<PAGE>
Prospectus Supplement
(To Prospectus dated December 3, 1998)
[LOGO APPEARS HERE]
Guidant Corporation
$350,000,000
6.15% Notes due 2006
Issue price: 99.608%
Interest payable February 15 and August 15
The notes will mature on February 15, 2006. Interest will accrue from February
16, 1999. The notes may not be redeemed prior to their scheduled maturity. We
will issue the notes in minimum denominations of $1,000 increased in multiples
of $1,000.
Neither the Securities and Exchange Commission nor any state securities commis-
sion has approved or disapproved of the notes or passed upon the adequacy or
accuracy of this prospectus supplement or the prospectus. Any representation to
the contrary is a criminal offense.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Discounts and Proceeds to
Public Commissions the Company
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per note 99.608% .625% 98.983%
- ----------------------------------------------------------------------------------------------
Total $348,628,000 $2,187,500 $346,440,500
- ----------------------------------------------------------------------------------------------
</TABLE>
We do not intend to apply for listing of the notes on any national securities
exchange. Currently, there is no public market for the notes.
We expect that delivery of the notes will be made to investors on or about Feb-
ruary 16, 1999.
J.P. Morgan & Co.
BT Alex. Brown
Chase Securities Inc.
Credit Suisse First Boston
February 11, 1999
<PAGE>
You should only rely on the information contained or incorporated by reference
in this prospectus supplement and the prospectus. We have not, and the under-
writers have not, authorized any other person to provide you with different in-
formation. If anyone provides you with different or inconsistent information,
you should not rely on it. We are not, and the underwriters are not, making an
offer to sell these securities in any jurisdiction where the offer or sale is
not permitted. You should assume that the information appearing in this pro-
spectus supplement and the prospectus, as well as information we previously
filed with the Securities and Exchange Commission and incorporated by refer-
ence, is accurate as of the date on the front cover of this prospectus only.
Our business, financial condition, results of operations and prospects may have
changed since that date.
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. S-3
Ratio of Earnings to Fixed Charges....................................... S-9
Use of Proceeds.......................................................... S-10
Pro Forma Capitalization................................................. S-11
Unaudited Pro Forma Combined Financial Information....................... S-12
Selected Consolidated Financial Data..................................... S-18
Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... S-20
Business................................................................. S-33
Description of the Notes................................................. S-49
Underwriting............................................................. S-50
Validity of the Notes.................................................... S-51
Experts.................................................................. S-51
Prospectus
Available Information.................................................... 2
Incorporation of Certain Information by Reference........................ 2
The Company.............................................................. 3
Ratio of Earnings to Fixed Charges....................................... 3
Use of Proceeds.......................................................... 3
Forward-Looking Statements............................................... 3
Description of Senior Debt Securities.................................... 4
Plan of Distribution..................................................... 20
Legal Matters............................................................ 21
Experts.................................................................. 21
</TABLE>
S-2
<PAGE>
SUMMARY
In this prospectus supplement and the accompanying prospectus, the words "Com-
pany," "Guidant," "we," "our," "ours" and "us" refer to the Guidant Corpora-
tion. This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
terms of our notes, you should carefully read the more detailed information re-
garding the terms and conditions of the notes in this prospectus supplement and
the prospectus. You should also read the documents we have referred you to in
the "Incorporation of Certain Information by Reference" section of the prospec-
tus for further information on our company and our financial statements. Unless
otherwise indicated, the information contained in this prospectus supplement
has been adjusted to reflect the two-for-one stock split described under "Stock
Split" below.
The Company
We are a multinational company that designs, develops, manufactures and markets
a broad range of innovative, high quality, therapeutic medical devices for the
treatment of cardiovascular and vascular diseases, including devices for
. cardiac rhythm management,
. vascular intervention, and
. cardiac and vascular surgery.
Our net sales for the year ended December 31, 1997 and the nine months ended
September 30, 1998 were $1,328.2 million and $1,403.5 million, respectively.
In cardiac rhythm management, we are a worldwide leader in automatic
implantable cardioverter defibrillator systems used in the detection and treat-
ment of abnormally fast heart rhythms. We also design, manufacture and market a
full line of implantable pacemaker systems used in the treatment of slow or ir-
regular heart rhythms. On February 1, 1999, the Company purchased Intermedics,
the electrophysiology business of Sulzer Medica USA Holding Co., a division of
Sulzer Medica, Ltd. for approximately $810 million (including a previously an-
nounced $200 million litigation settlement payment). Intermedics is a global
leader in the design, development, manufacture and distribution of pacemakers
and pacemaker leads, with 1997 revenues of approximately $325 million. We be-
lieve the acquisition of Intermedics will nearly double our share of the world-
wide market for pacemakers, solidifying our position as a leading pacemaker
company. We believe the acquisition of Intermedics will also significantly in-
crease our sales presence with cardiologists, which will benefit us not only in
our direct sale of pacemakers, but in the anticipated markets of congestive
heart failure and atrial fibrillation. Intermedics also has an intellectual
product portfolio which we believe will further strengthen our existing posi-
tion in intellectual property in the cardiac rhythm management area.
In vascular intervention, we are a worldwide leader in minimally invasive de-
vices, such as coronary stent systems and balloon dilatation catheters, used
for opening blocked coronary arteries. In November 1998 we received FDA ap-
proval to market the ACS MULTI-LINK DUET Coronary Stent System in the U.S. This
stent provides enhanced visibility, greater deliverability, lower profiles, and
a wider range of sizes. The ACS MULTI-LINK DUET Coronary Stent System is cur-
rently the top selling coronary stent in Europe and the United States.
In cardiac and vascular surgery we develop, manufacture and market products for
use in minimally invasive cardiac and vascular surgery.
Our business strategy is to design, develop, manufacture and market innovative,
high quality therapeutic products principally for use in treating cardiovascu-
lar disease, the leading cause of death in the United States, resulting in im-
proved quality of patient care and reduced treatment costs. In implementing
this strategy, we focus on the following three areas, which we believe are
critical to our future success:
. global product innovation,
. economic partnership with customers worldwide,
and
. organizational excellence.
We are committed to ongoing product innovation and have invested substantial
resources in the research and development of new products. During the past
three years, our research and development investment has approximated 15% of
sales.
S-3
<PAGE>
This investment has resulted in a continuous record of innovative product
introductions and has led to our global leadership position in cardiac
rhythm management and vascular intervention. For the nine months ended Sep-
tember 30, 1998, 64% of our total sales were from products introduced since
January 1, 1998.
We continue to pursue a strategy that includes the potential acquisition of
businesses in the medical device industry. We plan to acquire technologies
that are complementary to our existing technology base, products that serve
our existing customer base, and businesses that expand our geographical
presence. However, we cannot assure you that any acquisition will be con-
summated, or if consummated, when it will be consummated and what the terms
of the acquisition will be.
Recent Developments
Fourth Quarter Earnings
On January 28, 1999, we announced our fourth quarter sales of $493.5 mil-
lion, bringing our total sales to a record of $1,897 million for 1998. Com-
pared to the fourth quarter of 1997, our highest sales quarter in our his-
tory due to our highly successful entry into the U.S. stent market, fourth
quarter 1998 sales were essentially level.
Our 1998 fourth quarter sales of cardiac rhythm management products reached
$210.7 million, an increase of 15% over the same period last year. Sales of
the VENTAK MINI III and newly-launched MINI IV implantable defibrilator,
the VENTAK AVIII DR rate responsive dual chamber pacemaker/defibrillator
and the DISCOVERY and MERIDIAN pacing product lines drove revenue growth.
On a worldwide basis, our implantable defibrillator revenues increased 5%
over the fourth quarter of 1997, while our pacemaker sales grew 39% over
last year.
Our sales of vascular intervention products of $262.8 million decreased 11%
in the fourth quarter of 1998 compared to the same period in 1997, which
featured the U.S. launch of the ACS RX MULTI-LINK Coronary Stent System.
Our worldwide coronary stent sales totaled $181.6 million in the quarter.
Our U.S. revenues in coronary stents totaled $128.3 million. Total stent
sales were aided by our highly successful launch of the ACS MULTI-LINK DUET
Coronary Stent System in Europe and a strong performance by the ACS MULTI-
LINK Coronary Stent System in Japan.
Fourth quarter 1998 sales of our cardiac and vascular surgery products grew
by 6% over last year to $20.0 million. The VASOVIEW UNIPORT system for
less-invasive saphenous vein harvesting associated with coronary artery by
pass procedures helped drive growth in this quarter.
Gross profit of $384.6 million in the quarter improved slightly to 77.9% of
sales compared to 77.7% in the fourth quarter of 1997 due to increased man-
ufacturing volume and continued progress in manufacturing efficiencies.
Our operating expenses for the fourth quarter of 1998 declined by 5%, ex-
cluding special charges in 1997. Sales, marketing and administrative ex-
penses declined primarily due to lower selling costs, particularly for vas-
cular intervention products, and declines in administrative spending. Total
spending in research and development during the quarter rose to record lev-
els, representing 15.9% of sales and growing 18% over the fourth quarter of
1997 as we continue our investment in current and future technology plat-
forms. The fourth quarter of 1998 also benefitted from a lower income tax
rate, after excluding the impact of special charges, in comparison to the
fourth quarter of 1997.
For the year ended December 31, 1998, sales of $1,897 million increased 43%
compared to 1997, driven by performance of new products in all geographies
and markets. Favorable sales mix impact as well as continued realization of
manufacturing efficiencies and increased production volume led to a 46% in-
crease in gross profit over 1997 results. Adjusted 1998 operating expenses
rose 29% over adjusted 1997 results, and continued to reflect significant
investment in research and development and product distribution capabilities as
a foundation for long-term growth. With special charges excluded from both
current and prior year results, net income grew to $359.4 million or $1.19 per
share in 1998, rep-resenting an increase of 82% in net income and 81% in
earnings per share over the prior year.
On January 28, 1999 we announced that overall, excluding special charges in
1997, we recorded an increase in net income during the fourth quarter of
1998 of 13% to $86.8 million, and growth in earnings per share of 12% to
$0.29 on a post-stock split basis. At that time, we also announced that on
a reported basis, we had 1998 net income of $43.8 million or $0.14 per
share.
S-4
<PAGE>
We are amending our fourth quarter and year end 1998 results announced on
January 28, 1999 as a result of the following events:
On June 4, 1996, General Surgical Innovations, Inc. ("GSI") filed suit
against one of our subsidiaries alleging that our VASOVIEW Balloon Dissec-
tion System and Preperitoneal Distention Balloon Systems infringe a patent
owned by GSI. On February 8, 1999, the jury in this case returned a verdict
that we infringed on GSI's patent that covers our VASOVIEW and several
other general surgery products and found that we should pay $12.9 million
in damages to GSI. The jury also found certain claims of the patent to have
been wilfully infringed which could result in up to a trebling of the dam-
age award and entitle GSI to its attorney fees. GSI is also seeking injunc-
tive relief and a hearing relating to the injunction is set before the
court on February 26, 1999. While we may appeal the decision once a judge-
ment is entered and post-trial matters have been resolved, an additional
charge to reported income of approximately $9 million has been recognized
for the year ended December 31, 1998 to provide for this potential loss.
As a result of this decision and due to management's strategic redirection
of this business to cardiovascular applications announced in 1997, we also
reassessed the recoverability of our general surgery assets using impair-
ment guidelines specified by generally accepted accounting principles. Our
analysis determined that a non-cash impairment write-down of $40 million
became necessary.
Both the litigation and non-cash impairment charges are being reflected in
our amended 1998 results. While these charges have no effect on our previ-
ously reported sales, operating income or net income before special charges
for the fourth quarter and year end 1998 described above, they do reduce
net income and the related earnings per share by $46.0 million and $0.16
per share, respectively. Accordingly, we will have a reported net income of
$40.8 million and earnings per share of $0.13 for the fourth quarter of
1998 and we will have a reported net loss of $2.2 million and a loss per
share of $0.01 for the year ended December 31, 1998.
Recent Acquisition
On February 1, 1999, we completed our acquisition of Intermedics for an ag-
gregate cost of approximately $810 million (including a previously an-
nounced $200 million litigation settlement payment) using the purchase
method of accounting. A $200 million charge was recorded in the third quar-
ter of 1998 relating to the litigation settlement payment. An additional
one-time, pre-tax charge of $49 million will be recorded in the first quar-
ter of 1999 relating to the ascribed value of Intermedics in process tech-
nology. We initially financed this acquisition with the issuance of commer-
cial paper. However, we intend to use the net proceeds of this offering to
reduce the amount of our outstanding commercial paper borrowings. We also
intend to issue additional long term securities to further reduce the
amount of our outstanding commercial paper borrowings.
Stock Split
On December 21, 1998, we declared a two-for-one stock split in the form of
a 100% stock dividend which was distributed on January 27, 1999 to the
holders of record on January 13, 1999.
S-5
<PAGE>
The Offering
<TABLE>
<C> <S>
Securities................................... We are offering 6.15% Notes due
2006.
Principal Amount............................. $350,000,000.
Maturity..................................... February 15, 2006.
Interest Rate................................ 6.15% per year, accruing from
February 16, 1999.
Interest Payment Dates....................... February 15 and August 15,
beginning on August 15, 1999.
Ranking...................................... The notes will rank equal to
all of our other existing and
future senior unsecured
indebtedness.
Redemption................................... The notes are not redeemable
prior to maturity.
General Indenture Provisions................. The indenture includes the
following provisions:
. The indenture limits our
ability to merge or
consolidate with another
company, or transfer or sell
all or substantially all of
our assets;
. The indenture limits our
ability to create liens;
. The indenture limits our
ability to enter into sale
and leaseback transactions;
and
. The indenture limits the
amount of debt that some of
our subsidiaries may incur.
Use of Proceeds.............................. The Company will use the
proceeds of the notes to repay
a portion of its commercial
paper borrowings used to
finance the acquisition of
Intermedics.
</TABLE>
S-6
<PAGE>
Summary Financial Information
The historical financial data set forth below represents summary financial data
of our company. The pro forma information included in this summary reflects the
acquisition of Intermedics using the purchase method of accounting and
incurrence of debt in connection with the acquisition. The financial data pre-
sented below should be read in conjunction with the consolidated financial
statements of the Company and the accompanying notes incorporated by reference
into the accompanying prospectus and "Management's Discussion and Analysis of
Results of Operations and Financial Condition," and "Unaudited Pro Forma Com-
bined Financial Information" included elsewhere in this prospectus supplement.
<TABLE>
<CAPTION>
Pro Forma
Nine Months Nine Months Ended
Ended September 30, Year Ended December 31,
September 30, --------------------- ----------------------------------
(Dollars in millions, 1998 1998 1997 1997 1996 1995
except per-share data) ------------- -------- -------- -------- -------- ---------
--------------------------------------- ----------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net sales:
Cardiac rhythm
management $ 613.9 $ 486.3 $ 669.6 $ 574.6 $ 452.4
Vascular intervention 739.4 297.7 591.4 425.6 447.9
Cardiac & vascular
surgery 50.2 48.4 67.2 49.5 31.0
------------- -------- -------- -------- -------- ---------
Total net sales $1,641.6 1,403.5 832.4 1,328.2 1,049.7 931.3
Gross profit 1,249.1 1,090.4 622.3 1,007.4 733.8(1) 647.9
Income from operations 382.8(12) 362.5 (2) 153.6(3) 279.4(4) 240.8(1) 212.3
Net income (loss) $ 129.0(12) $ (43.0)(5) $ 83.2(6) $ 145.3(7) $ 52.3(8) $ 92.8
Earnings (loss) per
share(9) $ 0.44(12) $ (0.15)(5) $ 0.28(6) $ 0.49(7) $ 0.18(8) $ 0.32
Earnings (loss) per
share-diluted(9) $ 0.43(12) $ (0.15)(5) $ 0.28(6) $ 0.48(7) $ 0.18(8) $ 0.32
Weighted average shares
outstanding-diluted(9) 302.04 294.60 299.06 299.78 296.26 293.26
<CAPTION>
Pro Forma September 30, December 31,
September 30, --------------------- ----------------------------------
1998 1998 1997 1997 1996 1995
------------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Financial Position:
Working capital $ 306.7 $ 114.6 $ 123.9 $ 83.8(10) $ 127.6 $ 119.7
Capital expenditures,
net 91.3 76.6 53.2 76.8 63.6 64.9
Total assets 2,151.7 1,446.3 1,009.6 1,225.0 1,024.9 1,069.1
Borrowings 1,177.7 361.6 347.1 292.2 363.5 455.0
Borrowings as a
percentage of total
capitalization 71.5% 41.1% 39.2% 33.4% 43.8% 53.6%
Earnings to fixed
charges(11) 8.6 28.4 11.2 13.2 8.7 5.5
Shareholders' equity 468.8 517.8 538.1 581.8 466.9 394.4
</TABLE>
- --------------
(1) Includes the impact of special obsolescence charges of $28.8 million. Ex-
cluding the effect of these charges, gross profit was $762.6 million, and in-
come from operations was $269.6 million.
(2) In conjunction with the asset acquisitions of InControl, Inc., in September
1998 and NeoCardia, LLC., in May 1997, this includes the appraised value of in-
process research and development. Excluding the effect of these charges, income
from operations was $481.2 million.
(3) In conjunction with the asset acquisition of NeoCardia, LLC., the initial
purchase price of $57.4 million, which represented the appraised value of in-
process research and development, was charged to expense. Excluding the impact
of this charge, income from operations was $211.0 million.
(4) Includes merger-related costs of $11.1 million in connection with the ac-
quisition of EndoVascular Technologies, Inc. ("EVT") and a special contribution
to the Guidant Foundation, Inc., of $11.5 million. Excluding the impact of
these charges and the in-process research and development, income from opera-
tions was $359.4 million.
(5) Includes a $200 million charge recorded in the third quarter of 1998 rela-
tive to the settlement of intellectual property litigation reached in connec-
tion with the purchase of Intermedics and a $60 million charge recorded upon
Guidant's agreement with C.R. Bard, Inc. ("Bard") that settled two patent in-
fringement lawsuits. Excluding these charges along with the in-process research
and development charge referred to in (2) above, net income was $272.6 million,
earnings per share was $0.93, and earnings per share-diluted was $0.91.
(6) Excluding the effect of the in-process research and development, net income
was $120.3 million, earnings per share was $0.41, and earnings per share-di-
luted was $0.40.
S-7
<PAGE>
(7) In addition to the special items mentioned in (4) above, reported net in-
come includes a cumulative effect of a change in accounting principle of $4.7
million, net of tax. Excluding the effect of these special items, net income
was $197.4 million, earnings per share was $0.67, and earnings per share-di-
luted was $0.66.
(8) Includes the impact of impairment charges on atherectomy-related goodwill
and other intangible assets of $66.9 million. Excluding the effect of special
charges, net income, earnings per share, and earnings per share-diluted were
$136.4 million, $0.46, and $0.46, respectively.
(9) Per-share data and weighted average shares outstanding have been adjusted
for all years to reflect the two-for-one stock splits declared in August 1997
and December 1998.
(10) The decline in working capital primarily resulted from the classification
of $212.2 million of our commercial paper and bank borrowings as a current lia-
bility.
(11) Excludes the impact of the special charges.
(12) Excluding in-process research and development charges in 1998 and a $60
million litigation settlement charge related to Bard, income from operations
was $501.5 million, net income was $244.6 million, earnings per share was
$0.83, and earnings per share-diluted was $0.81.
The summary financial information above gives retroactive effect to our acqui-
sition of EVT in a tax-free stock exchange in the fourth quarter of 1997.
S-8
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our ratio of earnings to fixed charges for the
periods indicated.
<TABLE>
<CAPTION>
Pro Forma Nine Months
Nine Months Ended
Ended September 30, Year Ended December 31,
September 30, ------------- ------------------------
1998 1998 1997 1997 1996 1995 1994 1993
------------- ------ ------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges........... 8.6 28.4 11.2 13.2 8.7 5.5 8.0 17.8
</TABLE>
These computations include the Company and our subsidiaries. For these ratios,
"earnings" is determined by adding the "total fixed charges" and income taxes
to income from continuing operations excluding special charges. For this pur-
pose, "total fixed charges" consists of (1) interest on all indebtedness, and
(2) an interest factor attributable to rentals.
S-9
<PAGE>
USE OF PROCEEDS
The Company expects to use the net proceeds from the sale of the notes (esti-
mated at approximately $346.4 million, before deducting estimated expenses of
this offering) to repay a portion of its commercial paper borrowings. Such com-
mercial paper was issued to finance the acquisition of Intermedics, which was
consummated on February 1, 1999, and for general corporate purposes and working
capital. As of February 2, 1999, the Company's commercial paper borrowings had
a weighted average interest rate (on a bond-equivalent yield basis) of approxi-
mately 5.07% per annum with a weighted average maturity of approximately 29
days.
S-10
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth cash and cash equivalents and the consolidated
total capitalization of the Company as of September 30, 1998, adjusted to give
effect to (i) the acquisition of Intermedics, including the incurrence of com-
mercial paper borrowings in connection therewith and (ii) the issuance of $350
million of notes offered hereby and the application of the estimated net pro-
ceeds therefrom, as described under "Use of Proceeds." This table should be
read in conjunction with the consolidated financial statements of the Company
incorporated by reference herein and the "Unaudited Pro Forma Consolidated Fi-
nancial Statements" and the notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
As of September 30, 1998
Pro Forma As Adjusted
(In millions) ------------ -------------
<S> <C> <C>
Cash and cash equivalents $ 38.5 $ 38.5
============ =============
Debt:
Commercial paper 1,062.7 712.7
Bank borrowings 115.0 115.0
6.15% Notes due 2006 -- 350.0
------------ -------------
Total debt (including current portion) 1,177.7 1,177.7
Shareholders' Equity:
Common stock, no par value, 500,000,000
shares authorized 192.5 192.5
Paid-in capital 199.5 199.5
Retained earnings 165.0 165.0
Treasury stock (21.3) (21.3)
Deferred cost, ESOP (42.2) (42.2)
Cumulative currency translation adjustments (24.7) (24.7)
------------ -------------
Total Shareholders' equity 468.8 468.8
------------ -------------
Total capitalization $ 1,646.5 $ 1,646.5
============ =============
</TABLE>
S-11
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information has been pre-
pared to reflect the adjustments to Guidant Corporation's historical results of
operations and financial position and to give effect to the acquisition of
Intermedics using the purchase method of accounting and the incurrence of debt
in connection therewith, including commercial paper borrowings to initially fi-
nance the acquisition and the replacement of a portion of such borrowings with
$350 million of proceeds in connection with this offering.
On February 1, 1999, the Company completed the acquisition of Intermedics for
approximately $810 million (including a previously announced $200 million liti-
gation settlement payment). The final purchase price was determined according
to the aggregate sales volume in the first half of 1998 produced by the U.S.
independent sales representatives of Intermedics who, prior to the closing of
the transaction, agreed to become employees of Guidant. Sales representatives
responsible for producing approximately 70% of the aggregate U.S. sales volume
of Intermedics accepted offers to become Guidant employees by the date of the
closing of the acquisition. Although the remaining sales representatives will
continue to sell Intermedics products under contract, Guidant does not expect
all of such remaining Intermedics sales representatives to become Guidant em-
ployees. As a result of transitional issues related to the acquisition, Guidant
expects that the near term increase in sales volume resulting from the acquisi-
tion will be less than Intermedics' historical sales volume.
The unaudited pro forma combined statements of income for the year ended Decem-
ber 31, 1997, and for the nine months ended September 30, 1998, are based on
the combined historical results of operations adjusted to give effect to the
transaction as if it had occurred on January 1, 1997. The unaudited pro forma
combined statements of income exclude any benefits from synergies that may re-
sult from the Intermedics acquisition.
The unaudited pro forma combined balance sheet gives effect to the transaction
as if it had occurred on September 30, 1998. The unaudited pro forma combined
balance sheet includes the adjustments necessary to reflect the allocation of
the proposed acquisition cost to the fair values of the assets acquired and li-
abilities assumed, including a pro forma charge to retained earnings for in-
process technology acquired. Such allocation has been based on preliminary es-
timates of the fair value of the related assets and liabilities. The actual al-
location of such consideration may differ from that reflected in the pro forma
financial information after the completion of independent valuations and other
procedures to be performed. Management does not expect that the final alloca-
tion of the aggregate purchase price will differ materially from the prelimi-
nary allocations.
Pursuant to the Stock and Asset Purchase Agreement, intercompany amounts owed
to Intermedics and income tax liabilities were not assumed by Guidant. The ex-
cess of the purchase price over the fair value of the net tangible assets ac-
quired was allocated to specific intangible asset categories (principally good-
will) and is being amortized over the estimated periods of benefit associated
with these specific intangible asset categories.
The unaudited pro forma combined financial information is not necessarily in-
dicative of Guidant's results of operations or financial position had the
Intermedics acquisition reflected therein actually been consummated at its as-
sumed dates, nor is it necessarily indicative of Guidant's results of opera-
tions or financial position for any future period. The unaudited pro forma com-
bined financial information should be read in conjunction with Guidant's con-
solidated financial statements and notes thereto incorporated by reference in
this Prospectus.
