law, policy or custom, or to take advantage
of special tax or social insurance regimes applicable in a particular
jurisdiction. The Committee may approve such supplements, restatements or
alternate versions of the Plan as it may consider necessary or desirable for
such purposes, without thereby affecting the terms of the Plan as in effect for
any other purpose. Without limiting the generality of the foregoing, the
Committee may adopt special sub-plans applicable to individuals in particular
jurisdictions (e.g., French or U.K. qualified plans), may provide for
accelerated vesting with restrictions on the shares received under a Grant, and
may condition Grants on acknowledgments or agreements by Grantees tailored to
local law.
(c) No Acquired Rights. Nothing in the 1998 Plan or in this Section 10
shall confer upon any individual in any country the right to receive (or to
continue to receive) any Grant, any form of Grant or to receive any benefit in
lieu of a Grant hereunder, nor to have any special tax treatment apply to any
Grant.
11. GENERAL PROVISIONS.
(a) Transfer of Grants. Only a Grantee or his or her authorized legal
representative or valid transferee may exercise rights under a Grant. Such
persons may not transfer those rights. Except as set forth below, the rights
under a Grant may not be disposed of by transfer, alienation, pledge,
encumbrance, assignment, or any other means, whether voluntary, involuntary, or
by operation of law, and any such attempted disposition shall be void.
Notwithstanding the foregoing and solely to the extent permitted by the
Committee in an agreement relating to a Grant, rights under a Grant (other than
pursuant to an Incentive Stock Option) may be transferred to members of a
Grantee's immediate family, charitable institutions, or trusts or partnerships
whose beneficiaries are any of the foregoing, or to such other persons or
entities as may be approved by the Committee, in each case subject to the
condition that the Committee be satisfied that
10
<PAGE>
such transfer is being made for estate or tax planning purposes or for donative
purposes without consideration being received therefor. In addition, when a
Grantee dies, the personal representative or other person entitled to succeed to
the rights of the Grantee may exercise the rights. A successor to the rights
under a Grant pursuant to the foregoing ("Successor Grantee") must furnish proof
satisfactory to the Company of his or her right to receive the Grant, whether as
a result of a transfer from the Grantee, under the Grantee's will or under the
applicable laws of descent and distribution.
(b) Substitute Grants. The Committee may make a Grant to an employee of
another corporation who becomes an Eligible Person by reason of a corporate
merger, consolidation, acquisition of stock or property, reorganization or
liquidation involving the Company in substitution for a stock option,
performance award, or restricted stock grant granted by such other corporation
("Substituted Stock Incentive"). The terms and conditions of the substitute
Grant may vary from the terms and conditions required by the 1998 Plan and from
those of the Substituted Stock Incentives. The Committee shall prescribe the
exact provisions of the substitute Grants, preserving to the extent the
Committee deems practical the provisions of the Substituted Stock Incentives.
The Committee shall also determine the number of shares of Guidant Stock to be
taken into account under Section 4.
(c) Subsidiaries. The term "subsidiary" means a corporation of which
Guidant owns directly or indirectly 50% or more of the voting power.
(d) Fractional Shares. Fractional shares shall not be issued or
transferred under a Grant, but the Committee may pay cash in lieu of a fraction
or round the fraction.
(e) Compliance with Law. The 1998 Plan, the exercise of Grants, and the
obligations of the Company to issue or transfer shares of Guidant Stock under
Grants shall be subject to all applicable laws and regulations and to approvals
by any governmental or regulatory agency as may be required. The Committee may
revoke any Grant if it is contrary to law or modify a Grant to bring it into
compliance with any valid and mandatory law or governmental regulation. The
Committee may also adopt rules regarding the withholding of taxes on payment to
Grantees.
(f) Ownership of Stock. A Grantee or Successor Grantee shall have no
rights as a stockholder of the Company with respect to any shares of Guidant
Stock covered by a Grant until
11
<PAGE>
the shares are issued or transferred to the Grantee or Successor Grantee on the
Company's books.
(g) No Right to Employment. The 1998 Plan and the Grants under it shall
not confer upon any Grantee the right to continue in the employment of the
Company or affect in any way the right of the Company to terminate the
employment of a Grantee at any time, with or without notice or cause.
(h) Foreign Jurisdictions. The Committee may adopt, amend, and terminate
such arrangements, not inconsistent with the intent of the 1998 Plan, as it may
deem necessary or desirable to make available tax or other benefits of the laws
of foreign jurisdictions to Grantees who are subject to such laws.
(i) Governing Law. The 1998 Plan and all Grants made under it shall be
governed by and interpreted in accordance with the laws of the State of Indiana,
regardless of the laws that might otherwise govern under applicable Indiana
conflict-of-laws principles.
(j) Effective Date of the 1998 Plan. The 1998 Plan shall become effective
upon approval by the Company's shareholders.
12
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 35
<SECURITIES> 0
<RECEIVABLES> 391
<ALLOWANCES> 14
<INVENTORY> 128
<CURRENT-ASSETS> 638
<PP&E> 592
<DEPRECIATION> 245
<TOTAL-ASSETS> 1,306
<CURRENT-LIABILITIES> 416
<BONDS> 160
0
0
<COMMON> 193
<OTHER-SE> 512
<TOTAL-LIABILITY-AND-EQUITY> 1,306
<SALES> 958
<TOTAL-REVENUES> 958
<CGS> 217
<TOTAL-COSTS> 217
<OTHER-EXPENSES> 157
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 207
<INCOME-TAX> 73
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 134
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.89
</TABLE>
<PAGE>
EXHIBIT 99.1
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.
<PAGE>
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.