S-12
<PAGE>
Guidant Corporation and Intermedics
Unaudited Pro Forma Combined Statement of Income
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Guidant Pro Forma
(Dollars in millions, Corporation Intermedics Adjustments and Pro Forma
except per-share and Historical Historical Reclassifications Combined
other data) ----------- ----------- ----------------- ---------
<S> <C> <C> <C> <C>
Net sales $1,403.5 $238.1 $1,641.6
Cost of products sold 313.1 79.4 392.5
----------- ----------- ---------
Gross profit 1,090.4 158.7 1,249.1
Research and development 197.8 34.2 (1.0)(1)
1.8 (2) 232.8
Purchased research and
development 118.7 118.7
Sales, marketing and
administrative 411.4 97.6 5.8 (2) 514.8
Other operating expenses 7.6 (7.6)(2) --
Intangibles amortization -- 10.5 (10.5)(3) --
----------- ----------- ----------------- ---------
Income from operations 362.5 8.8 11.5 382.8
Other income (expenses)
Interest, net (10.1) (12.9) 13.3 (4) (47.5)
(37.8)(5)
Royalties, net (31.8) (1.0)(1) (32.8)
Amortization (13.1) (17.9)(6) (31.0)
Litigation settlement (260.0) 200.0 (7) (60.0)
Other, net (4.8) (0.2) -- (5.0)
----------- ----------- ----------------- ---------
(319.8) (13.1) 156.6 (176.3)
----------- ----------- ----------------- ---------
Income (loss) before
income taxes 42.7 (4.3) 168.1 206.5
Income taxes (benefit) 85.7 1.1 (9.3)(8) 77.5
----------- ----------- ----------------- ---------
Net income (loss) $ (43.0) $ (5.4) $177.4 $ 129.0
=========== =========== ================= =========
Earnings (loss) per
share(9):
Basic $ (0.15) $ 0.44
Diluted $ (0.15) $ 0.43
Weighted average shares
outstanding(9):
Basic 294.60 294.60
Diluted 294.60 302.04
</TABLE>
See accompanying notes to Unaudited Pro Forma Financial Information
S-13
<PAGE>
Guidant Corporation and Intermedics
Unaudited Pro Forma Combined Statement of Income
Year Ended December 31, 1997
<TABLE>
<CAPTION>
Guidant Pro Forma
(Dollars in millions, Corporation Intermedics Adjustments and Pro Forma
except per-share Historical Historical Reclassifications Combined
and other data) ----------- ----------- ----------------- ---------
<S> <C> <C> <C> <C>
Net sales $1,328.2 $325.5 $1,653.7
Cost of products sold 320.8 100.2 421.0
----------- ----------- ---------
Gross profit 1,007.4 225.3 1,232.7
Research and development 208.3 45.3 (3.8)(1)
1.0 (2) 250.8
Purchased research and
development 57.4 57.4
Sales, marketing and
administrative 439.7 126.4 7.5 (2) 573.6
Other operating expenses 8.5 (8.5)(2) --
Intangibles amortization 13.3 (13.3)(3) --
Merger-related costs 11.1 11.1
Foundation contribution 11.5 -- -- 11.5
----------- ----------- ----------------- ---------
Income from operations 279.4 31.8 17.1 328.3
Other income (expenses)
Interest, net (19.5) (17.9) 18.2 (4) (68.9)
(49.7)(5)
Royalties, net 2.3 (3.8)(1) (1.5)
Amortization (15.5) (23.8)(6) (39.3)
Other, net 2.1 (2.3) -- (0.2)
----------- ----------- ----------------- ---------
(30.6) (20.2) (59.1) (109.9)
----------- ----------- ----------------- ---------
Income (loss) before
income taxes and
cumulative effect of
change in accounting
principle 248.8 11.6 (42.0) 218.4
Income taxes (benefit) 98.8 6.9 (12.0)(8) 93.7
----------- ----------- ----------------- ---------
Income (loss) before
cumulative effect of
change in accounting
principle $ 150.0 $ 4.7 $(30.0) $ 124.7
=========== =========== ================= =========
Earnings per share:
Income before
cumulative effect
change in accounting
principle per common
share(9):
Basic $ 0.51 $ 0.42
Diluted $ 0.50 $ 0.42
Weighted average
shares
outstanding(9):
Basic 294.30 294.30
Diluted 299.78 299.78
</TABLE>
See accompanying notes to Unaudited Pro Forma Financial Information
S-14
<PAGE>
Guidant Corporation and Intermedics
Unaudited Pro Forma Combined Balance Sheet
September 30, 1998
<TABLE>
<CAPTION>
Guidant Pro Forma
Corporation Intermedics Adjustments and Pro Forma
Historical Historical Reclassifications Combined
(Dollars in millions) ----------- ----------- ----------------- ---------
<S> <C> <C> <C> <C>
Cash and cash
equivalents $ 28.7 $ 13.4 $ (3.6)(10) $ 38.5
Accounts receivable, net 366.5 66.4 (18.0)(11) 414.9
Other receivables 8.2 -- 8.2
Inventories 162.7 89.7 (3.2)(11) 249.2
Deferred income taxes 64.9 6.8 59.8 (11) 131.5
Prepaid expenses 20.7 2.0 -- 22.7
----------- ----------- ----------------- ---------
Total Current Assets 651.7 178.3 35.0 865.0
Goodwill and other
intangible assets, net 290.3 (12) 448.3 (13) 738.6
Investments 44.7 -- 44.7
Deferred income taxes 62.8 12.9 75.7
Sundry 31.1 0.8 3.6 (10) 35.5
Property and equipment,
net 365.7 82.7 (56.2)(11) 392.2
----------- ----------- ----------------- ---------
Total Assets $1,446.3 $274.7 $ 430.7 $2,151.7
=========== =========== ================= =========
Accounts payable and
accrued expenses 331.7 29.6 361.3
Income taxes payable 5.4 5.4
Payable to Sulzer Medica 200.0 (14) (200.0)(7) --
Current portion of long-
term debt -- 0.3 100.0 (15) 100.3
Liabilities assumed -- -- 93.0 (16) 93.0
----------- ----------- ----------------- ---------
Total Current
Liabilities 537.1 29.9 (7.0) 560.0
Long-term debt 361.6 5.8 (14) 710.0 (17) 1,077.4
Other noncurrent
liabilities 29.8 15.7 (14) 45.5
Common stock 192.5 192.5
Other stockholders'
equity 325.3 (49.0)(18) 276.3
Net assets acquired -- 223.3 (223.3)(19) --
----------- ----------- ----------------- ---------
Total Liabilities and
Stockholders' Equity $1,446.3 $274.7 $ 430.7 $2,151.7
=========== =========== ================= =========
</TABLE>
See accompanying notes to Unaudited Pro Forma Financial Information
S-15
<PAGE>
Guidant Corporation and Intermedics
Notes to Unaudited Pro Forma Combined Financial Information
(Dollars in millions)
Following is a description of pro forma adjustments reflected in the Unaudited
Pro Forma Combined Statements of Income and Balance Sheet:
(1) Reclassification of Intermedics' royalty expenses to conform with Guidant's
presentation.
(2) Represents the reclassification of Sulzer Medica corporate charges to con-
form with Guidant's presentation.
(3) Elimination of amounts recorded by Intermedics for amortization of intangi-
ble assets. Amortization expense related to goodwill and other intangibles ac-
quired in the transaction is reflected in Note 6.
(4) Represents interest on intercompany debt payable to Sulzer Medica. This
outstanding loan was forgiven at the date of acquisition under the terms of the
Stock and Asset Purchase Agreement.
(5) Represents the estimated increase in interest expense and financing fees
resulting from the acquisition. The estimated increase in interest expense as-
sumes the initial financing obtained in connection with the acquisition re-
mained outstanding during the periods presented. The initial transaction fi-
nancing needs were met with cash raised in the commercial paper markets, which
carries a variable rate of interest. Long-term financing in an aggregate prin-
cipal amount of $350 million will then be issued under this offering with an
effective interest rate of 6.33%. The average effective interest rate for the
nine months ended September 30, 1998 was 6.14% for total Company borrowings.
The average effective interest rate for total Company borrowings in 1997 was
5.98%. If the average effective interest rate for commercial paper had fluctu-
ated 1/8% for the nine months ended September 30, 1998, the pro forma interest
expense would have changed by $0.4 million. If the average effective interest
rate for commercial paper had fluctuated by 1/8% in 1997, the pro forma inter-
est expense would have changed by $0.6 million. Guidant expects to subsequently
issue additional long-term debt to further reduce outstanding commercial paper.
(6) Represents the amortization of the goodwill and other intangible assets re-
corded in the acquisition.
(7) When the planned acquisition of Intermedics was announced in the third
quarter of 1998, a charge of $200 million was recorded. This charge represents
the portion of the purchase price allocated to settlement of the intellectual
property litigation between Guidant and Sulzer Medica. As required by Regula-
tion S-X, this nonrecurring charge has been excluded from net income and is re-
flected in Guidant's September 30, 1998 retained earnings in the Unaudited Pro
Forma Combined Balance Sheet. The resulting liability has been reclassified to
debt as it was settled with commercial paper upon consummation of the acquisi-
tion.
(8) Represents the estimated tax effect of the Unaudited Pro Forma Combined
Statements of Income's pro forma adjustments based on the statutory tax rate of
38.0%.
(9) Per-share data and weighted average shares outstanding have been adjusted
to reflect a two-for-one stock split declared by Guidant in December 1998, ef-
fective in January 1999.
(10) Debt issuance costs.
(11) Adjustments to record fair valuation of assets received and deferred tax
assets generated as a result of the acquisition.
(12) At September 30, 1998, Intermedics had $304.0 million net of goodwill and
other intangible assets recorded. In a purchase transaction, only intangible
assets that can be identified are valued and recorded at appraised values. The
goodwill recorded on Intermedics books is not acquired as part of the asset
purchase. Identifiable intangible assets have been valued at $28 million and is
included in note (13).
(13) Goodwill and other intangible assets resulting from this transaction are
estimated as follows:
<TABLE>
<S> <C>
Goodwill $420.3
Developed Technology 28.0
</TABLE>
S-16
<PAGE>
(14) Certain liabilities were not assumed in the Stock and Asset Purchase
Agreement with Sulzer Medica. These include income taxes payable of $29.6 mil-
lion, other noncurrent liabilities of $9.6 million, and intercompany debt of
$392.4 million. All amounts are as of September 30, 1998.
(15) The Company expects that a minimum of approximately $1.1 billion of
borrowings will remain outstanding through September 30, 1999, and accordingly,
has classified $100 million as current at September 30, 1998.
(16) Accrual of liabilities assumed which includes costs to exit certain activ-
ities of the electrophysiology business. Liabilities assumed include severance,
distributor terminations, and certain miscellaneous cancellation fees.
(17) The initial transaction financing needs were met with cash raised in the
commercial paper markets, which carries a variable rate of interest. This rep-
resents the $810 million acquisition price, less $100 million classified as
short-term. A portion of the commercial paper will be converted to term debt
pursuant to this offering. Guidant expects to subsequently issue additional
long-term term debt to further reduce outstanding commercial paper.
(18) Pursuant to Regulation S-X, the in-process research and development has
been written off against combined retained earnings and has not been reflected
in the pro forma combined statement of operations.
(19) Elimination of the Intermedics net assets account.
S-17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below is derived from Guidant's au-
dited consolidated financial statements, except for the financial data for the
nine months ended September 30, 1998 and 1997 which is derived from Guidant
Corporation's unaudited consolidated financial statements. The financial data
for the nine months ended September 30, 1998 and 1997 include all adjustments,
consisting of normal recurring accruals, which Guidant considers necessary for
a fair presentation of its results of operations and financial position for
these periods. Operating results for the nine months ended September 30, 1998
are not necessarily indicative of the results for the entire year ended Decem-
ber 31, 1998. The financial data presented below should be read in conjunction
with the consolidated financial statements and accompanying notes incorporated
by reference to the accompanying prospectus and "Management's Discussion and
Analysis of Results of Operations and Financial Condition" included elsewhere
in this prospectus supplement. The financial data presented below should also
be read in conjunction with the unaudited pro forma combined financial data
that gives effect to the acquisition of Intermedics using the purchase method
of accounting.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
(Dollars in millions, --------------------- ------------------------------------------------------
except per-share and 1998 1997 1997 1996 1995 1994 1993
other data) -------- -------- -------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net sales:
Cardiac rhythm
management $ 613.9 $ 486.3 $ 669.6 $ 574.6 $ 452.4 $ 378.6 $ 336.5
Vascular intervention 739.4 297.7 591.4 425.6 447.9 464.5 451.6
Cardiac & vascular
surgery 50.2 48.4 67.2 49.5 31.0 19.3 6.6
-------- -------- -------- -------- -------- -------- --------
Total net sales 1,403.5 832.4 1,328.2 1,049.7 931.3 862.4 794.7
Cost of products sold 313.1 210.1 320.8 315.9(1) 283.4 270.9 236.2
-------- -------- -------- -------- -------- -------- --------
Gross profit 1,090.4 622.3 1,007.4 733.8(1) 647.9 591.5 558.5
Research and development 197.8 142.2 208.3 164.6 142.8 138.3 132.6
Purchased research and
development 118.7 (2) 57.4(3) 57.4 -- -- -- --
Sales, marketing, and
administrative 411.4 269.1 439.7 328.4 292.8 269.8 255.8
Special charges -- -- 22.6(4) -- -- -- 81.5
-------- -------- -------- -------- -------- -------- --------
Income from operations 362.5 (2) 153.6(3) 279.4(4) 240.8(1) 212.3 183.4 88.6
Other expenses, net 319.8 (5) 16.6 30.6(6) 104.8(7) 50.8 35.4 5.7
Net income (loss) $ (43.0)(8) $ 83.2(9) $ 145.3(10) $ 52.3(11) $ 92.8 $ 84.2 $ 46.5
Earnings (loss) per
share(16) $ (0.15)(8) $ 0.28(9) $ 0.49(10) $ 0.18(11) $ 0.32
Earnings (loss) per
share--diluted(16) $ (0.15)(8) $ 0.28(9) $ 0.48(10) $ 0.18(11) $ 0.32
Pro forma net income(12) $ 68.3
Pro forma earnings per
share(12)(16) $ 0.23
Cash dividends declared
per share(16) $ 0.019 $ 0.019 $ 0.025 $ 0.025 $ 0.0125 --
Weighted average shares
outstanding--
diluted(16) 294.60 299.06 299.78 296.26 293.26 291.00
<CAPTION>
September 30, December 31,
--------------------- ------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Position:
Working capital $ 114.6 $ 123.9 $ 83.8(13) $ 127.6 $ 119.7 $ 134.1 $ 153.8
Current ratio 1.2:1 1.3:1 1.2:1(13) 1.4:1 1.4:1 1.4:1 1.7:1
Capital expenditures,
net 76.6 53.2 76.8 63.6 64.9 51.8 43.7
Total assets 1,446.3 1,009.6 1,225.0 1,024.9 1,069.1 1,122.5 1,300.4
Borrowings 361.6 347.1 292.2 363.5 455.0 473.0 --
Borrowings as a
percentage of total
capitalization 41.1% 39.2% 33.4% 43.8% 53.6% 62.6% --
Earnings to fixed
charges(14) 28.4 11.2 13.2 8.7 5.5 8.0 17.8
Shareholders' equity 517.8 538.1 581.8 466.9 394.4 282.6 1,059.6
Book value per share--
diluted(16) $ 1.71 $ 1.80 $ 1.94 $ 1.58 $ 1.34 $ 0.97
Other Data:
Net sales per employee $224,500 $162,500 $239,500 $207,300 $183,000 $162,300 $153,000
Income from operations
per employee(14) 77,000 41,200 64,800 53,200 41,700 34,500 32,800
Effective income tax
rate(15) 35.3% 35.3% 35.3% 38.4% 40.5% 40.9% 39.8%
Full-time employee
equivalents 7,131 5,373 6,017 5,076 5,053 5,127 5,502
</TABLE>
- ---------------
(1) Includes the impact of special obsolescence charges of $28.8 million. Ex-
cluding the effect of these charges, cost of products sold was $287.1 million,
gross profit was $762.6 million, and income from operations was $269.6 million.
(2) In conjunction with the asset acquisitions of InControl, Inc., in September
1998 and NeoCardia, LLC., in May 1997, this represents the appraised value of
in-process research and development. Excluding the effect of these charges, in-
come from operations was $481.2.
S-18
<PAGE>
(3) In conjunction with the asset acquisition of NeoCardia, LLC., the initial
purchase price of $57.4 million, which represented the appraised value of in-
process research and development, was charged to expense. Excluding the impact
of this charge, income from operations was $211.0 million.
(4) Includes merger-related costs of $11.1 million in connection with the ac-
quisition of EndoVascular Technologies, Inc. ("EVT") and a special contribution
to the Guidant Foundation, Inc., of $11.5 million. Excluding the impact of
these charges and the in-process research and development, income from opera-
tions was $359.4 million.
(5) Includes a $200 million charge recorded in the third quarter of 1998 rela-
tive to the settlement of intellectual property litigation reached in connec-
tion with the purchase of Intermedics and a $60 million charge recorded upon
Guidant's agreement with C.R. Bard, Inc. that settled two patent infringement
lawsuits.
(6) Includes a one-time gain of $23.2 million on the sale of Guidant's equity
investment in Gynecare, Inc., and a corporate legal reserve of $11.5 million
recorded in the fourth quarter of 1997.
(7) Includes the impact of impairment charges on atherectomy-related goodwill
and other intangible assets of $66.9 million.
(8) Excluding the impact of the in-process research and development and litiga-
tion settlement charges referred to in (2) and (5), net income was $272.6 mil-
lion, earnings per share was $0.93, and earnings per share--diluted was $0.91.
(9) Excluding the effect of the in-process research and development referred to
in note (3) net income was $120.3 million, earnings per share was $0.41, and
earnings per share--diluted was $0.40.
(10) In addition to the special items mentioned in (4) above, reported net in-
come includes a cumulative effect of a change in accounting principle of $4.7
million, net of tax. Excluding the effect of these special items, net income
was $197.4 million, earnings per share was $0.67, and earnings per share--di-
luted was $0.66.
(11) Excluding the effect of special charges, net income, earnings per share,
and earnings per share--diluted were $136.4 million, $0.46, and $0.46, respec-
tively.
(12) Pursuant to the formation of Guidant, and its Initial Public Offering
(IPO), Guidant reported 1994 earnings on a pro forma basis, which give effect
to several capital structure and financing transactions.
(13) The decline in working capital and current ratio primarily resulted from
the classification of $212.2 million of Guidant's commercial paper and bank
borrowings as a current liability.
(14) Excludes impact of in-process research and development charges and other
special items mentioned above.
(15) Excludes impact of $200 million settlement with Sulzer Medica in the third
quarter of 1998 and the impact of EVT's nondeductible losses in 1994 through
1997.
(16) Per-share data and weighted average shares outstanding have been adjusted
for all years to reflect the two-for-one stock splits declared in August 1997
and December 1998.
The selected consolidated financial data above gives retroactive effect to
Guidant's acquisition of EVT in a tax-free stock exchange in the fourth quarter
of 1997.
S-19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Overview
The Company is a multinational company that designs, develops, manufactures and
markets a broad range of innovative, high-quality, therapeutic devices for use
in: (i) cardiac rhythm management ("CRM"), (ii) vascular intervention ("VI"),
and (iii) cardiac and vascular surgery ("CVS"). In CRM, the Company is a world-
wide leader in automatic implantable cardioverter defibrillator ("AICD") sys-
tems used in the detection and treatment of abnormally fast heart rhythms. The
Company also designs, manufactures, and markets a full line of implantable
pacemaker systems used in the treatment of slow or irregular arrhythmias. In
VI, the Company is a worldwide leader in minimally invasive devices, such as
coronary stent systems and balloon dilatation catheters used for opening
blocked coronary arteries. In addition, the Company's CVS group develops, manu-
factures, and markets products for use in minimally invasive cardiac and vascu-
lar surgeries.
Guidant's business strategy is to design, develop, manufacture, and market in-
novative, high-quality therapeutic products principally for use in treating
cardiovascular disease resulting in improved quality of patient care and re-
duced treatment costs. Cardiovascular disease is the leading cause of death in
the United States. In implementing this strategy, the Company focuses on the
following three areas, which the Company believes are critical to its future
success: (i) global product innovation, (ii) economic partnerships with custom-
ers worldwide, and (iii) organizational excellence.
Mergers and Acquisitions
On February 1, 1999, the Company completed the acquisition of Intermedics, the
electrophysiology business of Sulzer Medica for a total price, including trans-
action costs, of approximately $810 million (including a previously announced
$200 million litigation settlement payment). Intermedics is one of the leading
manufacturers and distributors of bradycardia pacemakers in the world. The fi-
nal purchase price was determined according to the aggregate sales volume in
the first half of 1998 produced by the U.S. independent sales representatives
of Intermedics who, prior to the closing of the transaction, agreed to become
employees of Guidant. Sales representatives responsible for producing approxi-
mately 70% of the aggregate U.S. sales volume accepted offers to become Guidant
employees by the date of the closing of the acquisition. Although the remaining
sales representatives will continue to sell Intermedics products under con-
tract, Guidant does not expect all of such remaining Intermedics sales repre-
sentatives to become Guidant employees. As a result of transitional issues re-
lated to the acquisition, Guidant expects that the near term increase in sales
volume resulting from the acquisition will be less than Intermedics' historical
sales volume.
The acquisition will be accounted for by the purchase method and has resulted
in a pre-tax charge of $200 million in the third quarter of 1998. This charge
represents the portion of the total price allocated to settlement of the intel-
lectual property litigation between Guidant and Intermedics. Guidant also will
record a pre-tax charge in the first quarter of 1999 of approximately $49 mil-
lion related to the appraised value of in-process research and development.
Tangible assets acquired net of liabilities assumed on this acquisition were
approximately $113 million. Goodwill acquired in this acquisition in excess of
$400 million, will be amortized using the straight line method over 20 years.
Guidant will finance this acquisition with debt, initially through the issuance
of commercial paper. Guidant, however, intends to use the net proceeds of this
offering to reduce the amount of outstanding commercial paper borrowings.
Guidant also intends to issue additional long term securities to further reduce
the amount of outstanding commercial paper borrowings.
The Company expects certain synergies to be achieved in the integration of
Intermedics. Long-term plans include manufacturing all CRM products in existing
Company facilities in Minnesota, Ireland and Puerto Rico. Current Intermedics
manufacturing facilities in Angelton, Texas and LeLocle, Switzerland will be
closed following a planned transition period of approximately one year. Costs
associated with these plans have been recognized in purchase accounting and are
not expected to result in any additional charge to earnings in 1999. The Com-
pany is actively seeking buyers of the other two businesses purchased as part
of Intermedics, Osypka and Oscor. The products made at Osypka and Oscor are not
part of Guidant's long-term CRM strategy. With the exception of Intermedics
ThinLine leads acquired in this transaction, the Company's CRM product strategy
will continue to be focused on existing Guidant products and products in the
Guidant pipeline. However, the Intermedics brand name will continue and all ex-
isting Intermedics contracts will be honored.
On September 15, 1998, Guidant completed its cash tender offer for all of the
outstanding common shares of InControl, Inc. ("InControl"), at a total cost of
$137.5 million. InControl is a pioneer in the development of device technology
for the
S-20
<PAGE>
treatment of atrial arrhythmias. The acquisition has been accounted for under
the purchase method and resulted in a pre-tax charge of $90 million related to
the appraised value of in-process research and development. Goodwill of approx-
imately $70 million acquired in this acquisition will be amortized using the
straight-line method over 15 years. The results of InControl's operations have
been included in the Company's consolidated results of operations from the date
of acquisition and did not have a material pro forma impact on the Company's
operations. This acquisition was financed through the issuance of commercial
paper.
On December 19, 1997, the Company completed its merger with EndoVascular Tech-
nologies, Inc. ("EVT"), in a tax-free stock-for-stock transaction. EVT, based
in Menlo Park, California, is a leader in the development of methods and de-
vices for minimally invasive repair of diseased or damaged vascular structures,
particularly abdominal aortic aneurysms ("AAA"). EVT has developed an
endovascular grafting system to provide catheter-based delivery and implanta-
tion of a specialized sutureless prosthesis to repair life-threatening AAAs
without major surgery. The Company believes that EVT's endovascular procedures
for AAA repair offer significant advantages over conventional AAA surgery.
EVT's products are currently undergoing clinical trials in the United States.
This business combination, accounted for under the pooling of interests method,
was effected through the exchange of 0.3154 shares of Guidant common stock for
each share of EVT common stock. Approximately 2.7 million shares of Guidant
common stock were issued in connection with the EVT merger. The consolidated
financial statements reflect the retroactive effect of this business combina-
tion.
In May 1997, Guidant acquired the assets of NeoCardia, LLC. ("NeoCardia"), a
privately held development-stage company for an initial price of $57.4 million.
Under the acquisition agreement, the Company was required to pay an additional
amount, plus subsequent additional bonus and royalty payments contingent upon
achieving certain product development and sales goals. On April 27, 1998, the
conditions which required the payment of additional consideration for the asset
acquisition of NeoCardia 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 in-
process research and development expense. NeoCardia, which currently does not
have any products available for commercial sale, has pioneered the use of radi-
ation therapy for the treatment of restenosis. The Company financed the acqui-
sition with commercial paper. The results of NeoCardia's operations have been
included in Guidant's consolidated results of operations from the date of ac-
quisition.
In-process or purchased research and development is recognized in purchase
business combinations for the portion of purchase price allocated to the ap-
praised value of in-process technologies. The portion assigned to in-process
technologies excludes the value of core and developed technologies, which are
recognized as intangible assets.
Settlement Agreement
On April 4, 1998, the Company entered into an agreement with C.R. Bard, Inc.
("Bard") that settled two patent infringement lawsuits and granted Guidant
paid-up licenses to certain patents. As a result of this agreement, Guidant re-
corded 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 lives of the patents.
S-21
<PAGE>
Operating Results
The following tables are summaries of the Company's net sales and major costs
and expenses excluding the impact of purchased research and development charges
and certain other one time charges:
<TABLE>
<CAPTION>
Nine Months
Ended
September 30, Year Ended December 31,
------------------- -----------------------------------
1998 1997 1997 1996 1995
-------- ------ -------- -------- ------
(unaudited)
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Cardiac rhythm
management $ 613.9 $486.3 $ 669.6 $ 574.6 $452.4
Vascular intervention 739.4 297.7 591.4 425.6 447.9
Cardiac & vascular
surgery 50.2 48.4 67.2 49.5 31.0
-------- ------ -------- -------- ------
Total net sales $1,403.5 $832.4 $1,328.2 $1,049.7 $931.3
Cost of products sold 313.1 210.1 320.8 287.1(1) 283.4
-------- ------ -------- -------- ------
Gross profit 1,090.4 622.3 1,007.4 762.6(1) 647.9
Research and development 197.8 142.2 208.3(2) 164.6 142.8
Sales, marketing, and
administrative 411.4 269.1 439.7(3) 328.4 292.8
-------- ------ -------- -------- ------
609.2 411.3 648.0 493.0 435.6
Income from operations $ 481.2(5) $211.0(5) $ 359.4(4) $ 269.6(1)(4) $212.3
======== ====== ======== ======== ======
<CAPTION>
Nine Months
Ended
September 30, Year Ended December 31,
------------------- -----------------------------------
1998 1997 1997 1996 1995
-------- ------ -------- -------- ------
(As a Percent of Net
Sales)
<S> <C> <C> <C> <C> <C>
Cardiac rhythm
management 43.7% 58.4% 50.4% 54.7% 48.6%
Vascular intervention 52.7 35.8 44.5 40.6 48.1
Cardiac & vascular
surgery 3.6 5.8 5.1 4.7 3.3
-------- ------ -------- -------- ------
Total net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of products sold 22.3 25.2 24.2 27.4(1) 30.4
-------- ------ -------- -------- ------
Gross profit 77.7 74.8 75.8 72.6(1) 69.6
Research and development 14.1 17.1 15.7(2) 15.7 15.3
Sales, marketing, and
administrative 29.3 32.3 33.1(3) 31.2 31.5
-------- ------ -------- -------- ------
43.4 49.4 48.8 46.9 46.8
Income from operations 34.3%(5) 25.4%(5) 27.0%(4) 25.7%(1)(4) 22.8%
======== ====== ======== ======== ======
</TABLE>
- ---------------
(1) Excludes the impact of $28.8 million in special noncash obsolescence
charges in the second quarter of 1996 resulting from the accelerated regulatory
approval for market release and customer acceptance of new-generation CRM prod-
ucts and programmers. Reported cost of products sold and gross profit for 1996
were $315.9 million and $733.8 million, respectively.
(2) Excludes a in-process research and development charge of $57.4 million
which represented the appraised value of in-process research and development
recorded in conjunction with the asset acquisition of NeoCardia, LLC., in the
second quarter of 1997.
(3) Does not include $11.1 million of estimated transaction and integration
costs related to the Company's merger with EVT and a special contribution to
the Guidant Foundation, Inc. of $11.5 million.
(4) Including the special charges, reported income from operations was $279.4
million and 21.0% of net sales in 1997 and $240.8 million and 22.9% of net
sales in 1996.
(5) Excludes in-process research and development charges of $118.7 million in
1998 and $57.4 million in 1997 which represents the appraised value of in-proc-
ess research and development recognized in conjunction with the acquisitions of
InControl, Inc. and NeoCardia, LLC.
S-22
<PAGE>
Nine Months Ended September 30, 1998
The Company had worldwide net sales of $1,403.5 million for the nine months
ended September 30, 1998, reflecting an increase of $571.1 million or 69% over
the nine months ended September 30, 1997. Growth in unit volume of 74% was
partially offset by net sales price declines of 3%, including changes in
worldwide product mix, and unfavorable fluctuations in foreign currency ex-
change rates of 2%.
Net sales of VI products for the nine months ended September 30, 1998, were
$739.4 million, an increase of $441.7 million or 148% over the comparable pe-
riod in 1997. This sales growth was primarily due to the continued enthusias-
tic market-acceptance of the ACS RX MULTI-LINK Coronary Stent System, which
was market released in the United States in October 1997. Worldwide coronary
stent sales during the nine months ended September 30, 1998 were $498.7 mil-
lion compared to $56.8 million during the same period in 1997. 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 intervention system sales and pricing have grown in popularity,
individual product line sales figures are becoming less relevant. Therefore,
the Company may choose alternate methods for reporting these sales in the fu-
ture.
International sales of coronary stents also contributed to the Company's sales
growth, due primarily to the launch of the ACS MULTI-LINK RX DUET Coronary
Stent System in Europe in March 1998 and 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. The ACS MULTI-LINK RX DUET System, the
Company's newest generation coronary stent, was designed specifically to de-
liver, deploy, and post-dilate the stent with lower delivery profiles, en-
hanced radiopacity, increased radial strength and flexibility.
The MULTI-LINK DUET System now constitutes nearly 90% of Guidant's European
stent unit revenue and is the primary contributor to Guidant's leading coro-
nary stent market position in Europe. The Company received U.S. approval for
market release of this product in November 1998. During the period, the Com-
pany experienced pricing pressure on certain other VI products, such as bal-
loon dilatation catheters, although pricing in the U.S. stent market appears
to have stabilized. The Company believes that pricing pressures on non-stent
VI products may continue through the remainder of 1998.
Net sales of CRM products for the nine months ended September 30, 1998, were
$613.9 million, an increase of $127.6 million or 26.2% over the same period in
1997. AICD systems led the sales growth with the VENTAK AV II DR, market re-
leased in the United States in March 1998, and strong worldwide sales of the
VENTAK MINI III, released to the U.S. market in February 1998. 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 AV prod-
uct family's exclusive Atrial View feature allows it to distinguish ventricu-
lar rhythms that are life threatening from less dangerous atrial arrhythmias.
The VENTAK AV III DR was launched in the United States in September 1998. This
device is 20% smaller than the VENTAK AV II DR and has additional diagnostic
capabilities. The fifth generation of this product, the VENTAK MINI IV, was
recently launched in the United States.
Management believes that sales growth in AICD systems is partially driven by
studies which demonstrate the relative superiority of implantable defibrilla-
tors to drug therapy. In December 1996, the New England Journal of Medicine
published the findings of the Multicenter Automatic Defibrillator Implantation
Trial ("MADIT"). This study, the first large, randomized clinical trial com-
paring AICDs with conventional antiarrhythmic drug therapy, was terminated
early because of the significant improvement in survival rates of patients
with AICDs. Currently, the Company is the only AICD manufacturer to have
United States Food and Drug Administration ("FDA") approval to expand its
product labeling to cover patients identified by MADIT. In addition, the Na-
tional Institute of Health halted the Antiarrhythmic vs. Implantable Defibril-
lators ("AVID") study in April 1997, also citing significantly increased pa-
tient survival with implantable defibrillators over conventional drug therapy.
The Company's pacemaker products also contributed to sales growth during the
period, particularly in the United States where sales of these products in-
creased 24.5% for the nine month period ended September 30, 1998, from the
same period in 1997. In May 1998, the Company announced the U.S. market re-
lease of the CPI DISCOVERY and CPI MERIDIAN devices. These systems were market
released in Europe in March of this year. The new pacemaker families include
advanced diagnostics and single and dual-chamber models featuring adaptive-
rate pacing designed to match pacing rates to the patient's activity level.
Net sales of CVS products for the nine months ended September 30, 1998, were
$50.2 million, an increase of $1.8 million or 3.7% over the comparable period
in 1997. Sales growth occurred in the United States and was driven primarily
by the
S-23
<PAGE>
VASOVIEW Balloon Dissection system. The VASOVIEW UNIPORT Endoscopic Vessel Har-
vesting System was released worldwide in August 1998. This represents a signif-
icant technological advance for the VASOVIEW System by enabling rapid,
atraumatic harvesting of the saphenous vein for use in coronary artery bypass
surgery.
The Company experienced sales growth both in the United States and interna-
tional markets. For the nine months ended September 30, 1998, U.S. net sales
increased 103% to $1,048.3 million and international net sales increased 12.4%
to $355.2 million, as compared to the nine months ended September 30, 1997.
U.S. net sales growth was primarily due to sales of the ACS RX MULTI-LINK Coro-
nary Stent, VENTAK AV II DR, and VENTAK MINI III. International net sales
growth was primarily driven by the ACS MULTI-LINK RX DUET Coronary Stent System
in Europe, ACS RX MULTI-LINK Coronary Stent System in Japan, VENTAK MINI III,
and VENTAK AV II DR. An unfavorable foreign currency exchange rate impact, due
to the continued strength of the U.S. dollar, reduced net sales by $18.6 mil-
lion for the nine months ended September 30, 1998, as compared to 1997. This
negative impact on gross profit was partially offset by gains from foreign ex-
change derivative contracts, which were recorded in cost of products sold.
Cost of products sold for the nine months ended September 30, 1998 was $313.1
million or 22.3% of net sales. For the nine months ended September 30, 1997,
cost of products sold was $210.1 million or 25.2% of net sales. This reduction
in cost of products sold as a percentage of net sales was due primarily to in-
creased 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. For the nine months ended
September 30, 1998, research and development expenses increased $55.6 million
or 39.1%. Increased research and development spending during this period re-
sulted primarily from: (i) new product development costs related to future gen-
erations of AICDs, pacemakers, and programmers; (ii) development of radiation
therapy devices for coronary restenosis; (iii) development of stent technology
for other parts of the vascular anatomy, such as carotid arteries; (iv) in-
creased performance-based compensation; (v) PMA preparation activities and in-
creased personnel costs related to the development of the Company's
endovascular grafting systems for the minimally invasive repair of AAA; and
(vi) clinical evaluation of implantable device systems for treatment of conges-
tive heart failure.
In September 1998, Guidant completed its acquisition of InControl, a pioneer in
the development of device technology for the treatment of atrial arrhythmias,
at a total cost of $137.5 million. As a result, the Company recorded a $90 mil-
lion pre-tax charge related to the appraised value of in-process research and
development ($58.2 million after tax). InControl's operating results have been
included in the Company's consolidated results of operations from the date of
acquisition. Goodwill of approximately $70 million acquired in this acquisition
will be amortized using the straight-line method over 15 years.
On April 27, 1998, the conditions which require the payment of the additional
consideration for the asset acquisition of NeoCardia 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 in-process research and development expense consis-
tent with the treatment of the original acquisition cost in the second quarter
of 1997.
For the nine months ended September 30, 1998, sales, marketing, and administra-
tive expenses increased $142.3 million or 52.9% in comparison to the same pe-
riod in the prior year. This increase was due to: (i) variable selling ex-
penses, such as commissions and bonuses, associated with the extraordinary
growth in sales; (ii) promotional expenses related to the release of new prod-
ucts; (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 associ-
ated with the ramp up of business activities related to products for the treat-
ment of AAA; and (vii) increased legal costs associated with various litiga-
tion. Notwithstanding this increase in spending, sales, marketing, and adminis-
trative expenses have decreased as a percent of sales to 29.3% for the nine
months ended September 30, 1998, versus 32.3% for the same period in 1997.
Income from operations for the nine months ended September 30, 1998, and 1997,
was $481.2 million and $211.0 million, respectively, excluding the purchased
research and development charges in both years. This represents growth of 128%
which was due to sales growth combined with increased gross profit and con-
trolled growth in operating expenses.
In connection with the Intermedics acquisition, which was completed on February
1, 1999, a one-time charge of $200 million was recorded in the third quarter of
1998. This charge represents the portion of the purchase price that is alloca-
ble to settlement of the Company's intellectual property litigation with
Intermedics.
S-24
<PAGE>
On April 4, 1998, the Company entered into an agreement with Bard that settled
two patent infringement lawsuits and grants the Company paid-up licenses to
certain patents. As a result, the Company recorded 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 lives of the patents.
Net other expenses for the nine months ended September 30, 1998, without the
$200 million litigation charge, were $59.8 million compared to $16.6 million
during the same period in 1997. The increase in adjusted net other expenses was
due primarily to decreased royalty income on certain vascular intervention
technology patents and increased royalty expenses driven by sales growth of
coronary stents, rapid exchange coronary dilatation catheters, and AICDs.
Without considering the effect of special charges, the effective income tax
rate for the nine months ended September 30, 1998 was 35.3%. For the comparable
period in 1997, the effective income tax rate was 38.1%, excluding the effect
of special charges. This decline in the effective income tax rate was primarily
due to the realization of benefits from certain tax losses.
Net loss for the nine months period ended September 30, 1998 was ($43.0) mil-
lion for a loss per share of ($0.29). For the nine months ended September 30,
1998, net income would have been $272.6 million and earnings per share-diluted
would have been $1.81 without the litigation settlement and in-process research
and development charges. Net income for the nine months ended September 30,
1997, excluding the impact of the special charges, would have been $120.3 mil-
lion and $0.80 per share-diluted. Growth in operating income and the reduced
effective income tax rate were the drivers behind this growth in adjusted net
income.
Year Ended December 31, 1997
The Company had worldwide net sales of $1,328.2 million for the year ended De-
cember 31, 1997, reflecting an increase of $278.5 million or 27% over 1996.
Growth in unit volume of 39% increased net sales, while net sales price de-
clines and fluctuations in foreign currency exchange rates decreased net sales
8% and 4%, respectively. The effect of changes in product mix are included in
the net sales price decrease.
Net sales of VI products for the year ended December 31, 1997, were $591.4 mil-
lion, an increase of $165.8 million or 39.0% from 1996. This growth in VI sales
occurred in the fourth quarter of 1997 and was primarily due to the enthusias-
tic market-acceptance of the ACS RX MULTI-LINK Coronary Stent System, which was
released in the United States in October 1997. Net sales of the ACS RX MULTI-
LINK Coronary Stent System were in excess of $200.0 million in the fourth quar-
ter of 1997. The Company also experienced significant sales growth in rapid ex-
change coronary dilatation catheters, primarily due to the ACS RX ROCKET, re-
leased in the United States in November 1997 and in international markets in
June 1997; the ACS RX COMET VP, released in the United States in February 1997;
the ACS RX COMET, released in international markets in June 1996 and in the
United States in November 1996; and international sales of the ACS RX MULTI-
LINK Coronary Stent System. The ACS RX ROCKET Coronary Dilatation Catheter is
an innovative rapid exchange catheter that enables physicians to treat multiple
lesions during angioplasty, pre-stent placement, or in conjunction with other
interventional technologies. Sales growth during the year was partially offset
by unit volume declines in perfusion and over-the-wire coronary dilatation
catheters, and atherectomy catheters; and lower net average selling prices of
most coronary dilatation catheters and guide wires in the United States and Eu-
rope. These lower net average selling prices include the impact of product mix
changes due to sales growth of rapid exchange catheters which have a lower av-
erage selling price than perfusion catheters.
Net sales of CRM products for 1997 were $669.6 million, an increase of $95.0
million or 16.5% over 1996. Sales growth was led by the VENTAK AV, market re-
leased in the United States in July 1997 and in Europe in November 1996; strong
worldwide sales of the VENTAK MINI II advanced, tiered-therapy AICD, released
in the United States in July 1996; and, to a lesser degree, the VENTAK AV II DR
which was recently market released in Europe. The Company's adaptive-rate pace-
maker products also contributed to sales growth during the year, particularly
in the United States, where sales of pacemaker systems during 1997 increased
12% from 1996.
Net sales of CVS products for the year ended December 31, 1997, were $67.2 mil-
lion, an increase of $17.7 million or 35.8% over 1996. Sales growth occurred in
both United States and international markets and was primarily driven by the
ORIGIN TACKER endoscopic fixation device; custom configurations which incorpo-
rate this device along with other CVS products; and, to some degree, the
VASOVIEW Balloon Dissection system, market released in September 1996.
S-25
<PAGE>
Also contributing to sales growth in CVS were sales of the Tube, Bifurcated,
and Aortoiliac ANCURE systems for endovascular repair of AAA which increased
to $3.3 million in 1997, from $1.2 million in 1996. All three of these prod-
ucts were in clinical trials in the United States in 1997 and, as a result,
revenue was only recognized upon the successful implantation of an EndoGraft
prosthesis. The Aortoiliac ANCURE system utilizes an endovascular prosthesis
that is a hybrid between the Company's Tube and Bifurcated systems.
The Company experienced sales growth both in the United States and interna-
tional markets during 1997. The Company's United States net sales increased
40.5% to $902.9 million, while international net sales grew 4.5% to $425.3
million for the year ended December 31, 1997, as compared to 1996. United
States net sales growth was primarily due to sales of the ACS RX MULTI-LINK
Coronary Stent System, VENTAK AV, VENTAK MINI II, ACS RX ROCKET, ACS RX COMET,
and ORIGIN TACKER and related custom configurations. International net sales
growth was primarily driven by the ACS RX MULTI-LINK Coronary Stent System,
VENTAK MINI II, VENTAK AV II DR, and VENTAK AV. Sales of the ACS RX COMET in
Europe and Japan, and ACS RX ROCKET in Europe also contributed to the interna-
tional sales growth. An unfavorable foreign currency exchange rate impact,
caused by the strengthening United States dollar, reduced net sales by approx-
imately $41.0 million for the year ended December 31, 1997, compared to 1996.
This negative impact on gross profit was partially offset by gains from for-
eign exchange derivative contracts, which were recorded in cost of products
sold.
Cost of products sold increased 1.6% to $320.8 million for the year ended De-
cember 31, 1997, and represented 24.2% of net sales versus 30.1% during 1996.
Cost of products sold without the effect of special noncash obsolescence
charges of $28.8 million would have been $287.1 million or 27.4% of net sales
in 1996. During the fourth quarter of 1997, the Company recorded obsolescence
charges of approximately $9.4 million on its older-generation programmer-re-
corder-monitors primarily due to customer acceptance of the newer-generation
Model 2901 Programmer-Recorder-Monitor. This charge was offset by: (i) gains
in 1997 of $17.8 million realized on the foreign exchange hedges referred to
above, (ii) cost savings realized from significantly increased manufacturing
volume during the year, (iii) continued improvement in productivity and manu-
facturing efficiencies in all businesses, and (iv) a change in the Company's
method of accounting for unrealized profit in inventory at its international
affiliate locations of approximately $6.2 million.
The acquisition of NeoCardia was accounted for under the purchase method. As a
result, the Company recorded a pre-tax charge of $57.4 million relating to the
appraised value of the in-process research and development. Substantially all
of the possible additional acquisition cost has also been treated as purchased
research and development expense.
The Company continued its commitment to achieving long-term growth and serving
its global customers by investing significant resources in research and devel-
opment. Research and development expenses of $208.3 million for the year ended
December 31, 1997, excluding the purchased research and development charge,
increased $43.7 million or 26.6% from 1996 and, as a percentage of net sales,
was 15.7% in both 1997 and 1996. Increased research and development spending
resulted primarily from: (i) new product development costs related to future
generations of AICDs, pacemakers, and programmers; (ii) increased performance-
based compensation; (iii) development of stent technology for other parts of
the vascular anatomy, such as carotid arteries; (iv) development of radiation
therapy devices for coronary restenosis; (v) clinical evaluation of
implantable device systems for the treatment of congestive heart failure; (vi)
expedited PMA preparation activities and increased clinical trial costs re-
lated to the Company's endovascular grafting systems; and (vii) other cardio-
vascular product development in CVS.
Sales, marketing, and administrative expenses exclusive of special charges of
$439.7 million increased $111.3 million or 33.9% for the year ended December
31, 1997, in comparison to 1996. This increase was due to: (i) variable sell-
ing expenses, such as commissions and bonuses, associated with the growth in
sales; (ii) increased legal costs associated with various litigation; (iii)
increased investment in the United States field-sales force; (iv) expenses in-
curred in preparation for the October 1997 launch of the ACS RX MULTI-LINK
Coronary Stent System in the United States; (v) implementation of European op-
erations and increased personnel costs associated with the ramp up of business
activities at EVT; and (vi) a charge of $4.0 million associated with the ter-
mination of a third-party distributor.
During the fourth quarter of 1997, the Company recorded $11.1 million of
special charges related to its merger with EVT. These charges include $4.2
million in transaction costs and $6.9 million of estimated costs, such as
distributor buyouts and unwinding various contractual commitments, to be
incurred in the integration of the operations of EVT with Guidant.
Also, during the fourth quarter, the Company recorded a gain of $23.2 million
in connection with the acquisition of Gynecare, Inc., ("Gynecare") by Johnson
& Johnson ("J&J") in a tax-free stock-for-stock merger. The Company held a 30%
interest in Gynecare, an enterprise engaged in the development of minimally
invasive medical devices for the treatment of
S-26
<PAGE>
uterine disorders. This gain was recorded in other income. The Company went on
to make a special contribution of $11.5 million of the common stock received
from the Gynecare transaction to the Guidant Foundation, Inc., the Company's
primary vehicle for community, educational, and charitable giving.
Income from operations for the years ended December 31, 1997 and 1996, were
$279.4 million and $240.8 million, respectively. Excluding the impact of the
in-process research and development charge, the special contribution to the
Guidant Foundation, merger-related special charges in 1997, and special obso-
lescence charges in 1996, income from operations would have been $359.4 million
or 27.1% of net sales and $269.6 million or 25.7% of net sales for 1997 and
1996, respectively. This increase in adjusted income from operations of 33.3%,
was due to net sales growth combined with lower manufacturing costs, partially
offset by increased research and development, and sales, marketing, and admin-
istrative spending.
The Company had net other expenses of $30.6 million and $104.8 million for the
years ended December 31, 1997 and 1996, respectively. Partially offsetting the
gain on its investment in Gynecare, the Company recorded charges of $11.5 mil-
lion during the fourth quarter related to various litigation activities. With-
out the effect of the securities gain and litigation charges recorded in the
fourth quarter, net other expenses would have been $42.3 million for the year
ended December 31, 1997. Included in net other expenses for the year ended De-
cember 31, 1996, are noncash impairment charges of $66.9 million taken by the
Company against its atherectomy-related goodwill and other intangible assets.
Without the effect of this special charge, net other expenses would have been
$37.9 million in 1996. This increase in adjusted net other expenses was primar-
ily due to increased net royalties on certain vascular intervention technology
patents and AICD royalty agreements; and charges associated with the disposal
of certain equipment, partially offset by reduced amortization expenses result-
ing from the lower intangible assets following the impairment charges and lower
interest expense.
The Company reduced its effective income tax rate in 1997 to 39.7% from 61.5%
in 1996. Without considering the effect of the special charges and the acquisi-
tion of EVT in 1997 and 1996, the effective income tax rates for the years
ended December 31, 1997 and 1996, were 35.3% and 38.4%, respectively. This de-
cline in the adjusted effective income tax rate was primarily due to: (i) in-
creased income tax benefits in certain international locations, (ii) increased
research and development income tax credits, (iii) reduced state income taxes,
and (iv) the reduced impact of nondeductible expenses.
In November 1997, the Financial Accounting Standards Board's Emerging Issues
Task Force (EITF) issued their consensus on Issue 9713, Accounting for Costs
Incurred in Connection with a Consulting Contract or an Internal Project that
Combines Business Process Reengineering and Information Technology Transforma-
tion. In implementing its strategy of global product innovation, creating eco-
nomic partnerships with customers, and organizational excellence, the Company
has invested significant resources in business process reengineering since its
IPO and subsequent split-off from Lilly. ETIF Issue No. 9713 requires companies
to expense as incurred third-party consulting costs associated with business
process reengineering that are part of a broader systems implementation proj-
ect. This change in accounting principle resulted in a pretax cumulative effect
adjustment of $7.3 million ($4.7 million after tax; $0.02 per share).
For the years ended December 31, 1997 and 1996, the Company reported net income
of $145.3 million and $52.3 million, respectively. Excluding the special
charges and other items in both 1997 and 1996, net income would have been
$197.4 million and $136.4 million in 1997 and 1996, respectively. This growth
in adjusted net income of 45% was due to growth in income from operations,
along with slower growth in net other expenses and a lower effective income tax
rate.
The Company has implemented Statement of Financial Accounting Standards (SFAS)
No. 128, Earnings per Share, which requires presentation of both basic and di-
luted earnings per share (EPS) on the face of the income statement. Basic EPS
excludes all potential future dilution and is based upon the weighted average
number of common shares outstanding during the period. Diluted EPS reflects the
potential dilution if stock options were exercised or converted into common
stock.
Reported basic earnings per share for 1997 and 1996 were $0.49 and $0.18, re-
spectively. Excluding the special charges and other items in both years, basic
earnings per share were $0.67 in 1997 and $0.46 in 1996. Reported diluted earn-
ings per share for 1997 and 1996 were $0.48 and $0.18, respectively. Excluding
the special charges and other items in both years, diluted earnings per share
were $0.66 in 1997 and $0.46 in 1996, representing an increase of 43%.
Year Ended December 31, 1996
The Company had worldwide net sales of $1,049.7 million for the year ended De-
cember 31, 1996, reflecting an increase of $118.4 million or 13% over 1995.
Growth in unit volume of 13% and net sales price increases of 2% were offset by
2% unfavorable impact of foreign currency exchange rates.
S-27
<PAGE>
Net sales of VI products for 1996 were $425.6 million, a decrease of $22.3 mil-
lion or 5.0% from 1995. The Company experienced sales growth in angioplasty
systems, primarily due to: (i) the ACS RX MULTI-LINK Coronary Stent System,
launched in Europe and other international markets in April 1996 and November
1995, respectively; (ii) increased sales of over-the-wire catheters, such as
the ACS CONCORDE and the high pressure ACS ENDURA, which were released to the
United States market in March 1996, and the ACS Tx2000, released to interna-
tional markets in June 1996 and to the United States market in November 1996;
(iii) the ACS RX COMET, also released to international markets in June 1996 and
to the United States market in November 1996; and (iv) growth in guide wires.
This sales growth was offset by sales declines in perfusion, rapid exchange,
and atherectomy catheters, and lower net average selling prices of most dilata-
tion catheters in the United States and Europe. These lower net average selling
prices of dilatation catheters include the impact of product mix changes due to
the sales growth in over-the-wire catheters discussed above. Atherectomy sales
declines were primarily due to increasing usage of coronary stents.
Net sales of CRM products for 1996 were $574.6 million, an increase of $122.2
million or 27.0% over 1995. This growth was led by strong worldwide sales of
the VENTAK MINI II, released in the United States in July 1996; the VENTAK MINI
HC, released in the United States in May 1996; the VENTAK MINI, released in the
United States in January 1996; and the VENTAK AV, released in Europe in Novem-
ber 1996. The technologically advanced VENTAK MINI II, incorporates the
Company's exclusive TRIAD defibrillation energy delivery system, which is de-
signed to simplify the device implant procedure and reduce the energy needed
for defibrillation. The Company's adaptive-rate pacemaker products also con-
tributed to sales growth during the period, led by the VIGOR DR and VIGOR SR,
which were released to the United States market in June 1995.
Net sales of CVS products for 1996 were $49.5 million, an increase of $18.5
million or 59.7% over 1995. CVS sales growth was experienced both in the United
States and international markets as the Company continued to expand the market-
ing of its innovative laparoscopic technologies. Sales growth was driven by the
ORIGIN TACKER endoscopic fixation device; custom procedural kits which incorpo-
rate this device along with other CVS products; and, to some degree, the
VASOVIEW Balloon Dissection system, market released in May 1996.
In 1996, the Company began recognizing revenue on sales of its Ancure systems
used in clinical trials. Sales of approximately $1.2 million, were almost en-
tirely made up of the Tube and Bifurcated Ancure systems.
The Company experienced sales growth both in the United States and interna-
tional markets during 1996. Net sales in the United States increased 6.6% to
$642.8 million, and international net sales increased 24.0% to $406.9 million
from 1996 as compared to 1995. United States net sales growth was primarily due
to CRM sales of the VENTAK MINI II, VENTAK MINI, VENTAK MINI HC, VIGOR DR, and
VIGOR SR. International net sales growth was primarily driven by European sales
of the ACS RX MULTI-LINK Coronary Stent System, VENTAK MINI II, VENTAK MINI HC,
VENTAK AV, and the VIGOR family of pacemakers. The commencement of new distri-
bution arrangements in Japan, Italy, and the Benelux countries and sales of
guide wires and the ACS RX COMET in Europe, and of the ACS Tx2000 in Japan,
also contributed to the international sales growth.
Cost of products sold increased 11.5% to $315.9 million in 1996. The Company
took noncash obsolescence charges of $28.8 million on certain CRM products and
programmers due to accelerated United States regulatory approval for market re-
lease and customer acceptance of new CRM products, particularly the VENTAK
MINI, VENTAK MINI HC, and VENTAK MINI II families of AICD devices. A portion of
the CRM inventory included in the special obsolescence charges taken in the
second quarter of 1996 was sold later in 1996 and 1997 as a result of unantici-
pated demand. Cost of products sold without the effect of the special obsoles-
cence charges in 1996 would have been 27.4% of net sales compared to 30.4% in
1995. This reduction in cost of products sold as a percentage of net sales was
primarily due to: (i) enhanced manufacturing efficiencies in CRM and vascular
intervention, (ii) reduced manufacturing costs of newer generation CRM and VI
products, and (iii) increased manufacturing volume.
Research and development expenses, which increased $21.8 million or 15.3% in
1996 compared to 1995, represented 15.7% and 15.3% of net sales in 1996 and
1995, respectively. Increased research and development spending during these
periods primarily resulted from new product development costs related to: (i)
the United States clinical evaluation of the ACS RX MULTI-LINK Coronary Stent
Systems, (ii) increased personnel, materials, and clinical costs primarily re-
lated to expanded clinical trials of the Company's EGS systems and the expan-
sion of EVT's facilities, (iii) the development of the VENTAK AV AICD system,
which had its first implants in September 1996 and its European market release
in November 1996, (iv) the clinical evaluation of implantable device systems
for the treatment of congestive heart failure, and (v) the development of fu-
ture generations of pacemaker products.
S-28
<PAGE>
Sales, marketing, and administrative expenses grew 12.2% in 1996 compared to
1995. Variable selling expenses, such as commissions and bonuses, associated
with the United States market releases of VENTAK MINI II, VENTAK MINI, VENTAK
MINI HC, ACS Tx2000, ACS RX COMET, ACS CONCORDE, and ACS ENDURA were among the
primary reasons for this increased spending during 1996. The commencement of
new distribution arrangements in Japan, Italy, and the Benelux countries; the
creation of a sales and marketing organization at EVT; and, to a lesser degree,
the transition to direct sales operations in Australia and in the Czech Repub-
lic also contributed to the increase in sales and marketing expenses. Increased
compensation accruals due to the Company's performance-based compensation pro-
grams contributed to the increase in general and administrative expenses during
the year.
Income from operations for 1996 of $240.8 million represented a 13.4% increase
from 1995 and was negatively affected by the special obsolescence charges on
CRM inventory and programmers discussed above. Income from operations, without
considering these special charges in 1996, would have increased $57.3 million
or 27.0% over 1995. This increase was primarily due to net sales growth in 1996
combined with reduced manufacturing costs, enhanced manufacturing efficiency,
and controlled growth in sales, marketing, and administrative spending.
In 1996, the Company had net other expenses of $104.8 million as compared to
$50.8 million in 1995. Included in net other expenses are noncash impairment
charges of $66.9 million taken by the Company against its atherectomy-related
goodwill and other intangible assets in 1996. This impairment loss primarily
resulted from declining sales and profitability of the Company's atherectomy
business. The goodwill and other intangible assets were recorded as part of the
purchase of Devices for Vascular Intervention, Inc., in 1989, prior to the for-
mation of Guidant. Without these noncash impairment charges, net other expenses
were $37.9 million in 1996. This decrease of $12.9 million or 25.4% was primar-
ily due to the following: (i) lower net interest expenses due to the decline in
outstanding borrowings and lower interest rates during 1996, and an increase in
the average cash balance at EVT, (ii) increased net royalty income due to roy-
alties received on certain vascular intervention technology patents, and (iii)
reduced amortization expense resulting from lower intangible balances after the
impairment charges.
The nondeductible impact of the impairment charges resulted in a significant
increase in the Company's effective income tax rate to 61.5% in 1996. The
Company's effective income tax rate, without considering the effect of the im-
pairment charges discussed above and the acquisition of EVT, was 38.4% for 1996
compared to 40.5% in 1995. The lower effective income tax rate resulted primar-
ily from increased tax benefits from the Company's operations in Puerto Rico
and the reduced impact of nondeductible goodwill amortization.
Net income for 1996 was $52.3 million compared to $92.8 million in 1995. Earn-
ings per share of $0.18 for 1996 decreased approximately 44% in comparison to
1995 earnings per share of $0.32. Without the noncash special obsolescence and
impairment charges (totaling $84.1 million after tax) recorded in the second
quarter of 1996, net income would have been $136.4 million and earnings per
share would have been $0.46 for 1996. This adjusted net income and earnings per
share growth from 1995 was primarily due to operating income growth, decreased
net other expenses, and the reduced effective income tax rate.
Liquidity and Financial Condition
The Company generated cash flows which were more than sufficient to fund opera-
tions in the first nine months of 1998. Cash and cash equivalents increased to
$28.7 million at September 30, 1998, from $17.7 million at December 31, 1997.
For the nine months ended September 30, 1998, cash provided by operating activ-
ities was $164.2 million compared to $99.5 million for the same period in 1997.
This increase was due to an increase in cash from operations exclusive of the
$200 million intellectual property settlement with Sulzer Medica.
Working capital of $114.6 million at September 30, 1998 increased by $30.8 mil-
lion from the prior year-end level. This increase was primarily due to an in-
crease in inventories resulting from preparations for certain new product
launches. The current ratio at September 30, 1998 and December 31, 1997, was
1.2:1. The Company believes its cash from operations is sufficient to fund es-
sentially all future working capital needs and discretionary operating spending
requirements.
Net cash used for investing activities totaled $170.3 million for the nine
months ended September 30, 1998, compared to $66.6 million for the same period
in 1997. The most significant uses of cash for investing activities in 1998 re-
lated to $40 million of intangibles acquired as part of the Company's settle-
ment agreement with Bard and the acquisition of InControl. Net additions of
property and equipment of $76.6 million for the nine months ended September 30,
1998, compared to $53.2 million for the same period in 1997, were also a sig-
nificant use of cash for investing activities during both periods. This in-
crease in property and equipment additions is due in part to the Company's re-
cently announced investment in a manufacturing facility in Ireland.
S-29
<PAGE>
Net cash provided by financing activities totaled $17.1 million for the nine
months ended September 30, 1998. Cash provided by operating activities was used
to reduce debt through 1998, however, this reduction in borrowings was more
than offset by the additional commercial paper issued for the $100 million pay-
ment to Bard as well as the acquisition of InControl. For the nine months ended
September 30, 1997, financing activities decreased cash by $26.2 million.
At September 30, 1998, the Company had outstanding borrowings of $361.6 million
through the issuance of commercial paper and bank borrowings at a weighted av-
erage interest rate of 5.54%. However, to finance the purchase of Intermedics,
the Company increased its outstanding borrowings to approximately $1.2 billion,
as of February 2, 1999, through the issuance of commercial paper. As of Febru-
ary 2, 1999, the Company's commercial paper borrowings had a weighted average
interest rate (on a bond-equivalent yield basis) of approximately 5.07%. The
commercial paper borrowings are supported by two replacement credit facilities
aggregating $1.2 billion. This includes a $400 million facility that permits
borrowings through August 2003 and a $800 million facility that permits
borrowings through August 1999. These credit facilities, under which there are
currently no outstanding borrowings, carry a variable market rate of interest.
The current debt level represents an increase in long-term debt of approxi-
mately $900 million from December 31, 1997, which is related to the acquisition
of Intermedics, the agreement reached with Bard in the first quarter of 1998
and the acquisition of InControl.
The Company intends to use the net proceeds of this offering to reduce the
amount of the Company's outstanding commercial paper borrowings. See "Use of
Proceeds." The Company also expects to issue additional long-term securities to
further reduce the amount of the Company's outstanding commercial paper
borrowings. The Company expects its cash from operations to be adequate to sup-
port the remainder of its outstanding commercial paper, and to meet its obliga-
tions to make interest payments on its debt and other anticipated operating
cash needs including planned capital expenditures which are expected to be ap-
proximately $130 million in 1998.
The Company has recognized net deferred tax assets aggregating $127.7 million
at September 30, 1998, and $82.4 million at December 31, 1997. The assets re-
late principally to the establishment of inventory and product related loss re-
serves and purchased research and development. In view of the consistent prof-
itability of its past operations, the Company believes that all these assets
will be substantially recovered and that no significant additional valuation
allowances are necessary.
Due to the global nature of its operations, the Company conducts its business
in various foreign currencies (primarily the currencies of Western Europe and
the Japanese yen) and, as a result, is subject to the exposures that arise from
foreign exchange rate movements. Such exposures arise from transactions denomi-
nated in foreign currencies, primarily intercompany loans and export
intercompany purchases of inventory, as well as from the translation of results
of operations from outside the United States. These exposures subject the
Company's results of operations primarily to the adverse impact of a strength-
ening United States dollar. The Company is also exposed to interest rate
changes.
The Company's risk-management objectives are to reduce earnings volatility and
protect the Company's cash flows from the impact of fluctuating foreign curren-
cies and interest rates. In the normal course of business, the Company follows
established policies and procedures in its management of these exposures. Sim-
ple derivative instruments, including foreign currency forward contracts and
purchased options, and interest rate swap agreements, are used as hedges to
meet these objectives. The primary feature of Guidant's risk-management philos-
ophy is that all hedging activity must be designed to reduce financial risks
associated with commercial and financial transactions which arise in the ordi-
nary course of business to allow management to focus on core business issues
and challenges. All hedging activities are entered into for purposes "other
than trading" as defined by SFAS No. 119. The contracts are initiated within
the guidelines of documented corporate risk-management policies. The Company
does not enter into foreign currency or interest rate transactions for specula-
tive purposes. The Company's risk-management activities were successful in re-
ducing the net impact of currency fluctuations to an immaterial level despite
adverse market conditions.
The fair value of all foreign currency derivative contracts outstanding at De-
cember 31, 1997, was $3.1 million. An analysis has been prepared to estimate
the sensitivity of the fair value of all derivative foreign exchange contracts
to hypothetical 10% favorable and unfavorable changes in spot exchange rates at
December 31, 1997. Premiums paid for purchased options are included in the fair
value. The results of the estimation, which may vary from actual results, are
as follows:
<TABLE>
<CAPTION>
Fair Value
of Derivatives
--------------
<S> <C>
10% adverse rate movement $(17.4)
At year end rates 3.1
10% favorable rate movement 30.4
</TABLE>
S-30
<PAGE>
Any gains and losses of fair value on derivative contracts would be largely
offset by losses and gains on underlying transactions or anticipated transac-
tions. These offsetting gains and losses are not reflected in the above table.
An analysis of the impact on the Company's interest rate sensitive financial
instruments of a hypothetical 10% change in short-term interest rates compared
to interest rates at year end will not have any significant impact on 1998
earnings.
Regulatory and Other Matters
Government and private sector programs limiting healthcare costs, including
coverage policies, price regulation, competitive pricing, and various types of
managed-care arrangements, exist in the United States and in several countries
where the Company does business, and further restrictions are possible. These
policies and programs require healthcare providers to put increased emphasis on
the delivery of more cost-effective medical therapies. Although management be-
lieves the Company is well positioned to respond to this worldwide trend toward
cost containment, uncertainty as to the outcome of current and prospective leg-
islative and regulatory initiatives and ongoing changes in the marketplace pre-
clude the Company from predicting the impact these initiatives and changes may
have on future operating results.
The Company's products are subject to extensive regulation by the FDA and, in
some jurisdictions, by state and foreign governmental authorities. The Company
must obtain specific clearance from the FDA before it can market products in
the United States. While the FDA Modernization Act of 1997, when fully imple-
mented, is expected to inject more predictability into the product review proc-
ess, streamline post-market surveillance, and promote the global harmonization
of regulatory procedures, the process of obtaining such clearances can be oner-
ous and costly, and there can be no assurance that all clearances sought by the
Company will be granted on a timely basis, if at all.
In recent years, many hospitals and other customers of medical device manufac-
turers have consolidated into large purchasing groups to enhance purchasing
power and become more cost-effective in the delivery of healthcare. To offer a
broader range of products to large purchasers, the medical device industry also
has been consolidating rapidly. Transactions with these purchasing groups are
often more significant, more complex, and involve more long-term contracts than
in the past. While this enhanced purchasing power may further increase the
pressure on product pricing, management is unable to estimate the potential fu-
ture impact at this time.
The operations of the Company, like those of other medical device companies,
involve the use of substances regulated under environmental laws, primarily in
manufacturing and sterilization processes. While it is difficult to quantify,
the Company believes that the potential impact of compliance with environmental
protection laws and regulations will not have a material impact on the
Company's financial position or results of operations. The Company operates in
an industry susceptible to significant product liability claims. Such claims
may be asserted against the Company in the future related to events not known
at the present time.
Management believes that its risk-management practices, including insurance
coverage, are adequate to protect the Company against any material product lia-
bility losses. The Company, along with other medical device companies, is con-
cerned that, because of inequities in United States tort law, suppliers of raw
materials and component parts essential to the manufacture of Company products
have indicated a desire to withdraw from or not sell to the market. Management
cannot estimate the possible future impact at this time.
From time to time, the Company is subject to claims of, and legal actions al-
leging, infringement by the Company of patent rights of others. While it is not
possible to predict or determine the outcome of the legal actions brought
against it, or to provide an estimate of the losses, if any, that may arise,
the Company believes the costs associated with such actions will not have a ma-
terial adverse effect on its consolidated financial position or liquidity, but
could possibly be material to its consolidated results of operations.
Year 2000
Many computer systems experience problems handling dates beyond 1999. There-
fore, some computer hardware and software will need to be modified prior to the
Year 2000 in order to remain functional. Guidant is taking all reasonable steps
necessary to confirm that its business systems, software and equipment that
consider and process daterelated information will continue to function properly
after December 31, 1999. In doing so, Guidant is paying particular attention to
ensuring compliance with all regulatory guidelines regarding Year 2000 issues.
The Company's products have been assessed and found to be Year 2000 compliant
with the exception of a few requiring minor adjustments. These minor adjust-
ments are limited to programmers and are relative to date-related limitations
that present no adverse health impact to the patient or system functions. As
they do not contain real time clocks, Guidant's implantable devices do not
present any Year 2000 issues.
S-31
<PAGE>
With respect to information technology business systems, the assessment of
equipment and software was started in 1997. To date only a limited number of
problems have been identified. Guidant, as a corporation formed in late 1994,
has many relatively new systems, including an enterprise-wide operational sup-
port system, which has already been certified Year 2000 compliant. As such,
Management's 1998 focus has been on assessing manufacturing equipment, facili-
ties infrastructure, and business partners. Based upon this assessment, neces-
sary actions will be taken to correct identified problems and develop contin-
gency arrangements. Guidant believes it will complete all assessment and
remediation in the equipment and infrastructure area by mid year 1999. This
timeframe will allow internal auditing and testing, as well as any further
remediation, if necessary, of these systems to take place in the latter half
of 1999.
Efforts to confirm the readiness of our various business partners, while ongo-
ing, will continue up to, and through, January 1, 2000. The Company is cur-
rently evaluating the steps necessary to ensure that assets acquired as part
of the InControl acquisition will not be adversely affected by the Year 2000
problem. The Company is also assessing the Year 2000 readiness of Intermedics.
The Company plans to devote the necessary resources to resolve all significant
issues in a timely manner. The costs associated with the Year 2000 assessment
and remediation of problems noted are expensed as incurred or capitalized if
the expenditures relate to hardware or software that will benefit future peri-
ods. Based upon current assessments, Management believes that the cost of such
actions will not have a material effect on Guidant's operating results or fi-
nancial condition. The Company currently expects its total out-of-pocket costs
related to addressing its Year 2000 issues will be approximately $20 million,
incurred predominantly in 1998 and 1999. Approximately $6 million of these ex-
penditures will be capitalized and depreciated over the assets estimated use-
ful lives.
The Year 2000 issue is expected to affect the systems of various entities with
which the Company interacts, including suppliers. The Company is assessing the
readiness of third-parties (e.g., customers and suppliers) which interact with
the Company's systems. However, the Company cannot reasonably estimate the po-
tential impact on its financial condition and operations if critical third
parties do not become Year 2000-ready on a timely basis. The Company is work-
ing through various trade associations as well as communicating directly with
its significant suppliers and customers to determine their Year 2000 readi-
ness. In addition, the Company has begun contingency planning to handle dis-
ruptions in electrical, telecommunications, and distribution services. There
can be no guarantee that these efforts will prevent the failure of third par-
ties to become Year 2000-ready from having a material adverse effect on the
Company's financial condition or operations.
Forward-Looking Statements
Under the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995, the Company cautions investors that any forward-looking state-
ments or projections made by the Company, including those made in this docu-
ment, are subject to risks and uncertainties which may cause actual results to
differ materially from those projected. Economic, competitive, governmental,
technological, and other factors which may affect the Company's operations are
discussed in the Company's most recent reports on Forms 10-Q and 10-K filed
with the Securities and Exchange Commission.
S-32
<PAGE>
BUSINESS
Overview
Guidant was incorporated in Indiana on September 9, 1994 to be the parent of
five of the nine businesses in the Medical Devices and Diagnostics ("MDD") Di-
vision of Eli Lilly and Company, an Indiana corporation ("Lilly"). Prior to the
consummation of the initial public offering of the Company's common stock on
December 20, 1994 (the "IPO"), the Company was a wholly-owned subsidiary of
Lilly. Pursuant to the IPO, 19.8% of the Company's common stock was issued to
the public. Lilly continued to own 80.2% of the Company's common stock after
the IPO. On September 25, 1995, Lilly disposed of its remaining ownership in-
terest in the Company by means of a tax-free split-off, an exchange offer pur-
suant to which Lilly shareholders were given the opportunity to exchange some,
all or none of their Lilly common stock for the Company's common stock owned by
Lilly (the "Exchange Offer"). The consummation of the Exchange Offer resulted
in Lilly distributing all of its Company common stock to Lilly shareholders. As
a result, Lilly no longer owns any Company common stock.
The Company is a multinational company that designs, develops, manufactures and
markets a broad range of innovative, high quality, therapeutic medical devices
for use in cardiac rhythm management ("CRM"), vascular intervention ("VI"), and
cardiac and vascular surgery ("CVS").
The Company's net sales for the year ended December 31, 1997 and the nine
months ended September 30, 1998, were $1,328.2 million and $1,403.5 million,
respectively.
In CRM, the Company is a worldwide leader in automatic implantable cardioverter
defibrillator ("AICD") systems used in the detection and treatment of abnor-
mally fast heart rhythms. The Company also designs, manufactures and markets a
full line of implantable pacemaker systems used in the treatment of slow or ir-
regular heart rhythms. On February 1, 1999, the Company purchased Intermedics,
the electrophysiology business of Sulzer Medica for approximately $810 million
(including a previously announced $200 million litigation settlement payment).
Intermedics is a global leader in the design, development, manufacture and dis-
tribution of pacemakers and pacemaker leads, with 1997 revenues of approxi-
mately $325 million. The Company believes this acquisition will nearly double
its share of the worldwide market for pacemakers, solidifying it as a leading
pacemaker company. The Company also believes the acquisition of Intermedics
will also significantly increase the Company's sales presence with cardiolo-
gists, which will benefit the Company not only in their direct sale of pacemak-
ers, but in the anticipated markets of congestive heart failure and atrial fib-
rillation. Also, Intermedics has an intellectual product portfolio which the
Company believes will further strengthen its existing position in intellectual
property in the cardiac rhythm management area.
In VI, the Company is a worldwide leader in minimally invasive devices, such as
coronary stent systems and balloon dilatation catheters used for opening
blocked coronary arteries. In November 1998 the Company received FDA approval
to market the ACS MULTI-LINK DUET Coronary Stent System ("DUET") in the U.S.
This stent provides enhanced visibility, greater deliverability, lower pro-
files, and a wider range of sizes. The DUET is currently the top selling stent
in Europe and the United States.
In CVS, the Company develops, manufactures and markets products for use in min-
imally invasive cardiac and vascular surgery.
The Company's business strategy is to design, develop, manufacture and market
innovative, high quality therapeutic products principally for use in treating
cardiovascular disease, the leading cause of death in the United States, re-
sulting in improved quality of patient care and reduced treatment costs. In im-
plementing this strategy, the Company focuses on the following three areas,
which the Company believes are critical to its future success: (1) global prod-
uct innovation, (2) economic partnership with customers worldwide, and (3) or-
ganizational excellence.
The Company will continue to pursue a strategy that includes the potential ac-
quisition of businesses in the medical device industry. The Company plans to
acquire technologies that are complementary to its existing technology base,
products that serve its existing customer base, and businesses that expand its
geographical presence. However, the Company cannot assure you that any acquisi-
tion will be consummated, or if consummated, when it will be consummated and
what the terms of the acquisition will be.
Cardiac Rhythm Management
In the CRM market, implantable device systems are used to detect and treat ab-
normally fast, abnormally slow or irregular heart rhythms or arrhythmias. The
Company's CRM product line is organized into two major categories: tachycar-
S-33
<PAGE>
dia ("Tachy") and bradycardia ("Brady"). The Tachy product category includes
AICDs, endocardial defibrillation leads, programmers and accessories used pri-
marily in the treatment of abnormally fast arrhythmias. The Brady product cate-
gory includes pacemaker pulse generators, endocardial pacing leads, programmers
and accessories used primarily in the treatment of slow or irregular arrhyth-
mias. Customers for Brady products include electrophysiologists, implanting
cardiologists and cardiovascular surgeons. Customers for Tachy products are
primarily electrophysiologists. Sales of the Company's CRM products, as a per-
centage of the Company's total consolidated net sales for the years ended De-
cember 31, 1997, 1996 and 1995, were 50%, 55% and 49%, respectively.
Tachy
AICD systems, or Tachy products, are used to detect and treat potentially fa-
tal, abnormally fast heart rhythms by delivering electrical energy to the heart
and, in so doing, restoring the heart's normal rhythm. Tachyarrhythmias often
result from the presence of abnormal cardiac tissue which interfere with the
normal electrical activity of the heart.
The Company's Tachy products offer multiple therapeutic options (tiered-thera-
py). Tiered-therapy devices use a staged process for treating multiple arrhyth-
mias by first providing lower intensity pacing pulses, or antitachycardia pac-
ing, to the patient in an attempt to correct the abnormal rhythm. If
antitachycardia pacing is unsuccessful or if the arrhythmia requires more ag-
gressive therapy, then the device can progress to low or high energy shocks.
AICD's that provide both detection and treatment of abnormally fast heart
rhythms and dual-chamber pacing were introduced by the Company in July 1997.
These products, the VENTAK AV family, became important to the CRM market be-
cause they provide more physiolic pacing for patients who need it, as well as
improved diagnostic capabilities. The Company was the only company with these
units for approximately 15 months. The Company introduced four generations
of the AV family during this 15-month time frame. In October 1998 Medtronic re-
ceived approval to market their competing product, the GEM DR. In January 1999
Medtronic received approval for their second generation product, the GEM II.
The Company expects the VENTAK AV family and its successor, PRIZM, to compete
with the GEM family.
Brady
Cardiac pacemaker systems, or Brady products, are generally used to manage a
slow or irregular heartbeat caused by disorders that disrupt the heart's normal
electrical conduction system. This often results in a heart rate insufficient
to provide adequate blood flow through the body, creating symptoms including
fatigue, dizziness and fainting. Brady products range from conventional single
chamber devices to more sophisticated adaptive-rate dual chamber devices.
Brady products are used to treat patients whose natural pacemaker, the sinus
node, is malfunctioning, or for patients suffering from a disruption in the
electrical conduction system. Normally, the sinus node, located in the upper
atrial portion of the heart, sends electrical signals through the atria to the
atrioventricular ("AV") node, which in turn sends signals down to the lower
(ventricular) chambers of the heart. The patient population needing pacemakers
can be divided roughly in half: those with malfunctioning sinus nodes, or Sick
Sinus Syndrome, and those suffering from malfunctioning AV nodes, or AV Block.
On February 1, 1999, the Company purchased Intermedics, the electrophysiology
business of Sulzer Medica for approximately $810 million (including a previ-
ously announced $200 million litigation settlement payment). Intermedics is a
global leader in the design, development, manufacture and distribution of pace-
makers and pacemaker leads, with 1997 revenues of approximately $325 million.
The Company believes this acquisition will nearly double its share of the
worldwide market for pacemakers, solidifying it as a leading pacemaker company.
The Company believes the acquisition of Intermedics will also significantly in-
crease the Company's sales presence with cardiologists, which will benefit the
Company not only in their direct sale of pacemakers, but in the anticipated
markets of congestive heart failure and atrial fibrillation. Intermedics also
has an intellectual product portfolio which the Company believes will further
strengthen its existing position in intellectual property in the cardiac rhythm
management area.
In September 1998, the Company acquired InControl, Inc., a pioneer in the de-
velopment of devices for the treatment of atrial arrhythmias, for $137.5 mil-
lion in cash. The acquisition was accounted for under the purchase method of
accounting and resulted in a charge of $90 million, which represented the value
assigned to in-process research and development.
Vascular Intervention
The Company offers its customers a wide range of VI products, including stent
systems, coronary dilatation catheters, guide wires, atherectomy catheters,
guiding catheters and related accessories. Customers for VI products are pri-
marily interventional cardiologists. Sales of VI products, as a percentage of
the Company's total consolidated net sales for the years ended December 31,
1997, 1996 and 1995 were 45%, 40% and 48%, respectively.
S-34
<PAGE>
More than six million Americans have been diagnosed with coronary artery dis-
ease ("CAD"), which is the formation of blood flow restrictions (atheroscle-
rotic lesions) within the coronary arteries. If untreated, CAD can lead to a
heart attack, or cause chest pain that may interfere with normal activities.
Worldwide, over one million patients annually undergo a minimally invasive CAD
intervention (angioplasty, stenting, atherectomy or mechanical or laser abla-
tion), which are less invasive and less expensive alternatives to coronary ar-
tery bypass graft surgery.
In a percutaneous transluminal coronary angioplasty ("PTCA") procedure, a lo-
cal anesthetic is administered and a small incision is made in the patient's
groin area to gain access to the femoral artery. The physician inserts a guid-
ing catheter through the femoral artery into the entrance of the coronary
blood vessel and then advances a small guide wire through the inside of the
guiding catheter, into the blood vessel and across the site of the blockage.
Then a dilatation catheter is delivered over the guide wire through the inside
of the guiding catheter into the blood vessel and across the site of the
blockage. The dilatation catheter is then inflated to compress the atheroscle-
rotic plaque against the artery wall, thereby enlarging the opening of the
vessel and increasing blood flow to the heart. At the end of the PTCA proce-
dure, all of the devices are withdrawn.
The major clinical challenge to PTCA is clinical restenosis, the renarrowing
of the blood vessel at the site of the initial treatment generally requiring
another intervention within six months of the initial procedure. A number of
other technologies have evolved to reduce the occurrence of this condition,
often in combination with a coronary dilatation catheter, including stenting,
atherectomy and ablation. Like coronary dilatation catheters, coronary stents,
atherectomy catheters and ablation catheters are delivered through a guiding
catheter and over a guide wire.
Coronary stents are metal tubes or coils that are mounted on coronary dilata-
tion catheters. Coronary stents are permanently deployed at the blockage by
inflating the coronary dilatation catheter to expand the stent in the artery.
When the coronary dilatation catheter is removed from the artery, the stent
stays in place, which provides a "mechanical" way of keeping the artery open.
In November 1998 and October 1997, the Company received approval to market the
ACS MULTI-LINK DUET and the ACS MULTI-LINK Coronary Stent Systems, respective-
ly, in the United States.
Atherectomy is the excision and removal of blockages by catheters with minia-
ture cutting systems. Ablation is the mechanical or laser reduction of block-
ages without the removal of the tissue.
In May 1997, the Company acquired the assets of NeoCardia, LLC., a privately
held development-stage company. Under the acquisition agreement, the Company
paid a total amount of $86.1 million in cash in 1997 and in 1998. The Company
could also pay subsequent additional bonus and royalty payments contingent
upon achieving certain product development and sales goals. NeoCardia, which
currently does not have any products available for commercial sale, has pio-
neered the use of radiation therapy to reduce the occurrence of restenosis.
The Company has recently commenced clinical studies in this area. However, no
assurance can be given that the Company will obtain the regulatory approvals
necessary for commercial marketing.
Cardiac and Vascular Surgery
The Company is involved in the development and marketing of innovative surgi-
cal devices and systems which alter the surgeon's approach to surgical proce-
dures and may provide improved clinical benefit, reduced procedure time and
better patient outcomes. The primary customers for CVS products are cardiac
and vascular surgeons. Sales of CVS products, as a percentage of the Company's
total consolidated net sales for the years ended December 31, 1997, 1996 and
1995, were 5%, 5% and 3%, respectively. These percentages include other mini-
mally invasive surgery products sold by the Company with a focus on
laparoscopic market opportunities in the field of general surgery. Certain of
these devices were developed for and manufactured under original equipment
manufacturer (OEM) distribution arrangements.
In December 1997, the Company completed its acquisition of EndoVascular Tech-
nologies, Inc. ("EVT"). EVT designs, develops and manufactures minimally
invasive systems to repair diseased or damaged vascular structures. EVT is
currently developing a product, the ANCURE system, to provide a catheter-based
delivery and implantation of a specialized vascular prosthesis to repair ab-
dominal aortic aneurysms which would represent a less invasive alternative to
the open surgical procedure performed today. The ANCURE system is approved for
marketing in Europe and Australia and has completed Phase II clinical trials
in the United States. However, no assurance can be given that the Company will
obtain the regulatory approvals necessary for commercial marketing in the
United States.
S-35
<PAGE>
Products
Tachy Products
The Company offers a broad array of Tachy products, including complex devices
and systems offering multiple therapeutic options as set forth in the following
chart:
<TABLE>
<CAPTION>
Date of Commercial Release
--------------------------
First
International
Category Description Product Name U.S. Release Release
- -------------- -------------------------- ------------------- ------------ -------------
<S> <C> <C> <C> <C>
Tiered- AICDs that provide low and VENTAK MINI IV Dec. 1998 Dec. 1998
Therapy high energy shock therapy, VENTAK MINI III HE Dec. 1998 Dec. 1998
Brady pacing and VENTAK AV III DR Sept. 1998 Oct. 1998
antitachycardia pacing. VENTAK AV II DR Mar. 1998 Sept.
1997
VENTAK MINI III Jan. 1998 Oct. 1997
VENTAK AV II DDD Dec. 1997 Sept.
1997
VENTAK AV DDD July 1997 Nov. 1996
VENTAK MINI II+ July 1996 June 1996
VENTAK MINI II July 1996 June 1996
VENTAK MINI+HC May 1996 Dec. 1995
VENTAK MINI HC May 1996 Dec. 1995
VENTAK MINI + Jan. 1996 Dec. 1995
VENTAK MINI Jan. 1996 Dec. 1995
Endocardial Insulated wires, inserted ENDURANCE EZ (1) Nov. 1998
Defibrillation through a vein into the ENDURANCE RX (1) April
heart, 1998
Leads which allow energy to be ENDURANCE Sept. 1998 Feb. 1998
transmitted to and from ENDOTAK DSP Jan. 1996 Oct. 1994
the
implanted AICD, allowing ENDOTAK 70 Series Aug. 1994 Nov. 1992
arrhythmias to be detected
and treated.
</TABLE>
- ---------------
(1) This product is not currently available in the United States. There can be
no assurance that the Company will obtain the regulatory approval necessary for
commercial marketing of this product in the United States.
S-36
<PAGE>
Brady Products
The Company offers a broad array of Brady products ranging from conventional
single chamber devices to more sophisticated adaptive-rate, dual chamber de-
vices as set forth in the following chart:
<TABLE>
<CAPTION>
Date of Commercial Release
--------------------------
First
International
Category Description Product Name U.S. Release Release
- ------------------- ---------------------------- --------------------- ------------ -------------
<S> <C> <C> <C> <C>
Single Chamber Pacemakers that pace one
(SSI) chamber of the heart,
typically the ventricle, at
a programmed rate.
PULSAR SSI (1) March 1998
MERIDIAN SSI May 1998 March 1998
VIGOR SSI March 1995 May 1993
VISTA VVI Apr. 1988 Dec. 1987
Single Chamber Pacemakers that pace one
Adaptive-Rate chamber of the heart, and
(SSIR) incorporate a sensor that
modifies the pacing rate in
response to physical
activity.
PULSAR MAX SP (1) Oct. 1998
PULSAR SR (1) March 1998
DISCOVERY SR May 1998 March 1998
MERIDIAN SR May 1998 March 1998
VIGOR SR June 1995 May 1993
Dual Chamber (DDD) Pacemakers that pace both
chambers of the heart,
thereby improving heart
synchronization and cardiac
output.
PULSAR DDD (1) March 1998
MERIDIAN DDD May 1998 March 1998
VIGOR DDD Oct. 1994 May 1993
VISTA DDD June 1990 Oct. 1989
Dual Chamber Pacemakers that pace both
Adaptive-Rate chambers of the heart, and
(DDDR) incorporate a sensor that
modifies the pacing rate in
response to physical
activity.
PULSAR MAX DR (1) Oct. 1998
PULSAR DR (1) March 1998
DISCOVERY DR May 1998 March 1998
MERIDIAN DR May 1998 March 1998
VIGOR DR June 1995 May 1993
Endocardial Insulated wires, inserted
Pacemaker Leads through a vein into the
heart, which allow energy to
be transmitted to and from
the implanted pacemaker.
SELUTE PICOTIP ATRIAL (1) Oct. 1998
SWEET PICO RX (1) May 1998
SELUTE PICOTIP April 1998 Sept. 1997
SWEET TIP RX Oct. 1998 June 1997
SELUTE ATRIAL (1) Oct. 1996
SELUTE May 1996 Dec. 1994
SELUTE Atrial (1) June 1996
SWEET TIP RX (1) June 1996
</TABLE>
- ---------------
(1) This product is not currently available in the United States. There can be
no assurance that the Company will obtain the regulatory approval necessary for
commercial marketing of this product in the United States.
On February 1, 1999, the Company completed the acquisition of Intermedics.
Based in Angelton, Texas, Intermedics is a leading manufacturer and distributor
of bradycardia pacemakers worldwide. Intermedics also manufactures ICDs, leads,
and other electrophysiology products, including cardiac ablation catheters.
Intermedics offers its products to electrophysiologist, cardiovascular sur-
geons, cardiologists and institutional buyers, including community hospitals.
Intermedics has one of the strongest brand names in the bradycardia pacemaker
industry and sells its pacemakers through a large network of independent dis-
tributors, who cover more than 80 countries. Intermedics products include dual-
chamber pacemakers such as the Cosmos 3, dual-chamber, rate-responsive pacemak-
ers such as the Relay, Marathon DR and Momentum DR, single-chamber rate-respon-
sive pacemakers such as Dash and Marathon SR, and single-chamber rate-respon-
sive pacemakers such as the Unity-C and the Unity.
S-37
<PAGE>
Vascular Intervention Products
The Company offers its customers a wide range of VI products, including coro-
nary dilatation catheters, coronary stents, atherectomy catheters, guide wires
and accessories as well as products for peripheral vascular application as set
forth in the following chart:
<TABLE>
<CAPTION>
Date of
U.S.
Commercial
Category Description Product Name Release
- ------------------- ---------------------------- -------------------------- ----------
<S> <C> <C> <C>
CORONARY:
Stents Stents are implantable metal ACS MULTI-LINK OTW DUET Nov. 1998
devices that are permanently ACS MULTI-LINK RX DUET Nov. 1998
deployed to provide a ACS OTW MULTI-LINK HP April 1998
"mechanical" way to keep an ACS OTW MULTI-LINK April 1998
artery open. ACS RX MULTI-LINK HP Feb. 1998
ACS RX MULTI-LINK Oct. 1997
Rapid Exchange RX coronary dilatation ACS RX GEMINI Jan. 1999
("RX") Coronary catheters allow for easy ACS RX SOLARIS Nov. 1998
Dilatation Catheter exchange of the catheter ACS RX ROCKET Nov. 1997
without removing the ACS RX COMET VP Feb. 1997
original guide wire. ACS RX COMET Nov. 1996
RX ELIPSE Oct. 1993
Perfusion Coronary Perfusion coronary ACS RX ESPRIT Apr. 1998
Dilatation Catheter dilatation catheters allow ACS OTW LIFESTREAM Dec. 1995
continuous blood flow during ACS RX LIFESTREAM Mar. 1995
the PTCA procedure, offering
flexibility in inflation
times. Perfusion catheters
are available in RX and OTW
configurations.
Over-the-Wire OTW coronary dilatation ACS AVENGER April 1998
("OTW") Coronary catheters are delivered over ACS Tx2000 VP April 1997
Dilatation Catheter a separate guide wire to ACS Tx2000 Nov. 1996
position the balloon across
the lesion.
Atherectomy Catheters which allow for ATHEROCATH--BANTAM Dec. 1996
Products the excision and removal of ATHEROCATH--GTO Sept. 1994
atherosclerotic plaque. ATHEROCATH SCA--EX Sept. 1992
Guide wires Individual guide wires are ACS HI-TORQUE CROSS--IT Sept. 1998
inserted through coronary ACS HI-TORQUE BALANCE Nov. 1998
and peripheral vessels HEAVYWEIGHT
before the dilatation ACS HI-TORQUE ALL STAR Sept. 1997
catheter, facilitating the ACS HI-TORQUE BALANCE Aug. 1997
placement of the dilatation MIDDLEWEIGHT
catheter or atherectomy ACS HI-TORQUE IRON MAN Feb. 1997
catheter. HI-TORQUE BALANCE Oct. 1994
ACS HI-TORQUE EXTRA S'PORT Sept. 1994
HI-TORQUE EXTRA SUPPORT Feb. 1992
HI-TORQUE TRAVERSE Nov. 1991
DOC Feb. 1988
HI-TORQUE FLOPPY II June 1986
Accessories Accessories are products ACS VIKING Nov. 1997
that facilitate the delivery INDEFLATOR 20/30 Sept. 1996
or operation of a device. ACS ANCHOR Apr. 1996
TOURGUIDE Dec. 1995
INDEFLATOR 20/20 March 1990
</TABLE>
S-38
<PAGE>
<TABLE>
<CAPTION>
Date of
U.S.
Commercial
Category Description Product Name Release
- ------------------- ---------------------------- ----------------------- -----------
<S> <C> <C> <C>
PERIPHERAL:
Stents See above. MEGALINK Nov. 1998(1)
Guide Wires See above. SUPRACORE July 1998
Accessories See above. EZPATH GUIDING CATHETER May 1998
</TABLE>
- ---------------
(1) This product is released in select international markets and is not cur-
rently available in the United States. There can be no assurance that the Com-
pany will obtain the regulatory approval necessary for commercial marketing of
this product in the United States.
CVS Products
The Company currently markets the VASOVIEW balloon dissection system, a broad
product offering for minimally invasive access to, and removal of, the saphe-
nous vein. The saphenous vein is used in coronary artery bypass graft surgery
("CABG"). The Company also markets a cardiac stabilizer which enables immobili-
zation of the anastomotic site on a beating heart during CABG procedures. In
addition, as a result of the Company's acquisition of EVT, the Company markets
the ANCURE system in Europe and Australia. The ANCURE system is a catheter-
based product that delivers and implants a specialized vascular prosthesis to
repair abdominal aortic aneurysms. The Company also markets a number of other
minimally invasive surgery products for access, retraction and fixation, focus-
ing on laparoscopic market opportunities in general surgery. These products in-
clude the ORIGIN TACKER fixation device. See "Legal and Regulatory Proceed-
ings."
Sales and Marketing
The Company has a broad product line which requires a sales and marketing
strategy that is tailored to its customers in order to deliver high quality,
cost-effective products and services to all of its customer segments worldwide.
Because of the diverse needs of the global market that the Company serves, the
Company's distribution system includes both direct sales forces under one man-
agement structure and independent distributors. The Company utilizes separate
sales forces to sell its CRM, VI and CVS products in order to take advantage of
specific clinical and technical expertise. In many cases, members of the sales
forces are present during procedures in order to provide technical consultation
to the physician in the use of the Company's products. Management believes the
purchase of Intermedics will add significantly to the Company's Brady sales
force effort. The addition of Intermedics' experienced sales force and their
valuable relationships should bolster the Company's own pacemaker sales. The
Company estimates only 3 to 4% of its pacemaker sales are to Intermedics top
100 accounts and approximately 60% of Intermedics' sales are with accounts the
Company does little, if any, business. The Company is not dependent on any sin-
gle customer and no single customer accounted for more than 5% of the Company's
net sales in 1997.
Sales personnel work closely with the primary decision makers who purchase the
Company's products, whether physicians, material managers, biomedical staff,
hospital administrators or purchasing managers. Additionally, the sales forces
actively pursue approval of the Company as a qualified supplier for hospital
group purchasing organizations that negotiate contracts with suppliers of medi-
cal products. The Company already has contracts with a number of national buy-
ing groups and is working with a growing number of regional buying groups that
are emerging in response to cost containment pressures and health care reform.
In addition, the Company has contracted with a number of hospitals to provide
products under a predictable procedural cost program.
United States
In the United States, the Company sells substantially all of its products
through its direct sales forces. The different uses of the Company's product
lines and the different physicians performing the corresponding procedures ne-
cessitate focused sales organizations that can utilize their specific clinical
and technical knowledge. In 1997, 68% of the Company's consolidated net sales
were derived from sales in the United States.
The Company's sales operations for its CRM and VI products are divided into
three geographic areas within the United States, under a single management
structure to which all sales operations report. The Company believes this geo-
graphic organizational structure provides the opportunity to leverage the
Company's resources across the individual business unit sales organizations by
facilitating rapid decision making and development of sales and marketing
strategies at the customer level, while retaining its clinical focus.
S-39
<PAGE>
International
In 1997, 32% of the Company's net sales were derived from its international op-
erations through its direct sales forces and independent distributors. The Com-
pany sells its products in over 70 countries. Major international markets for
the Company's products include: Japan, Germany, France, Spain, Italy, the
United Kingdom, Australia, Belgium, The Netherlands, and Canada. The sales and
marketing approach in international markets varies depending on market size and
stage of development. The Company believes that its geographic-based sales or-
ganization gives the Company greater flexibility in responding to each of these
markets.
Manufacturing
The Company's manufacturing operations are carried out in facilities in Menlo
Park, Santa Clara and Temecula, California; St. Paul, Minnesota; and Dorado,
Puerto Rico. Additionally, in July 1998, the Company purchased an existing
155,000 square foot, high-tech manufacturing facility in Clonmel, Ireland. It
is expected that the Company will begin manufacturing at this site in the third
quarter of 1999.
In general, the Company's production activities occur in a controlled environ-
ment setting or "cleanroom." Such a manufacturing environment helps ensure that
products meet all cleanliness standards and requirements. In addition, manufac-
turing employees are trained in the necessary production operations, the Qual-
ity System Regulation requirements (regulations adopted by the United States
Food and Drug Administration ("FDA") in October 1996 which replace the require-
ments previously known as Good Manufacturing Practices) and ISO 9001 and
EN46001 international quality system standards applicable to the production
process. The Company uses various production and quality performance measures
to provide high manufacturing quality and efficiency.
The Company vertically integrates its operations where it believes such inte-
gration provides significant cost, supply or quality benefits. In some areas,
the Company is highly vertically integrated. In other cases, the Company pur-
chases components. In all cases, the Company attempts to work closely with its
suppliers to ensure the cost-effective delivery of high quality materials and
components. The Company's major considerations used in the selection and reten-
tion of suppliers are supplier technology, quality, reliability, consistent on-
time deliveries, value-added services and cost. The Company tries to select and
build long-term relationships with suppliers who have demonstrated a commitment
to these factors. To date, the Company has been able to obtain all required
components and materials for all market released products and for all products
under development.
Raw Materials
The Company purchases certain of the materials and components used in manufac-
turing its products, some of which are custom-made for the Company. In addi-
tion, the Company purchases certain supplies from single sources due to quality
considerations, costs or constraints resulting from regulatory requirements. In
the past, certain suppliers have announced that, in an effort to reduce poten-
tial product liability exposure, they intend to limit or terminate sales to the
medical device industry. In addition, agreements with certain suppliers can be
terminated by either party upon short notice. The Company has agreed to indem-
nify certain suppliers against certain potential product liability exposure.
The establishment of additional or replacement suppliers for certain components
or materials cannot be accomplished quickly, largely due to the FDA approval
system and the complex nature of manufacturing processes employed by many sup-
pliers. The inability to develop satisfactory alternatives, if required, or a
reduction or interruption in supply or a significant increase in the price of
materials or components could have a material adverse effect on the Company.
Patents, Trademarks, Proprietary Rights and Licenses
The Company believes that patents and other proprietary rights are important to
its business. The Company also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. The Company reviews third-party patents and patent
applications in an effort to develop an effective patent strategy, identify li-
censing opportunities and monitor the patent claims of others.
There has been substantial litigation regarding patent and other intellectual
property rights in the medical device industry. From time to time, the Company
is subject to claims of, and legal actions alleging, infringement by the Com-
pany of the patent rights of others. The Company believes that it has been vig-
ilant in reviewing the patents of others with regard to the Company's products.
However, an adverse outcome with respect to any one or more of these claims or
actions could have a material adverse effect on the Company.
S-40
<PAGE>
The Company owns numerous patents and has numerous patent applications pending
in the United States and in certain foreign countries which relate to aspects
of the technology used in many of the Company's products. The Company's policy
is generally to file patent applications in the United States and foreign coun-
tries where rights are available and the Company believes it is commercially
advantageous to do so. In addition, the Company is a party to several license
agreements with unrelated third parties pursuant to which it has obtained, for
varying terms, the exclusive or non-exclusive rights to certain patents held by
such third parties in consideration for cross-licensing rights or royalty pay-
ments. The Company has also granted various rights in its own patents to others
under license agreements. There can be no assurance that pending patent appli-
cations will result in issued patents, that patents issued to or licensed by
the Company will not be challenged or circumvented by competitors, that such
patents will not be found to be invalid or that such patents will be found to
be sufficiently broad to protect the Company's technology or provide the Com-
pany with a competitive advantage.
The Company actively monitors the products of its competitors for possible in-
fringement of the Company's owned and/or licensed patents. Historically, liti-
gation has been necessary to enforce certain patent rights held by the Company
and the Company plans to continue to defend and prosecute its rights with re-
spect to such patents. There can be no assurance, however, that the Company's
efforts in this regard will be successful. In addition, patent litigation could
result in substantial cost to and diversion of effort by the Company. The Com-
pany also relies upon trade secrets for protection of its confidential and pro-
prietary information. There can be no assurance that others will not indepen-
dently develop substantially equivalent proprietary information or techniques
or that third parties will not otherwise gain access to the Company's trade se-
crets.
It is the Company's policy to require certain of its employees, consultants and
other parties to execute confidentiality and invention assignment agreements
upon the commencement of employment or consulting relationships with the Compa-
ny. There can be no assurance, however, that these agreements will provide
meaningful protection against, or adequate remedies for, the unauthorized use
or disclosure of the Company's trade secrets.
The Company has the following registered trademarks that are referred to here-
in: ACS, ACS EDGE, ACS MULTI-LINK, ACS RX COMET, ACS RX LIFESTREAM, AICD,
ATHEROCATH, ATHEROCATH-GTO, CPI, DOC, ENDOTAK, ENDOTAK DSP, EXCEL, HI-TORQUE
BALANCE, HI-TORQUE FLOPPY II, HI-TORQUE TRAVERSE, INDEFLATOR, ORIGIN, PRx, RX
ELIPSE, SELUTE, VENTAK, VIGOR and VISTA. The following are trademarks of the
Company: ACS ANCHOR, ACS AVENGER, ACS HI-TORQUE ALL STAR, ACS HI-TORQUE BALANCE
MIDDLEWEIGHT, ACS HI-TORQUE EXTRA S'PORT, ACS HI-TORQUE IRON MAN, ACS MULTI-
LINK RX DUET, ACS OTW LIFESTREAM, ACS OTW MULTI-LINK, ACS RX MULTI-LINK HP, ACS
RX MULTI-LINK HP, ACS RX FLOWTRACK, ACS RX PERFUSION, ACS RX ROCKET, ACS Tx
2000, ACS Tx 2000 VP, ACS VIKING, ANCURE, ATHEROCATH-BANTAM, INDEFLATOR PLUS
20, 20/30 INDEFLATOR, ORIGIN TACKER, SCA-EX, SWEET TIP RX, TOURGUIDE, VASOVIEW,
VENTAK AV and VENTAK MINI.
Competition
The medical devices market is highly competitive. The Company competes with
many companies, some of which may have access to greater financial and other
resources than the Company. Furthermore, the medical devices market is charac-
terized by rapid product development and technological change. The present or
future products of the Company could be rendered obsolete or uneconomic by
technological advances by one or more of the Company's present or future com-
petitors or by other therapies such as drugs. The Company must continue to
develop and acquire new products and technologies to remain competitive with
other developers of medical devices and therapies.
The Company faces substantial competition from a number of companies in the
markets for its products. The Company's primary competitors in CRM are
Medtronic, Inc. ("Medtronic") and St. Jude Medical, Inc. ("St. Jude"). The
Company's primary competitors in VI are Boston Scientific Corporation ("BSC"),
Johnson & Johnson ("J&J"), Arterial Vascular Engineering, Inc. ("AVE") and
Medtronic (which recently merged with AVE). With respect to CVS devices, the
principal competitors of the Company are the United States Surgical Corpora-
tion, J&J, Medtronic and BSC. The Company believes that it competes primarily
on the basis of product features, product quality, customer support, field
services and cost-effectiveness.
Government Regulation
As a manufacturer of medical devices, the Company is subject to extensive regu-
lation by the FDA and, in some jurisdictions, by state and foreign governmental
authorities. These regulations govern the introduction of new medical devices,
the observance of certain standards with respect to the design, manufacture,
testing, labeling and promotion of such devices,
S-41
<PAGE>
the maintenance of certain records, the ability to track devices, the reporting
of potential product defects, the export of devices and other matters. The Com-
pany believes that it is in substantial compliance with such governmental regu-
lations.
From time to time, the Company has received notifications from the FDA or other
authorities of alleged deficiencies in the Company's compliance with applicable
regulatory requirements. These include FDA warning letters and adverse inspec-
tion reports. To date, the Company has been able to address or correct such de-
ficiencies to the satisfaction of the FDA or other authorities and, to the ex-
tent deficiencies arise in the future, the Company expects to be able to so
correct them, but there can be no assurance that this will be the case. In ad-
dition, from time to time, the Company has recalled, or issued safety alerts or
advisory notices on, certain of its products. To date, no such recall or safety
alert has had a material adverse effect on the Company, but there can be no as-
surance that a future recall or safety alert would not have such an effect.
The Company's medical devices introduced in the United States market are re-
quired by the FDA, as a condition of marketing, to secure a premarket notifica-
tion clearance pursuant to Section 510(k) of the federal Food, Drug and Cos-
metic Act, an approved pre-market approval ("PMA") application or a supplemen-
tal PMA. Alternatively, the Company may seek United States market clearance
through a Product Development Protocol approved by the FDA. Establishing and
completing a Product Development Protocol, or obtaining a PMA or supplemental
PMA, can take up to several years and can involve preclinical studies and clin-
ical testing. In order to perform clinical testing in the United States on an
unapproved product, the Company is also required to obtain an investigational
device exemption from the FDA. In addition to requiring clearance for new prod-
ucts, FDA rules may require a filing and FDA approval, usually through a PMA
supplement or a 510(k) pre-market notification clearance, prior to marketing
products that are modifications of existing products.
While the FDA Modernization Act of 1997, when fully implemented, is expected to
inject more predictability into the product review process, streamline post-
market surveillance, and promote the global harmonization of regulatory proce-
dures, the process of obtaining such clearances can be onerous and costly.
There can be no assurance that all the necessary approvals, including approval
for product improvements and new products, will be granted on a timely basis,
if at all. Delays in receipt of or failure to receive such approvals could have
a material adverse effect on the Company's business. Moreover, after clearance
is given, if the product is shown to be hazardous or defective, the FDA and
foreign regulatory agencies have the power to withdraw such clearance or re-
quire the Company to change the device, its manufacturing process or its label-
ing, to supply additional proof of its safety and effectiveness or to recall,
repair, replace or refund the cost of the medical device. In addition, federal,
state and foreign regulations regarding the manufacture and sale of medical de-
vices are subject to future changes. The Company cannot predict what impact, if
any, such changes might have on its business. However, such changes could have
a material impact on the Company's business.
The Company is also required to register with the FDA as a device manufacturer.
As such, the Company is subject to periodic inspection by the FDA for compli-
ance with the FDA's Quality System Regulation and other regulations. These reg-
ulations require that the Company manufacture its products and maintain its
documents in a prescribed manner with respect to design, manufacturing, testing
and control activities. Further, the Company is required to comply with various
FDA requirements for labeling and promotion. The Medical Device Reporting regu-
lation requires that the Company provide information to the FDA whenever there
is evidence to reasonably suggest that one of its devices may have caused or
contributed to a death or serious injury or, if a malfunction were to recur,
could cause or contribute to a death or serious injury. In addition, the FDA
prohibits the Company from promoting a medical device before marketing clear-
ance has been received or promoting an approved device for unapproved indica-
tions. If the FDA believes that a company is not in compliance with applicable
regulations, it can institute proceedings to detain or seize products, issue a
warning letter, issue a recall order, impose operating restrictions, enjoin fu-
ture violations and assess civil penalties against the company, its officers or
its employees and can recommend criminal prosecution to the Department of Jus-
tice. Other regulatory agencies may have similar powers.
Medical device laws are also in effect in many of the countries in which the
Company does business outside the United States. These laws range from compre-
hensive device approval requirements for some or all of the Company's medical
device products to simpler requests for product data or certifications. The
number and scope of these requirements are increasing. In addition, the Company
is required to notify the FDA if it exports to certain countries medical de-
vices manufactured in the United States that have not been approved by the FDA
for distribution in the United States. The Company is also required to maintain
certain records relating to exports and make the records available to the FDA
for inspection, if required.
Health Care Cost Containment and Third-Party Reimbursement
During the past several years, the major third-party payers of hospital
services in the United States (Medicare, Medicaid, private health care
insurance and managed care plans) have substantially revised their policies,
methodologies and
S-42
<PAGE>
formulae in an attempt to contain health care costs. The introduction of
various Medicare cost containment incentives, combined with closer scrutiny of
health care expenditures by both private health insurers and employers, has
resulted in increased contractual adjustments and discounts in hospital charges
for services performed and in the shifting of services from inpatient to
outpatient settings. If hospitals respond to such pressures by substituting
lower cost products or therapies for the Company's products, the Company could
be adversely affected. Moreover, third-party payers may deny reimbursement if
they determine that a device was not used in accordance with cost-effective
treatment methods as determined by the payer, was experimental, or for other
reasons. Certain states have already made significant changes to their Medicaid
programs and have also adopted health care reform. Similar initiatives to limit
the growth of health care costs, including price regulation, are also underway
in several other countries in which the Company does business. For example, in
April 1998, the Japanese Ministry of Health and Welfare recently announced its
intentions to cut reimbursement levels for medical devices. Implementation of
health care reform may limit the price of, or the level at which reimbursement
is provided for, the Company's products.
The ability of customers to obtain appropriate reimbursement for their products
and services from government and third-party payers is critical to the success
of all medical device companies around the world. Several foreign governments
have attempted to dramatically reshape reimbursement policies affecting medical
devices. Further restrictions on reimbursement of the Company's customers will
likely have an impact on the products purchased by customers and the prices
they are willing to pay.
Product Liability and Insurance
The design, manufacture and marketing of medical devices of the types produced
by the Company entail an inherent risk of product liability claims. The
Company's products are often used in intensive care settings with seriously ill
patients. In addition, many of the medical devices manufactured and sold by the
Company are designed to be implanted in the human body for long periods of time
or indefinitely. The occurrence of a problem with one of the Company's products
could result in product liability claims and/or a recall of, or safety alert or
advisory notice relating to, the product. While the amount of product liability
insurance maintained by the Company has been adequate in relation to claims
made against the Company in the past, there can be no assurance that the amount
of such insurance will be adequate to satisfy claims made against the Company
in the future or that the Company will be able to obtain insurance in the fu-
ture at satisfactory rates or in adequate amounts. Product liability claims or
product recalls in the future, regardless of their ultimate outcome, could have
a material adverse effect on the Company's business, financial condition and
reputation, and on the Company's ability to attract and retain customers for
its products.
Environmental Compliance
The Company is subject to various federal, state and local as well as foreign
laws and regulations relating to the protection of the environment. In the
course of its business, the Company is involved in the handling, storage and
disposal of certain chemicals. While the Company continues to make capital and
operational expenditures relating to compliance with existing environmental
laws and regulations, it does not anticipate that those expenditures will have
a material adverse effect on its business.
S-43
<PAGE>
Properties
As of December 31, 1998, the Company owned or leased the following principal
facilities:
<TABLE>
<CAPTION>
Approximate Leased
Location Type of Facility Square Feet or Owned
- ----------------- ------------------------------------------ --------------- ---------
<S> <C> <C> <C>
Basingstoke, UK Administration 24,000 Leased
Brussels, Belgium Administration and CRM research 17,000 Leased
Clonmel, Ireland Manufacturing 155,000 Owned
Dorado, PR CRM manufacturing and administration 54,000 Owned
Houston, TX VI research and development and 22,500 Leased
administration
Indianapolis, IN Administration 18,000 Leased
Menlo Park, CA CVS manufacturing, research and 200,000 Leased
development, administration, sales and
marketing and warehouse
Santa Clara, CA VI manufacturing, research and 370,000 Owned
development, administration, and sales
and marketing
St. Paul, MN CRM manufacturing, research and 360,000 Owned
development, administration and sales and
marketing
St. Paul, MN CRM lead development and administration 100,000 Leased
St. Paul, MN CRM packaging, shipping and warehouse 25,000 Leased
Temecula, CA VI manufacturing, CRM research and 500,000 Owned
development
Tokyo, Japan Administration 10,000 Leased
</TABLE>
The Company currently maintains its executive offices at 111 Monument Circle,
29th Floor, Indianapolis, Indiana. Subject to normal expansion, the Company be-
lieves that its facilities are adequate to meet its present and reasonably
foreseeable needs.
The Company believes that none of its properties is subject to any encumbrance,
easement or other restriction that would detract materially from its value or
materially impair its use in the operation of the business of the Company. The
buildings owned by the Company are of varying ages and are in good condition.
Research and Development
The Company is engaged in ongoing research and development to introduce clini-
cally advanced new products, to enhance the effectiveness, ease of use, safety
and reliability of its existing products and to expand the applications for
which the uses of its products are appropriate. The Company is dedicated to de-
veloping novel technologies that will furnish health care providers with a more
complete line of products to treat medical conditions through minimally
invasive procedures.
The Company's research and development activities are carried out primarily in
facilities located in Santa Clara, Menlo Park, and Temecula, California; St.
Paul, Minnesota; Redmond, Washington; and Brussels, Belgium. The Company's re-
search and development staff is focused on product design and development,
quality, clinical research and regulatory compliance. To pursue primary re-
search efforts, the Company has developed alliances with several leading re-
search institutions and universities. The Company also works with leading cli-
nicians around the world in conducting scientific studies on the Company's
products. These studies include clinical trials which provide data for use in
regulatory submissions and post market approval studies involving applications
of the Company's products.
The Company evaluates developing technologies in areas where it may have tech-
nological or marketing expertise for possible investment or acquisition. The
Company has invested in several start-up ventures. In return for funding and
technology, the Company has received equity interests in these ventures.
S-44
<PAGE>
Quality Assurance Systems
The Company is committed to providing high quality products to its customers.
To meet this commitment, the Company has implemented modern quality systems
and concepts throughout the organization. The Company's quality system starts
with the initial product specification and continues through the design of the
product, component specification process and the manufacturing, sales and ser-
vicing of the product. The quality system is designed to build in quality and
to utilize continuous improvement concepts throughout the product life.
Certain of the Company's operations are certified under ISO 9001, ISO 9002,
EN46001 and EN46002 international quality system standards. ISO 9001 and 9002
require, among other items, an implemented quality system that applies to com-
ponent quality, supplier control and manufacturing operations. In addition,
ISO 9001 and EN46001 require an implemented quality system that applies to
product design. Such certification can be obtained only after a complete audit
of a company's quality system by an independent outside auditor. These certi-
fications require that these facilities undergo periodic reexamination.
Employees
As of December 31, 1998, the Company had approximately 6,100 full-time employ-
ees, including approximately 680 employees outside the United States. The Com-
pany maintains compensation, benefits, equity participation and work environ-
ment policies intended to assist in attracting and retaining qualified person-
nel. The Company believes that the success of its business will depend, in
significant part, on its ability to attract and retain such personnel. In ad-
dition, the Company contracts for services where appropriate. The contract la-
bor provides management with flexibility in dealing with fluctuations in vol-
ume during periods of high sales growth and through new product transfers to
manufacturing.
None of the Company's employees are represented by a labor union. The Company
has never experienced an organized work stoppage or strike and considers its
relations with its employees to be excellent.
Legal and Regulatory Proceedings
The Company is currently a party to various legal actions which have occurred
in the normal course of its business. The litigation includes disputes over
intellectual property, product liability, employment litigation and general
commercial matters.
The Company currently has a number of disputes with Boston Scientific Corpora-
tion ("BSC") and its subsidiary, SciMed Life Systems, Inc. ("SciMed"). These
include the following:
. In a lawsuit originally filed on May 31, 1994, in the Northern District of
California, SciMed alleges that the ACS RX ELIPSE coronary dilatation cathe-
ter infringes certain patents owned by SciMed. Subsequently, the complaint
was amended to further allege infringement by the ACS RX MULTI-LINK coronary
stent system. In the lawsuit, SciMed is seeking injunctive relief and mone-
tary damages;
. On October 10, 1995, Advanced Cardiovascular Systems, Inc. ("ACS"), the
Company's wholly-owned VI subsidiary, filed suit against SciMed alleging
that the SciMed Express Plus and Express Plus II coronary dilatation cathe-
ters infringe certain patents of ACS. In addition, on March 12, 1996, ACS
filed a separate lawsuit alleging that these products infringe another pa-
tent of ACS. These lawsuits were filed in the Northern District of Califor-
nia and ACS is seeking injunctive relief and monetary damages;
. On March 12, 1996, ACS filed suit against SciMed in the Northern District of
California alleging that SciMed's Trio/Bandit line of coronary dilatation
catheters infringes a patent of ACS. In the lawsuit, ACS is seeking injunc-
tive relief and monetary damages;
. On September 17, 1997, ACS filed suit against SciMed and BSC in the Northern
District of California alleging that the SciMed Rebel rapid exchange coro-
nary dilatation catheter infringes certain patents of ACS. In the lawsuit,
ACS is seeking injunctive relief and monetary damages;
. An arbitration was held between SciMed and the Company in May 1998, to de-
termine whether the ACS RX COMET, ACS RX COMET VP, ACS RX ROCKET coronary
dilatation catheters, and ACS RX MULTI-LINK HP coronary stent system were
reasonable modifications under the 1991 ACS/SciMed Settlement Agreement, and
therefore immune from suit by patents owned by SciMed. On August 17, 1998,
the Arbitration Panel by a 2-1 majority held in a Draft Determination that
these products were not reasonable modifications. The Company requested re-
consideration of the Draft Determi-
S-45
<PAGE>
nation and on December 4, 1998 the Arbitration Panel by a 2-1 majority held
in a Final Determination that the ACS RX COMET, ACS RX COMET VP and ACS RX
ROCKET coronary dilatation catheters were reasonable modifications under the
Settlement Agreement, and were immune from suit. The ACS RX MULTI-LINK HP
coronary stent system was held not to be a reasonable modification;
. On August 12, 1998, ACS and Guidant Sales Corporation ("GSC") filed suit
against BSC and SciMed in the Southern District of Indiana alleging that
SciMed's NIR stent infringes certain patents of ACS. In the lawsuit ACS is
seeking injunctive relief and monetary damages;
. On December 29, 1998, SciMed filed suit against the Company in The Hague, The
Netherlands alleging infringement of a European Patent owned by SciMed by the
ACS RX ELIPSE coronary dilatation catheter and the ACS RX MULTI-LINK, ACS RX
MULTI-LINK HP, and ACS RX DUET coronary stent systems. SciMed is seeking in-
junctive relief and monetary damages; and
. On January 13, 1999, SciMed filed suit against the Company, ACS and GSC in
the Northern District of California alleging that ACS's RX MULTI-LINK, RX
MULTI-LINK HP, and MULTI-LINK RX DUET coronary stent systems infringe certain
SciMed patents. In the lawsuit, SciMed is seeking injunctive relief and mone-
tary damages.
The Company currently has a number of disputes with Medtronic, including the
following:
. On October 10, 1995, ACS filed suit against Medtronic alleging that the
Medtronic Falcon coronary dilatation catheter infringes certain patents of
ACS. On March 12, 1996, ACS filed another suit against Medtronic alleging
that the Medtronic Falcon coronary dilatation catheter infringes another pa-
tent of ACS. Both of these lawsuits were filed in the Northern District of
California. In the lawsuits, ACS is seeking injunctive relief and monetary
damages; and
. On November 6, 1997, Medtronic filed suit against ACS in the United States
District Court for Minnesota alleging that the ACS MULTI-LINK coronary stent
infringes a patent owned by Medtronic. In the lawsuit, Medtronic is seeking
injunctive relief and monetary damages.
The Company currently has a number of disputes with J&J and its subsidiary,
Cordis Corporation ("Cordis"), including the following:
. On August 26, 1997, J&J and Expandable Grafts Partnership ("EGP") filed suit
against the Company's subsidiary Guidant Canada Corporation in the Federal
Court of Canada alleging that the sale of the ACS MULTI-LINK coronary stent
in Canada infringes a patent licensed to J&J by EGP. In the lawsuit, J&J and
EGP seek injunctive relief and monetary damages;
. On October 3, 1997, Cordis filed suit against the Company and ACS, in the
District Court for the District of Delaware alleging that the sale of the ACS
MULTI-LINK coronary stent by ACS infringes certain patents licensed to
Cordis. In addition, on October 8, 1997, Cordis filed a motion for a prelimi-
nary injunction in this lawsuit seeking to prevent ACS from selling the ACS
MULTI-LINK coronary stent other than in certain limited circumstances and
subject to certain conditions. On October 22, 1997, the complaint was amended
to include BSC and AVE as co-defendants. The complaint was re-filed on Febru-
ary 6, 1998 to include EGP as a plaintiff. A hearing on the motion for a pre-
liminary injunction was held in February 1998 and in July 1998, Cordis' mo-
tion for a preliminary injunction was denied by the court. On October 27,
1998, one of the patents asserted against the Company and ACS emerged from a
re-examination filed by Cordis. In the lawsuit, Cordis is seeking injunctive
relief and monetary damages;
. On December 2, 1997, Cordis filed suit against Guidant and ACS in the United
States District Court for the District of Delaware alleging that the ACS RX
ROCKET coronary dilatation catheter infringes patents owned by Cordis. Cordis
has also filed a motion for a preliminary injunction, which was heard by the
court on April 9, 1998. A decision has not yet been rendered. In the lawsuit,
Cordis is seeking injunctive relief, monetary damages and attorney fees. A
separate lawsuit was also filed against the Company in December 1997 in The
Netherlands alleging infringement of the European equivalents of these pat-
ents. In this separate lawsuit, Cordis is seeking injunctive relief and mone-
tary damages; and
. On June 4, 1998, Cordis filed suit against the Company and ACS in the United
States District Court for the Eastern District of Virginia alleging that the
ACS MULTI-LINK coronary stent infringes two patents owned by Cordis. The
Company's motion to transfer the case to the Northern District of California
was granted on August 7, 1998. Cordis is seeking injunctive relief and mone-
tary damages.
S-46
<PAGE>
The Company currently has a number of disputes with General Surgical Innova-
tions, Inc. ("GSI"), including the following:
. On May 28, 1996, Origin Medsystems, Inc. ("Origin"), a wholly-owned subsidi-
ary of the Company, filed suit against GSI in the Northern District of Cali-
fornia alleging that GSI's Spacemaker balloon products infringe a patent of
Origin. In the lawsuit, Origin is seeking injunctive relief and monetary dam-
ages. On April 20, 1998 GSI's motion that the Origin patent was obtained by
inequitable conduct was granted. On November 2, 1998 the Court awarded GSI
its attorney fees in the amount of $990,000 plus interest. Origin has ap-
pealed both decisions;
. On June 4, 1996, GSI filed suit against Origin in the Northern District of
California alleging that Origin's VASOVIEW Balloon Dissection System and
Preperitoneal Distention Balloon Systems infringe a patent owned by GSI.
GSI's motion for summary judgment of infringement was granted on October 29,
1998, and a trial was held on the validity of the GSI patent. On February 8,
1999 the jury held the patent valid and awarded GSI approximately $12.9 mil-
lion in damages. The jury also found certain claims of the patent to have
been wilfully infringed which could result in up to a trebling of the damage
award and entitle GSI to its attorney fees. GSI is also seeking injunctive
relief and a hearing relating to the injunction is set before the court on
February 26, 1999. Once a judgment is entered and post-trial matters have
been resolved, Origin may appeal; and
. On September 24, 1997, GSI filed suit against Origin in the Northern District
of California alleging that Origin's VASOVIEW Balloon Dissection System in-
fringes another patent owned by GSI. GSI is seeking injunctive relief and un-
specified monetary damages.
The Company currently has a number of disputes with Arterial Vascular Engineer-
ing, Inc. ("AVE"), including the following:
. On December 24, 1997, ACS filed suit against AVE in the United States Dis-
trict Court for the Northern District of California alleging infringement of
three patents of ACS by certain AVE stents. This case was subsequently trans-
ferred to the District Court of Delaware. On April 10, 1998 ACS filed suit
against AVE alleging infringement of an additional ACS patent by certain AVE
stents. This lawsuit is also located in the District Court of Delaware. In
the lawsuit, ACS is seeking injunctive relief and monetary damages; and
. On February 18, 1998, AVE filed suit against ACS in the District Court of
Delaware alleging that the sale of the ACS MULTI-LINK Coronary Stent in-
fringes certain patents licensed to AVE. The lawsuit also alleges misappro-
priation of trade secrets and breach of a confidentiality agreement by ACS.
In the lawsuit, AVE is seeking injunctive relief, monetary damages, and to
invalidate certain ACS stent patents.
The Company currently has a number of disputes with St. Jude Medical, Inc.
("St. Jude"), including the following:
. On May 3, 1996, Pacesetter, Inc. ("Pacesetter"), a subsidiary of St. Jude,
filed a lawsuit against Cardiac Pacemaker, Inc. ("CPI"), a wholly-owned sub-
sidiary of the Company, which is currently pending in the United States Dis-
trict Court for Minnesota. The complaint, as subsequently amended, alleges
infringement of certain Pacesetter patents by certain CPI pacemaker models
and programmers for pacemakers and defibrillators. The lawsuit seeks injunc-
tive relief, unspecified monetary damages, and an award of attorneys' fees.
On December 16, 1998, following a trial on the merits, the jury returned a
verdict finding no liability by CPI on two of the three patents asserted by
Pacesetter, and infringement by software in certain CPI programmers for cer-
tain pacemakers and defibrillators of the third patent. The jury awarded
Pacesetter damages in the amount of $9.675 million, and the court is cur-
rently considering Pacesetter's request for an injunction and CPI's request
that Pacesetter's patent be declared unenforceable;
. On December 24, 1996, certain entities affiliated with Telectronics Holdings
Ltd. ("Telectronics Parties") and Pacesetter filed suit against the Company,
CPI, GSC and Lilly in the United States District Court for the District of
Minnesota alleging that the claims made in the State Court Case (as defined
below) are subject to an arbitration provision in the license agreement en-
tered into in 1994 among CPI, Lilly and the Telectronics Parties
("Telectronics Agreement"). In the lawsuit, the Telectronics Parties and
Pacesetter are seeking declaratory and injunctive relief and an award of
costs. In February 1997, the District Court ruled against the Telectronics
Parties and Pacesetter and held that the dispute was not subject to the arbi-
tration provision. The Telectronics Parties and Pacesetter appealed the
Court's ruling, and 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. 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 9,
1998, the Minnesota District Court entered an Order referring the matter to
arbitration, subject to the qualification that "the arbitrator shall deter-
mine what role, if any, Pacesetter should have in the arbitration proceed-
ing." The Telectronics Parties and the Company have completed the procedures
for selecting an arbitrator and have commenced the arbitration process;
S-47
<PAGE>
. On November 26, 1996, the Company and its subsidiaries, CPI and GSC, and
Lilly filed suit (the "State Court Case") against St. Jude, Pacesetter,
Ventritex, Inc. ("Ventritex") and the Telectronics Parties in the Marion su-
perior Court, State of Indiana, alleging (among other things) that the
Telectronics Agreement did not transfer to Pacesetter when Pacesetter pur-
chased certain assets of the Telectronics Parties in 1996. The lawsuit seeks
declaratory and injunctive relief to prevent and invalidate the purported
transfer of the Telectronics Agreement to Pacesetter. On June 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; and
. On November 26, 1996, CPI, GSC and Lilly filed suit against St. Jude,
Pacesetter and Ventritex in the United States District Court for the Southern
District of Indiana alleging that upon consummation of the merger of
Ventritex and Pacesetter, the continued manufacture, use or sale of certain
Ventritex products would infringe certain patents of CPI and Lilly. The law-
suit seeks declaratory and injunctive relief and monetary damages. On June 8,
1998, the United States District Court for the Southern District of Indiana
entered an Order staying proceedings.
The Company currently has a number of lawsuits with Angeion Corporation, in-
cluding:
. On May 3, 1996, Angeion Corporation filed a lawsuit against CPI which is cur-
rently pending in the United States District Court for Minnesota. The com-
plaint, as subsequently amended, alleges infringement of certain Angeion de-
fibrillator patents by CPI's MINI I and MINI II defibrillator models. The
lawsuit seeks injunctive relief, unspecified monetary damages, and an award
of attorneys' fees.
. On September 15, 1998, CPI filed suit against Angeion Corporation in the
United States District Court of Minnesota. The complaint alleges infringement
of certain CPI defibrillator patents by Angeion's defibrillator products. In
the lawsuit, CPI is seeking injunctive relief and monetary damages.
On May 15, 1995, Intermedics, Inc., a division of Sulzer Medica, filed a law-
suit against CPI which is currently pending in the United States District Court
for Minnesota. The complaint alleges infringement of certain Intermedics pat-
ents by CPI's VENTAK MINI and PRx defibrillator models and certain VIGOR and
EXCEL pacemaker models. (The EXCEL models are not currently manufactured or
sold by CPI). Intermedics is seeking injunctive relief and monetary damages.
CPI has filed counterclaims alleging that certain of its patents are infringed
by the Intermedics Res-Q defibrillator products and certain Intermedics pace-
maker products. On February 1, 1999, the Company completed its acquisition of
Intermedics, including its intellectual property, subject to certain condi-
tions. Following completion of this acquisition, the above-identified suits
were terminated except for certain patents asserted against the Company's VIGOR
pacemakers. A release for all past alleged infringement has been granted, and
if there are any future claims, Intermedics has no ability to obtain increased
damages, costs, or fees and CPI has an unqualified right to a sublicense to
these patents. CPI was also released from any claims for attorney fees or for
treble damages. As a result, both suits have been dismissed.
On February 1, 1999 Deborah Charms filed suit against the Company and CPI in
the United States District Court for the Western District of Texas alleging
that unspecified defibrillation products of CPI infringe a patent owned by
Charms. In the lawsuit, Charms is seeking injunctive relief and unspecified
monetary damages.
In addition, the Company is currently involved in a number of other patent re-
lated actions, including U.S. patent interferences, European and Japanese pa-
tent oppositions and U.S. patent reexamination proceedings.
S-48
<PAGE>
DESCRIPTION OF THE NOTES
The notes will be issued under an Indenture dated as of January 18, 1996 be-
tween the Company and Citibank, N.A., as Trustee, as supplemented by a Supple-
mental Indenture dated as of January 8, 1999. An Officers' Certificate sets
forth the terms of the notes in accordance with the Indenture in an aggregate
principal amount of $350 million. Information about the Indenture and the gen-
eral terms and provisions of the notes is in the accompanying prospectus under
"Description of Senior Debt Securities." Capitalized terms not defined herein
have the meanings assigned to them in the prospectus or the Indenture referred
to therein.
The defeasance and covenant defeasance provisions of the Indenture described
under "Description of Senior Debt Securities--Discharge, Legal Defeasance and
Covenant Defeasance" in the prospectus apply to the notes.
The notes will be issued in book-entry form, as a single note registered in the
name of the nominee of The Depository Trust Company, which will act as Deposi-
tary. Beneficial interests in book-entry notes will be shown on, and transfers
of the notes will be made only through, records maintained by the Depositary
and its participants. The provisions set forth under "Description of Senior
Debt Securities--Book-Entry Senior Debt Securities" in the accompanying pro-
spectus will apply to the notes. The notes will mature on February 15, 2006.
Payment of Principal and Interest
The interest rate on the notes will be 6.15% per annum. The Company will pay
interest in arrears on February 15 and August 15, beginning August 15, 1999.
Interest will accrue from February 16, 1999 or from the most recent interest
payment date to which the Company has paid or provided for the payment of in-
terest to the next interest payment date or the scheduled maturity date, as the
case may be. The Company will pay interest computed on the basis of a 360-day
year of twelve 30-day months.
The Company will pay interest on the notes in immediately available funds to
the persons in whose names the notes are registered at the close of business on
the February 1 or August 1 preceding the respective interest payment date. At
maturity, the Company will pay the principal, together with final interest on
the notes, in immediately available funds.
If an interest payment date or the maturity date is not a "Business Day," the
Company will pay interest or principal, as the case may be, on the next suc-
ceeding Business Day. The term "Business Day" means any day other than a Satur-
day or Sunday or a day on which applicable law authorizes or requires banking
institutions in the City of New York, New York to close.
Redemption
The notes will not be redeemable prior to maturity.
Events of Default
The following Event of Default will apply to the notes in addition to the other
Events of Default described under "Description of Debt Securities--Events of
Default":
there shall have occurred with respect to any indebtedness or other obliga-
tion for borrowed money of the Company or any of its Subsidiaries having an
outstanding principal amount of $25,000,000 (or the equivalent thereof in
other currencies) or more individually or in the aggregate, (i) a default
or defaults where the holder or holders thereof have declared such indebt-
edness to be due and payable prior to its stated maturity or (ii) a default
or defaults in the payment of the principal of such indebtedness when the
same became due and payable at its final maturity after the expiration of
any grace period with respect thereto, and such acceleration has not been
rescinded or annulled or such indebtedness has not been discharged in full
within 15 days of such acceleration or such final maturity after the expi-
ration of any grace period with respect thereto, as the case may be.
Same-Day Settlement and Payment
The notes will trade in the Depositary's same-day funds settlement system until
maturity or until the Company issues the notes in definitive form. The Deposi-
tary will therefore require secondary market trading activity in the notes to
settle in immediately available funds. The Company can give no assurance as to
the effect, if any, of settlement in immediately available funds on trading ac-
tivity in the notes.
Governing Law
The notes will be governed by and construed in accordance with the laws of the
State of New York.
S-49
<PAGE>
UNDERWRITING
The Company is selling the notes to the underwriters named below under an Un-
derwriting Agreement dated as of February 11, 1999. The underwriters, and the
amount of the notes each of them has severally agreed to purchase from the Com-
pany, are as follows:
<TABLE>
<CAPTION>
Principal
Underwriters Amount of notes
------------ ---------------
<S> <C>
J.P. Morgan Securities Inc. .............................. $192,500,000
BT Alex. Brown Incorporated............................... 52,500,000
Chase Securities Inc...................................... 52,500,000
Credit Suisse First Boston Corporation.................... 52,500,000
---------------
Total................................................... $350,000,000
===============
</TABLE>
Under the terms and conditions of the Underwriting Agreement, if the underwrit-
ers take any of the notes, then they are obligated to take and pay for all of
the notes.
The notes are a new issue of securities with no established trading market. The
Company does not intend to apply for listing of the notes on any national secu-
rities exchange. The underwriters have advised the Company that they intend to
make a market for the notes, but they have no obligation to do so. They also
may discontinue market making at any time without providing any notice. The
Company cannot give any assurance as to the liquidity of any trading market for
the notes.
The underwriters initially propose to offer part of the notes directly to the
public at the public offering price set forth on the cover page and part to
certain dealers at a price that represents a concession not in excess .375% of
the principal amount of the notes. Any underwriter may allow, and any such
dealer may reallow, a concession not in excess of .250% of the principal amount
of the notes to certain other dealers. After the initial offering of the notes,
the underwriters may, from time to time, vary the offering price and other
selling terms.
The Company has agreed to indemnify the underwriters against certain liabili-
ties, including liabilities under the Securities Act of 1933, as amended, or to
contribute payments which the underwriters may be required to make in respect
of such liabilities.
In connection with the offering of the notes, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the prices of the
notes. Specifically, the underwriters may overallot in connection with the of-
fering of the notes, creating a short position in the notes for their own ac-
count. In addition, the underwriters may bid for, and purchase, the notes in
the open market to cover short positions or to stabilize the price of the
notes. Finally, the underwriters may reclaim selling concessions allowed for
distributing the notes in the offering, if the underwriters repurchase previ-
ously distributed notes in transactions to cover short positions, in stabiliza-
tion transactions or otherwise. Any of these activities may stabilize or main-
tain the market prices of the notes above independent market levels. The under-
writers are not required to engage in any of these activities and may end any
of these activities at any time.
In the ordinary course of their respective businesses, the underwriters and
their affiliates have engaged, and may in the future engage, in commercial
banking and/or investment banking transactions with the Company and its affili-
ates.
S-50
<PAGE>
VALIDITY OF THE NOTES
Dewey Ballantine LLP, New York, New York, will pass upon the legality of the
notes for the Company. Davis Polk & Wardwell, New York, New York, will pass
upon the legality of the notes for the underwriters. Dewey Ballantine LLP and
Davis Polk & Wardwell will rely on the opinion of Baker & Daniels, Indianapo-
lis, Indiana, with respect to all matters of Indiana law. J.B. King, Vice Pres-
ident, General Counsel and a Director of the Company, also currently acts as
counsel to Baker & Daniels.
EXPERTS
The consolidated financial statements of the Company incorporated by reference
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon included therein and incorporated herein by
reference. Such consolidated financial statements are incorporated herein by
reference in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The financial statements of the electrophysiology business of Sulzer Medica
Ltd. as of and for the three years ended December 31, 1997 incorporated into
this Prospectus Supplement by reference to the audited historical financial
statements included in Exhibit 99.1 of Guidant Corporation's Form 8-K dated
February 4, 1999 have been incorporated herein in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
S-51
<PAGE>
PROSPECTUS
$500,000,000
GUIDANT CORPORATION
SENIOR DEBT SECURITIES
----------------
WE WILL PROVIDE THE SPECIFIC TERMS OF EACH SERIES OF SENIOR DEBT SECURITIES
WE ISSUE IN SUPPLEMENTS TO THIS PROSPECTUS. YOU SHOULD READ THIS PROSPECTUS AND
THE SUPPLEMENTS CAREFULLY BEFORE YOU INVEST.
WE MAY OFFER THE SECURITIES DIRECTLY OR THROUGH UNDERWRITERS, AGENTS OR
DEALERS. THE SUPPLEMENT WILL DESIGNATE THE TERMS OF THAT PLAN OF DISTRIBUTION.
"PLAN OF DISTRIBUTION" BELOW ALSO PROVIDES MORE INFORMATION ON THIS TOPIC.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
OUR PRINCIPAL EXECUTIVE OFFICES ARE LOCATED AT 111 MONUMENT CIRCLE, 29TH
FLOOR, INDIANAPOLIS, INDIANA 46204-5129, AND OUR TELEPHONE NUMBER IS (317) 971-
2000.
OUR SHARES OF COMMON STOCK ARE LISTED ON BOTH THE NEW YORK STOCK EXCHANGE
UNDER THE TRADING SYMBOL "GDT" AND ON THE PACIFIC EXCHANGE UNDER THE TRADING
SYMBOL "GDT".
The date of this Prospectus is December 3, 1998
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR ANY ACCOMPANYING PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON A HAVING BEEN AUTHORIZED BY THE COMPANY (AS DEFINED HEREIN) OR
ANY UNDERWRITER, DEALER OR AGENT. THIS PROSPECTUS AND ANY ACCOMPANYING
PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
ANY OFFER TO BUY ANY SECURITIES OTHER THAN THE SENIOR DEBT SECURITIES (AS
DEFINED HEREIN) TO ANY PERSON IN MY JURISDICTION IN WHICH IT IS UNLAWFUL TO
MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF
THIS PROSPECTUS OR ANY ACCOMPANYING PROSPECTUS SUPPLEMENT NOR ANY SALE MADE
HEREBY OR THEREBY SHALL, UNDER ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION
CONTAINED OR INCORPORATED HEREIN OR THEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF OR THEREOF.
AVAILABLE INFORMATION
Guidant Corporation (the "Company") is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). The
reports, proxy statements and other information filed by the Company with the
Commission are available over the Internet at the Company's web site at
http://www.guidant.com and at the Commission's web site at http://www.sec.gov.
Such filings can also be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 or its regional offices located at
Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661-
2511 and at Suite 1300, 7 World Trade Center, New York, New York 10048. Copies
of such material can be obtained by mail from the Public Reference Section of
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The public may call the Commission at 1-800-SEC-
0330 for further information on the public reference rooms and the prescribed
rates. In addition, such reports, proxy statements and other information may be
inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
New York, New York 10005 and the Pacific Exchange, Inc., 301 Pine Street,
San Francisco, California 94101.
The Company has filed with the Commission a Registration Statement on Form S-
3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Offered Securities. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto. For further information with respect to
the Company and the Offered Securities, reference is hereby made to the
Registration Statement and the exhibits and schedules filed therewith, which
may be obtained from the principal office of the Commission in Washington,
D.C., upon the payment of fees prescribed by the Commission.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act are incorporated herein by reference: (i) the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997; (ii) the
Company's Quarterly Reports on Form 10-Q for the fiscal quarters ended
March 31, 1998, June 30, 1998 and September 30, 1998; (iii) the Company's
Current Report on Form 8-K dated September 15, 1998; and (iv) the description
of the Company's common stock included in the Company's registration statement
on Form 8-A, as amended on October 6, 1994.
All reports and other documents filed by the Company pursuant to Section 13
(a), 13 (c), 14 or 15 (d) of the Exchange Act after the date of this Prospectus
and before the termination of the offering made hereby will be deemed to be
incorporated by reference herein and to be a part hereof from the date of
filing of such reports and documents. Any statement contained in a document
incorporated or deemed to be incorporated by
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<PAGE>
reference herein will be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document, which also is or is deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
Each person, including any beneficial owner, to whom a Prospectus is
delivered, may request a copy of any or all of the documents incorporated
herein by reference (other than exhibits, unless such exhibits specifically are
incorporated by reference into such documents or this Prospectus) at no cost by
writing or calling the Company at the following address and telephone number:
Guidant Corporation, P.O. Box 44906, Indianapolis, Indiana 46244, (317) 971-
2000, Attention: Investor Relations.
THE COMPANY
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). 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. The Company is also a worldwide leader in
minimally invasive procedures used for opening blocked coronary arteries. In
addition, the Company develops, manufactures, and markets products for use in
minimally invasive cardiac and vascular surgeries.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's ratio of earnings to fixed
charges for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
1998 1997 1997 1996 1995 1994 1993
------ ------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges...... 28.4 11.2 13.2 8.7 5.5 8.0 17.8
</TABLE>
These computations include the Company and our subsidiaries, and companies in
which we own 50% or less equity. For these ratios, "earnings" is determined by
adding the "total fixed charges" (excluding interest capitalized), income
taxes, minority common stockholders equity in net income and amortization of
interest capitalized to income from continuing operations excluding special
charges. For this purpose, "total fixed charges" consists of (1) interest on
all indebtedness and amortization of debt discount and expense, and (2) an
interest factor attributable to rentals.
USE OF PROCEEDS
Unless otherwise indicated in the Prospectus Supplement, the net proceeds to
be received by the Company from the sale of the Offered Securities will be
added to the Company's general funds and will be used for general corporate
purposes, including capital expenditures, to finance possible acquisitions and
to repay, redeem or repurchase its outstanding indebtedness.
FORWARD-LOOKING STATEMENTS
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 or
incorporated by reference, are subject to risks and uncertainties which may
cause actual results to differ materially from those projected. Economic,
competitive, governmental, technological, and other factors which may affect
the Company's operations are discussed in the Company's most recent reports on
Forms 10-Q and 10-K filed with the Securities and Exchange Commission.
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<PAGE>
DESCRIPTION OF THE SENIOR DEBT SECURITIES
The Company may offer and issue from time to time in one or more series its
senior unsecured debt securities (the "Senior Debt Securities"). The Senior
Debt Securities are to be issued under an indenture to be dated as of a date
prior to the first issuance of Senior Debt Securities, as supplemented from
time to time (the "Senior Indenture"), between the Company and Citibank, N.A.,
as Trustee (the "Trustee"). The form of the Senior Indenture as well as the
Form of Supplemental Indenture thereto are filed as exhibits to the
Registration Statement. The Senior Indenture is subject to and governed by the
Trust Indenture Act of 1939, as amended (the "TIA"). The statements made under
this heading relating to the Senior Debt Securities and the Senior Indenture
are summaries of the provisions thereof and do not purport to be complete and
are qualified in their entirety by reference to the Senior Indenture, including
the definitions of certain terms therein and in the TIA. Certain capitalized
terms used below but not defined herein have the meanings ascribed to them in
the Senior Indenture.
The particular terms of the Senior Debt Securities in respect of which this
Prospectus is being delivered (the "Offered Securities"), any modifications of
or additions to the general terms of the Senior Debt Securities as described
herein that may be applicable and any applicable federal income tax
considerations will be described in an accompanying supplement to this
Prospectus (each, a "Prospectus Supplement") relating to the Offered
Securities. Accordingly, for a description of the terms of the Offered
Securities, reference must be made both to the Prospectus Supplement relating
thereto and the description of Senior Debt Securities set forth in this
Prospectus.
GENERAL
The Senior Debt Securities will be direct, unsecured obligations of the
Company. The indebtedness represented by the Senior Debt Securities will rank
senior to all indebtedness of the Company that by its terms is subordinated in
right of payment. The Senior Debt Securities may be issued in one or more
series.
The Senior Indenture provides that the aggregate principal amount of Senior
Debt Securities that may be issued thereunder is unlimited. The terms of each
series of Senior Debt Securities will be established pursuant to a resolution
of the Board of Directors of the Company and set forth or determined in the
manner provided in an Officer's Certificate or by a supplemental indenture.
The Company conducts certain of its operations through its Subsidiaries, and
therefore the Company is dependent on the cash flow of its Subsidiaries to meet
its debt obligations, including its obligations under the Senior Debt
Securities. In addition, the rights of the Company and its creditors, including
the Holders of the Senior Debt Securities, to participate in the assets of any
Subsidiary upon the latter's liquidation or reorganization will be subject to
the prior claims of the Subsidiary's creditors except to the extent that the
Company may itself be a creditor with recognized claims against the Subsidiary.
The accompanying Prospectus Supplement will set forth the terms of the
Offered Securities, which may include the following:
(1) The title of the Offered Securities.
(2) The limit, if any, upon the aggregate principal amount of the Offered
Securities.
(3) The date or dates on which or periods during which the Offered
Securities may be issued, and the date or dates, or the method by
which such date or dates will be determined, on which the principal of
(and premium, if any, on) the Offered Securities are, or may be
payable.
(4) The rate or rates at which the Offered Securities will bear interest,
if any, or the method by which such rate or rates shall be determined,
the date or dates from which such interest, if any, shall accrue or
the method by which such date or dates shall be determined, the
interest payment dates on which such interest will be payable and, if
the Offered Securities are Registered Securities, the
4
<PAGE>
regular record dates, if any, for the interest payable on such
interest payment dates, and, if the Offered Securities are floating
rate securities, the notice, if any, to Holders regarding the
determination of interest and the manner of giving such notice and any
conditions or contingencies as to the payment of interest in cash or
otherwise, if any.
(5) The place or places where the principal of (and premium, if any) and
interest on the Offered Securities shall be payable.
(6) The obligation, if any, of the Company to redeem, repay, purchase or
offer to purchase the Offered Securities pursuant to any mandatory
redemption, sinking fund or analogous provisions or at the option, of
the Holder thereof and the period or periods within which, or the
dates on which, the prices at which and the terms and conditions upon
which the Offered Securities shall be redeemed, repaid, purchased or
offered to be purchased, in whole or in part, pursuant to such
obligation.
(7) The right, if any, of the Company to redeem the Offered Securities at
its option and the period or periods within which, or the date or
dates on which, the price or prices at which, and the terms and
conditions upon which Offered Securities may be redeemed, if any, in
whole or in part, at the option of the Company or otherwise.
(8) If other than denominations of $1,000 and any integral multiple
thereof, the denominations in which any Registered Securities of the
series shall be issuable, and if other than the denomination of
$5,000, the denomination or denominations in which any Bearer
Securities of the series shall be issuable.
(9) Whether the Offered Securities are to be issued as original issue
discount securities ("Discount Securities") and the amount of discount
at which such Offered Securities may be issued and, if other than the
principal amount thereof, the portion of the principal amount of
Offered Securities which shall be payable upon declaration of
acceleration of the Maturity thereof upon an Event of Default.
(10) Provisions, if any, for the defeasance of the Offered Securities or
for the discharge of certain of the Company's obligations with respect
to the Offered Securities.
(11) Whether the Offered Securities are to be issued as Registered
Securities or Bearer Securities or both, and, if Bearer Securities are
issued, whether any interest coupons appertaining thereto ("Coupons")
will be attached thereto, whether such Bearer Securities may be
exchanged for Registered Securities and the circumstances under which,
and the place or places at which, any such exchanges, if permitted,
may be made.
(12) Whether provisions for payment of additional amounts or tax
redemptions shall apply and, if such provisions shall apply, such
provisions; and, if any of the Offered Securities are to be issued as
Bearer Securities, the applicable procedures and certificates relating
to the exchange of temporary Global Securities for definitive Bearer
Securities.
(13) If other than U.S. dollars, the currency, currencies or currency units
(the term "currency" as used herein will include currency units) in
which the Offered Securities shall be denominated or in which payment
of the principal of (and premium, if any) and interest on the Offered
Securities may be made, and particular provisions applicable thereto
and, if applicable, the amount of Offered Securities which entities
the Holder or its proxy to one vote for purposes of the Senior
Indenture.
(14) If the principal of (and premium, if any) or interest on the Offered
Securities are to be payable, at the election of the Company or a
Holder thereof, in a currency other than that in which the Offered
Securities are denominated or payable without such election, in
addition to or in lieu of the applicable provisions of the Senior
Indenture, the period or periods within which and the terms and
conditions upon which, such election may be made and the time and the
manner of determining the exchange rate or rates between the currency
or currencies in which the Offered Securities are denominated or
payable without such election and the currency or currencies in which
the Offered Securities are to be paid if such election is made.
5
<PAGE>
(15) The date as of which any Offered Securities shall be dated.
(16) If the amount of payments of principal of (and premium, if any) or
interest on the Offered Securities may be determined with reference to
an index, including, but not limited to, an index based on a currency
or currencies other than that in which the Offered Securities are
denominated or payable, or any other type of index, the manner in
which such amounts shall be determined.
(17) If the Offered Securities are denominated or payable in a foreign
currency, any other terms concerning the payment of principal of (and
premium, if any) or any interest on the Offered Securities (including
the currency or currencies of payment thereof); and whether the
judgment currency provisions of the Senior Indenture are established
as terms of the Offered Securities.
(18) The designation of the original currency determination agent, if any.
(19) The applicable overdue interest rate, if any.
(20) If the Offered Securities do not bear interest, applicable dates for
determining record holders of Offered Securities.
(21) Any deletions from, modifications of or additions to any Events of
Default or covenants provided for in the Senior Indenture with respect
to the Offered Securities, whether or not such Events of Default or
covenants are consistent with the Events of Default or covenants set
forth in the Senior Indenture.
(22) If any of the Offered Securities are to be issued as Bearer
Securities, (x) whether interest in respect of any portion of a
temporary Offered Security in global form (representing all of the
Outstanding Bearer Securities of the series) payable in respect of any
interest payment date prior to the exchange of such temporary Offered
Security for definitive Offered Securities shall be paid to any
clearing organization with respect to the portion of such temporary
Offered Security held for its account and, in such event, the terms
and conditions (including any certification requirements) upon which
any such interest payment received by a clearing organization will be
credited to the persons entitled to interest payable on such interest
payment date, (y) the terms upon which interests in such temporary
Offered Security in global form may be exchanged for interests in a
permanent Global Security or for definitive Offered Securities and the
terms upon which interests in a permanent Global Security, if any, may
be exchanged for definitive Offered Securities and (z) the cities in
which the Authorized Newspapers designated for the purposes of giving
notices to Holders are published.
(23) Whether the Offered Securities shall be issued in whole or in part in
the form of one or more Global Securities and, in such case, the
depositary or any common depositary for such Global Securities; and if
the Offered Securities are issuable only as Registered Securities, the
manner in which and the circumstances under which Global Securities
representing Offered Securities may be exchanged for Registered
Securities in definitive form.
(24) The designation, if any, of any depositaries, trustees (other than the
Trustee), paying agents, authenticating agents, security registrars
(other than the Trustee) or other agents with respect to the Offered
Securities.
(25) If the Offered Securities are to be issuable in definitive form only
upon receipt of certain certificates or other documents or upon
satisfaction of certain conditions, the form and terms of such
certificates, documents or conditions.
(26) If any of the Offered Securities are to be issued as Registered
Securities, the person to whom any interest on any Registered Security
shall be payable, if other than the person in whose name that
Registered Security is registered at the close of business on the
Regular Record Date for such interest, and if any of the Offered
Securities are to be issued as Bearer Securities, the manner in which,
or the person to whom, any interest on any Bearer Security shall be
payable, if otherwise than upon the presentation and surrender of the
Coupons, if any, appertaining thereto as they
6
<PAGE>
severally mature, the extent to which, or the manner in which, any
interest payable on an Offered Security in temporary global form on an
interest payment date will be paid and the extent to which, or the
manner in which, any interest payable on an Offered Security in
permanent global form on an interest payment date will be paid.
(27) The provisions, if any, granting special rights to the Holders of
Offered Securities upon the occurrence of such events as may be
specified.
(28) Any other terms or conditions relating to the Offered Securities not
specified in the Senior Indenture (which other terms shall not be
inconsistent with the requirements of the TIA and the provisions of
the Senior Indenture).
(29) The terms of any right to convert or exchange Senior Debt Securities
of the series, either at the option of the Holder thereof or the
Company, into or for shares of Common Stock of the Company or other
securities or property, including without limitation the period or
periods within which and the price or prices (including adjustments
thereto) at which any Senior Debt Securities of the series shall be
converted or exchanged, in whole or in part.
In the event that Discount Securities are issued, the federal income tax
consequences and other special considerations applicable to such Discount
Securities will be described in the Prospectus Supplement relating thereto.
The general provisions of the Senior Indenture do not contain any provisions
that would afford holders of Senior Debt Securities protection in the event of
a highly leveraged transaction, reorganization, restructuring, merger or
similar transaction involving the Company or its Subsidiaries that may
adversely affect holders of the Senior Debt Securities or, except as described
in "Certain Covenants of Senior Debt Securities," that would limit the ability
of the Company or its Subsidiaries to incur indebtedness. Reference is made to
the Prospectus Supplement relating to the Offered Securities for information
with respect to any deletions from, modifications of or additions to, if any,
the Events of Default or covenants of the Company described below that are
applicable to the Offered Securities.
All of the Senior Debt Securities of a series need not be issued at the same
time, and may vary as to interest rate, maturity and other provisions and
unless otherwise provided, a series may be reopened for issuance of additional
Senior Debt Securities of such series.
If applicable, the Company will comply with the requirements of Rule 14e-1
under the Exchange Act and any other applicable securities laws or regulations
in connection with any repurchase of the Senior Debt Securities of a series at
the option of the Holder.
DENOMINATIONS, REGISTRATION AND TRANSFER
Unless specified in the Prospectus Supplement, with respect to any series of
Senior Debt Securities, any Registered Securities of a series, other than
Registered Securities issued in global form (which may be of any
denomination), shall be issuable in denominations of $1,000 and any integral
multiple thereof and any Bearer Securities of a series, other than Bearer
Securities issued in global form (which may be of any denomination), shall be
issuable in denominations of $5,000. Unless specified in the Prospectus
Supplement, the Senior Debt Securities of any series shall be payable in U.S.
dollars. The Senior Indenture also provides that Senior Debt Securities of a
series may be issuable in global form. See " -- Book Entry Senior Debt
Securities." Unless otherwise indicated in the Prospectus Supplement, Bearer
Securities (other than in global form) will have Coupons attached.
Registered Securities of any series will be exchangeable for other
Registered Securities of the same series of like aggregate principal amount
and of like Stated Maturity and with like terms and conditions. If so
specified in the Prospectus Supplement, at the option of the Holder thereof,
to the extent permitted by law, any Bearer Security of any series may be
exchanged for a Registered Security of such series of like aggregate
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<PAGE>
principal amount and of a like Stated Maturity and with like terms and
conditions, upon surrender of such Bearer Security at the corporate trust
office of the Trustee or at any other office or agency of the Company
designated for the purpose of making any such exchanges. Subject to certain
exceptions, any Bearer Security issued with Coupons surrendered for exchange
must be surrendered with all unmatured Coupons and any matured Coupons in
default attached thereto.
Notwithstanding the foregoing, the exchange of Bearer Securities for
Registered Securities will be subject to the provisions of United States income
tax laws and regulations applicable to Senior Debt Securities in effect at the
time of such exchange.
Except as otherwise specified in the Prospectus Supplement, in no event may
Registered Securities, including Registered Securities received in exchange for
Bearer Securities, be exchanged for Bearer Securities.
Upon surrender for registration of transfer of any Registered Security of any
series at the office or agency of the Company maintained for such purpose, the
Company shall deliver, in the name of the designated transferred, one or more
new Registered Securities of the same series of like aggregate principal amount
of such denominations as are authorized for Registered Securities of such
series and of a like Stated Maturity and with like terms and conditions. No
service charge will be made for any registration of transfer or exchange of
Senior Debt Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith.
The Company shall not be required (i) to register the transfer of or exchange
Senior Debt Securities of any series during a period beginning at the opening
of business 15 days before the day of the transmission of a notice of
redemption of Senior Debt Securities of such series selected for redemption and
ending at the close of business on the day of such transmission, or (ii) to
register the transfer of or exchange any Senior Debt Security so selected for
redemption in whole or in part, except the unredeemed portion of any Senior
Debt Security being redeemed in part.
CONVERSION OR EXCHANGE RIGHTS
The terms on which Senior Debt Securities of any series are convertible into
or exchangeable for Common Stock or other securities of the Company will be set
forth in the Prospectus Supplement relating thereto. Such terms will include
provisions as to whether conversion or exchange is mandatory, at the option of
the Holder or at the option of the Company, and may include provisions pursuant
to which the number of shares of Common Stock or other securities of the
Company to be received by the Holders of Senior Debt Securities would be
subject to adjustment.
CERTAIN COVENANTS OF SENIOR DEBT SECURITIES
The Senior Indenture contains, among other things, the following covenants:
Limitation on Liens. The Company will not, and will not permit any Restricted
Subsidiary to, create, incur, assume or suffer to exist any Debt secured by a
Lien on any Principal Property, any shares of Capital Stock of any Restricted
Subsidiary or any Debt of any Restricted Subsidiary without making effective
provision for all outstanding Senior Debt Securities and all other amounts due
under the Senior Indenture to be directly secured equally and ratably with (or,
if such Debt so secured is subordinate in right of payment to the Senior Debt
Securities, prior to) the obligation or liability secured by such Lien;
provided that the foregoing restriction shall not apply to:
(i) any Lien upon any Principal Property acquired, constructed or
improved after the date of the Senior Indenture; provided that (x)
such Lien is created solely for the purpose of securing Debt
incurred to finance the cost (including the cost of construction or
improvement) of the item of property subject thereto and such Lien
is created at the time of or within 270 days
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after the later of the acquisition, the completion of construction
or the commencement of full operation of such property, (y) the
principal amount of the Debt secured by such Lien does not exceed
100% of such cost and (z) any such Lien shall not extend to or
cover any property other than such item of property and any
improvements on such item;
(ii) Liens securing Debt of a Person existing at the time such Person
becomes or is merged into a Restricted Subsidiary and not incurred
in connection with, or in contemplation of, such Person becoming or
being merged into a Restricted Subsidiary; provided that such Liens
do not extend to or cover any property or assets other than those
securing such Debt prior to such Person becoming or being merged
into a Restricted Subsidiary;
(iii) Liens on property existing at the time of acquisition thereof,
whether or not assumed by the Company or a Restricted Subsidiary;
(iv) Liens with respect to the assets of a Restricted Subsidiary granted
by such Restricted Subsidiary to the Company or a Restricted
Subsidiary to secure Debt owing to the Company or such Restricted
Subsidiary;
(v) Liens existing on the date of the Senior Indenture;
(vi) any Lien in favor of the United States or any state or territory
thereof or any other country, or any agency, instrumentality or
political subdivision of any of the foregoing, to secure partial,
progress, advance or other payments or performance pursuant to the
provisions of any contract or statute, or any Liens securing
pollution control, industrial revenue, or similar revenue bonds;
(vii) Liens securing Debt incurred in connection with taxes not yet due
or which are being contested in good faith by appropriate
proceedings;
(viii) Liens incurred or created in the ordinary course of business not
arising in connection with Debt that does not in the aggregate
materially impair the use or value of the properties or assets of
the Company and its Subsidiaries taken as a whole;
(ix) Liens arising out of any legal proceeding or final judgement which
is being contested in good faith, provided enforcement of any such
Lien has been stayed;
(x) any extension, renewal, substitution or replacement (or successive
extensions, renewals, substitutions or replacements), in whole or
in part, of any Lien referred to in the foregoing clauses (i)
through (ix), inclusive; provided that (a) the principal amount of
the Debt secured by such Lien shall not exceed the principal amount
of Debt secured outstanding immediately prior to such extension,
renewal, substitution or replacement and (b) such extension,
renewal, substitution or replacement Lien shall be limited to all
or part of the same property that secured the Lien so extended,
renewed, substituted or replaced; and
(xi) any Lien not permitted by the foregoing clauses (i) through (x)
inclusive; provided that after giving effect thereto, the sum of,
without duplication, (i) the aggregate outstanding principal amount
of Debt secured by such Liens otherwise prohibited by the Senior
Indenture and (ii) the aggregate amount of all Attributable Debt
with respect to outstanding Sale and Leaseback Transactions
otherwise prohibited by the Senior Indenture does not exceed 15% of
Consolidated Net Tangible Assets.
Limitation on Sale and Leaseback Transactions. The Company will not, and
will not permit any Restricted Subsidiary to, enter into any Sale and
Leaseback Transaction on any Principal Property unless (i) the Company or such
Restricted Subsidiary could incur a Lien on such Principal Property securing
Debt in an amount equal to the Attributable Debt with respect to the Sale and
Leaseback Transaction under the covenant described in "-- Limitation on Liens"
above without equally and ratably securing the Senior Debt Securities,
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<PAGE>
(ii) such Sale and Leaseback Transactions are between or among the Company and
any of its Restricted Subsidiaries or between or among Restricted Subsidiaries,
(iii) the lease is for a period not exceeding three years and the Company or
the Restricted Subsidiary that is a party to such lease intends that its use of
such Principal Property will be discontinued on or before the expiration of
such period or (iv) the Company applies, or causes the Restricted Subsidiary to
apply, an amount equal to the fair value (as determined by the Board of
Directors), of the Principal Property sold pursuant to such Sale and Leaseback
Transaction to (A) the retirement, within 180 days after the effective date of
any such Sale and Leaseback Transaction, of Funded Debt of the Company or of
the Restricted Subsidiary, or (B) the purchase of other property that will
constitute Principal Property.
Limitation on Funded Debt of Restricted Subsidiaries. The Company will not
permit any Restricted Subsidiary to (a) create, incur, assume or suffer to
exist any Funded Debt other than (i) Funded Debt secured by a Lien on Principal
Property which is permitted under the provision described in "-- Limitations on
Liens" above, (ii) Funded Debt owed to the Company or any Restricted
Subsidiary, (iii) Funded Debt of a corporation which is merged with or into the
Company or a Restricted Subsidiary; provided such Funded Debt was not incurred
in connection with, or in contemplation of such corporation being merged, (iv)
Funded Debt in existence on the date of the Senior Indenture, (v) Funded Debt
created in connection with the issuance of tax exempt governmental obligations
supported by payments to be made by the Company or a Restricted Subsidiary or
(vi) renewals, extensions or replacements of the foregoing; or (b) guarantee,
directly or indirectly through any arrangement that is substantially the
equivalent of a guarantee, the payment of any Funded Debt except for (i)
guarantees existing on the date of the Senior Indenture, (ii) guarantees which,
on the date of the Senior Indenture, a Restricted Subsidiary is obligated to
give, (iii) guarantees of Funded Debt secured by a mortgage, pledge or lien
which is permitted to such Restricted Subsidiary under the provisions described
in "-- Limitation on Liens" above, (iv) renewals, extensions or replacements of
the foregoing or (v) guarantees of Funded Debt permitted under clause (a) of
this paragraph. Notwithstanding the foregoing, any Restricted Subsidiary may
create, incur, assume or guarantee Funded Debt in addition to that permitted in
this paragraph, and renew, extend, substitute or replace such Funded Debt;
provided that at the time of such creation, incurrence, assumption, guarantee,
renewal, extension, substitution or replacement, and after giving effect
thereto, the aggregate amount of all such Funded Debt of such Restricted
Subsidiaries and all such Funded Debt directly or indirectly guaranteed by such
Restricted Subsidiaries does not exceed the greater of (i) $20,000,000 or (ii)
15% of Consolidated Net Worth.
EVENTS OF DEFAULT
The Senior Indenture provides that upon the happening of any Event of Default
(as defined in the Senior Indenture) with respect to any series of Senior Debt
Securities specified therein (unless it is inapplicable to such series of
Senior Debt Securities or it is specifically deleted in a supplemental
indenture or Board Resolution under which such series of Senior Debt Securities
is issued or has been modified in any such supplemental indenture), including
(i) failure to pay interest when due on the Senior Debt Securities or any
payment with respect to the Coupons, if any, of such series outstanding
thereunder, continued for 30 days; (ii) failure to pay principal or premium, if
any, when due (whether at maturity, declaration or otherwise) on the Senior
Debt Securities of such series outstanding thereunder, (iii) failure to observe
or perform any covenant of the Company in the Senior Indenture or the Senior
Debt Securities of such series (other than a covenant included in the Senior
Indenture or the Senior Debt Securities solely for the benefit of a series of
Senior Debt Securities other than such series), continued for 60 days after
written notice from the Trustee or the Holders of 25% or more in aggregate
principal amount, of Senior Debt Securities of such series outstanding
thereunder; (iv) certain events of bankruptcy, insolvency or reorganization;
and (v) any other Event of Default as may be specified for such series, the
Trustee or the Holders of 25% or more in aggregate principal amount of Senior
Debt Securities of such series outstanding thereunder may declare the principal
amount of all Senior Debt Securities of such series to be due and payable
immediately, but if all defaults with respect to the Senior Debt Securities of
such series (other than non-payment of accelerated principal) are cured and
there has been no sale of property under any judgment or decree for the payment
of moneys due which shall have been obtained or
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entered, the Holders of a majority in aggregate principal amount of the Senior
Debt Securities of such series outstanding thereunder may waive the default and
rescind the declaration and its consequences.
MERGER OR CONSOLIDATION
The Senior Indenture provides that the Company may not consolidate with or
merge into any other corporation or sell or convey its properties and assets
substantially as an entirety to any person, unless (1) the corporation formed
by such consolidation or into which the Company is merged or the person which
acquires, by sale or conveyance, the properties and assets of the Company
substantially as an entirety (the "successor corporation") is a corporation
organized and existing under the laws of the United States or any state or the
District of Columbia and expressly assumes by a supplemental indenture the due
and punctual payment of the principal of (and premium, if any) and interest on
all the Outstanding Senior Debt Securities and Coupons, if any, issued under
the Senior Indenture and the performance of every covenant in the Senior
Indenture on the part of the Company to be performed or observed; (2)
immediately after giving effect to such transaction, no Event of Default under
the Senior Indenture, and no event which, after notice or lapse of time, or
both, would become such an Event of Default, shall have occurred and be
continuing; and (3) the Company has delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that such consolidation,
merger, sale or conveyance and such supplemental indenture comply with the
Senior Indenture provisions and that all conditions precedent therein provided
for relating to such transaction have been complied with.
MODIFICATION OR WAIVER
Without prior notice to or consent of any Holders, the Company and the
Trustee, at any time and from time to time, may modify the Senior Indenture for
any of the following purposes: (1) to evidence the succession of another
corporation or other entity to the rights of the Company and the assumption by
such successor of the covenants and obligations of the Company in the Senior
Indenture and in the Senior Debt Securities and Coupons, if any, issued
thereunder, (2) to add to the covenants of the Company for the benefit of the
Holders of all or any series of Senior Debt Securities and the Coupons, if any,
appertaining thereto (and if such covenants are to be for the benefit of less
than all series, stating that such covenants are expressly being included
solely for the benefit of such series), or to surrender any right or power
conferred in the Senior Indenture upon the Company; (3) to add any additional
Events of Default (and if such Events of Default are to be applicable to less
than all series, stating that such Events of Default are expressly being
included solely to be applicable to such series); (4) to add or change any of
the provisions of the Senior Indenture to such extent as shall be necessary to
permit or facilitate the issuance thereunder of Senior Debt Securities of any
series in bearer form, registrable or not registrable, and with or without
Coupons, to permit Bearer Securities to be issued in exchange for Registered
Securities, to permit Bearer Securities to be issued in exchange for Bearer
Securities of other authorized denominations or to permit the issuance of
Senior Debt Securities of any series in uncertificated form; provided that any
such action shall not adversely affect the interests of the Holders of Senior
Debt Securities of any series or any related Coupons in any material respect;
(5) to change or eliminate any of the provisions of the Senior Indenture;
provided that any such change or elimination will become effective only when
there is no Outstanding Senior Debt Security issued thereunder or Coupon of any
series created prior to such modification which is entitled to the benefit of
such provision and as to which such modification would apply; (6) to secure the
Senior Debt Securities issued thereunder or to provide that any of the
Company's obligations under the Senior Debt Securities or the Senior Indenture
shall be guaranteed; (7) to supplement any of the provisions of the Senior
Indenture to such extent as is necessary to permit or facilitate the defeasance
and discharge of any series of Senior Debt Securities; provided that any such
action will not adversely affect the interests of the Holders of Senior Debt
Securities of such series or any other series of Senior Debt Securities issued
under the Senior Indenture or any related Coupons in any material respect;
(8) to establish the form or terms of Senior Debt Securities and Coupons, if
any, as permitted by the Senior Indenture; (9) to evidence and provide for the
acceptance of appointment thereunder by a successor Trustee with respect to one
or more series of Senior Debt Securities and to add to or change any of the
provisions of the Senior Indenture as is necessary to provide for or facilitate
the administration of the trusts thereunder by
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more than one Trustee; (10) to cure any ambiguity, to correct or supplement any
provision in the Senior Indenture which may be defective or inconsistent with
any other provision therein, to eliminate any conflict between the terms of the
Senior Indenture and the Senior Debt Securities issued thereunder and the TIA
or to make any other provisions with respect to matters or questions arising
under the Senior Indenture which will not be inconsistent with any provision of
the Senior Indenture; provided such other provisions shall not adversely affect
the interests of the Holders of Outstanding Senior Debt Securities or Coupons,
if any, of any series created thereunder prior to such modification in any
material respect; or (11) to change or modify any of the provisions of the
Senior Indenture, provided that any such changes or modifications shall not
adversely affect the interests of the Holders of Outstanding Senior Debt
Securities or Coupons, if any, of any series created thereunder prior to such
modification in any material respect.
With the written consent of the Holders of not less than a majority in
principal amount of the Outstanding Senior Debt Securities of each series
affected by such modification voting separately, the Company and the Trustee
may modify the Senior Indenture for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Senior
Indenture or of modifying in any manner the rights of the Holders of Senior
Debt Securities and Coupons, if any, under the Senior Indenture; provided,
however, that no such modification may, without the consent of the Holder of
each Outstanding Senior Debt Security of each such series affected thereby, (1)
change the Stated Maturity of the principal of, or any installment of interest
on, any Senior Debt Security, or reduce the principal amount thereof or the
interest thereon or any premium payable upon redemption thereof, or change the
Stated Maturity of or reduce the amount of any payment to be made with respect
to any Coupon, or change the currency or currencies in which the principal of
(and premium, if any) or interest on such Senior Debt Security is denominated
or payable, or reduce the amount of the principal of a Discount Security that
would be due and payable upon a declaration of acceleration of the Maturity
thereof, or adversely affect the right of repayment or repurchase, if any, at
the option of the Holder, or reduce the amount of, or postpone the date fixed
for, any payment under any sinking fund or analogous provisions for any Senior
Debt Security, or impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity thereof (or, in the case of redemption,
on or after the Redemption Date), or limit the obligation of the Company to
maintain a paying agency outside the United States for payments on Bearer
Securities; (2) reduce the percentage in principal amount of the Outstanding
Senior Debt Securities of any series, the consent of whose Holders is required
for any supplemental indenture, or the consent of whose Holders is required for
any waiver of compliance with certain provisions of the Senior Indenture or
certain defaults or Events of Default thereunder and their consequences
provided for in the Senior Indenture; (3) modify any of the provisions of the
Senior Indenture which provide for waivers by the Holders of Senior Debt
Securities of past defaults or waivers by the Holder of Senior Debt Securities
of compliance by the Company with any covenants, except to increase any such
percentage required to permit such waivers; or (4) modify any of the provisions
of the Senior Indenture which provide that certain other provisions of the
Senior Indenture cannot be modified without the consent of the Holder of each
Outstanding Senior Debt Security of each series affected thereby, except to
require that certain other provisions of the Senior Indenture cannot be
modified without the consent of the Holder of each Outstanding Senior Debt
Security of each series affected thereby.
A modification which changes or eliminates any covenant or other provision of
the Senior Indenture with respect to one or more particular series of Senior
Debt Securities and Coupons, if any, or which modifies the rights of the
Holders of Senior Debt Securities and Coupons of such series with respect to
such covenant or other provision, shall be deemed not to affect the rights
under the Senior Indenture of the Holders of Senior Debt Securities and
Coupons, if any, of any other series.
The Holders of not less than a majority in principal amount of the
Outstanding Senior Debt Securities of any series may on behalf of the Holders
of all the Senior Debt Securities of any such series waive, by notice to the
Trustee and the Company, any past default or Event of Default under the Senior
Indenture with respect to such series and its consequences, except a default
(1) in the payment of the principal of (or premium, if any) or interest on any
Senior Debt Security of such series, or in the payment of any sinking fund
installment or
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analogous obligation with respect to the Senior Debt Securities of such series,
or (2) in respect of a covenant or provision hereof which pursuant to the
second paragraph under "Modification and Waiver" cannot be modified or amended
without the consent of the Holder of each Outstanding Senior Debt Security, of
such series affected. Upon any such waiver, such default will cease to exist,
and any Event of Default arising therefrom will be deemed to have been cured,
for every purpose of the Senior Debt Securities of such series under the Senior
Indenture, but no such waiver will extend to any subsequent or other default or
Event of Default or impair any right consequent thereon.
The Company may omit in any particular instance to comply with certain
covenants in the Senior Indenture (including, if so specified in the Prospectus
Supplement, any covenant not set forth in the Senior Indenture but specified in
the Prospectus Supplement to be applicable to the Senior Debt Securities of any
series issued thereunder, except as otherwise specified in the Prospectus
Supplement, and including the covenants relating to the maintenance by the
Company of its existence, rights and franchises, the limitation on liens, the
limitation on sale and leaseback transactions and the limitation on funded debt
of certain subsidiaries) if before the time for such compliance the Holders of
at least a majority in principal amount of the Outstanding Senior Debt
Securities of such series either waive such compliance in such instance or
generally waive compliance with such provisions, but no such waiver may extend
to or affect any term, provision or condition except to the extent expressly so
waived, and, until such waiver becomes effective, the obligations of the
Company and the duties of the Trustee in respect of any such provision will
remain in full force and effect.
DISCHARGE, LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Senior Indenture with respect to the Senior Debt Securities of any series
may be discharged, subject to certain terms and conditions, when (1) either (A)
all Senior Debt Securities and the Coupons, if any, of such series have been
delivered to the Trustee for cancellation, or (B) all Senior Debt Securities
and the Coupons, if any, of such series not theretofore delivered to the
Trustee for cancellation (i) have become due and payable, (ii) will become due
and payable at their Stated Maturity within one year, or (iii) are to be called
for redemption within one year under arrangements satisfactory to the Trustee
for the giving of notice by the Trustee and the Company, in the case of (i),
(ii) or (iii) of subclause B, has irrevocably deposited or caused to be
deposited with the Trustee as trust funds in trust for such purpose an amount
in the currency in which such Senior Debt Securities for principal (and
premium, if any) and interest to the date of such deposit (in the case of
Senior Debt Securities which have become due and payable) or to the Stated
Maturity or Redemption Date, as the case may be; provided however, in the event
a petition for relief under the applicable federal or state bankruptcy,
insolvency or other similar law is filed with respect to the Company within 91
days after the deposit and the Trustee is required to return the deposited
money to the Company, the obligations of the Company under the Senior Indenture
with respect to such Senior Debt Securities will not be deemed terminated or
discharged; (2) the Company has paid or caused to be paid all other sums
payable under the Senior Indenture by the Company; (3) the Company has
delivered to the Trustee an officers' certificate and an opinion of counsel
each stating that all conditions precedent therein provided relating to the
satisfaction and discharge of the Senior Indenture with respect to such series
have been complied with; and (4) the Company has delivered to the Trustee an
opinion of counsel or a ruling of the Internal Revenue Service to the effect
that such deposit and discharge will not cause the Holders of the Senior Debt
Securities of such series to recognize income, gain or loss for federal income
tax purposes.
If provision is made for the defeasance of Senior Debt Securities of a
series, and if the Senior Debt Securities of such series are Registered
Securities and denominated and payable only in U.S. dollars, then the
provisions of the Senior Indenture relating to defeasance shall be applicable
except as otherwise specified in the Prospectus Supplement for Senior Debt
Securities of such series. Defeasance provisions, if any, for Senior Debt
Securities denominated in a foreign currency or currencies or for Bearer
Securities may be specified in the Prospectus Supplement.
At the Company's option, either (a) the Company shall be deemed to have been
Discharged (as defined below) from its obligations with respect to Senior Debt
Securities of any series ("legal defeasance option") or
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(b) the Company shall cease to be under any obligation to comply with certain
provisions of the Senior Indenture relating to mergers and consolidations of
the Company, the provisions relating to limitations on liens, limitations on
sale and leaseback transactions and limitations on funded debt of certain
subsidiaries (and, if so specified, any other obligation of the Company or
restrictive covenant added for the benefit of such series ("covenant defeasance
option")) at any time after the applicable conditions set forth below have been
satisfied: (1) the Company shall have deposited or caused to be deposited
irrevocably with the Trustee as trust funds in trust, specifically pledged as
security for, and dedicated solely to, the benefit of the Holders of the Senior
Debt Securities of such series, (i) money in an amount, or (ii) U.S. Government
Obligations which through the payment of interest and principal in respect
thereof in accordance with their terms will provide, not later than one day
before the due date of any payment, money in an amount, or (iii) a combination
of (i) and (ii), sufficient, in the opinion (with respect to (ii) and (iii)) of
a nationally recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee, to pay and discharge
each installment of principal (including any mandatory sinking fund payments)
of and premium, if any, and interest on, the Outstanding Senior Debt Securities
of such series on the dates such installments of interest or principal and
premium are due; (2) such deposit shall not cause the Trustee with respect to
the Senior Debt Securities of that series to have a conflicting interest with
respect to the Senior Debt Securities of any series; (3) such deposit will not
result in a breach of violation of, or constitute a default under, the Senior
Indenture or any other agreement or instrument to which the Company is a party
or by which it is bound; (4) if the Senior Debt Securities of such series are
then listed on any national securities exchange, the Company shall have
delivered to the Trustee an opinion of counsel or a letter or other document
from such exchange to the effect that the Company's exercise of its legal
defeasance option or the covenant defeasance option, as the case may be, would
not cause such Senior Debt Securities to be delisted; (5) no Event of Default
or event (including such deposit) which, with notice or lapse of time or both,
would become an Event of Default with respect to the Senior Debt Securities of
such series shall have occurred and be continuing on the date of such deposit
and, with respect to the legal defeasance option only, no Event of Default
under the provisions of the Senior Indenture relating to certain events of
bankruptcy or insolvency or event which with the giving of notice or lapse of
time, or both, would become an Event of Default under such bankruptcy or
insolvency provisions shall have occurred and be continuing on the 91st day
after such date; and (6) certain other opinions, officers' certificates and
other documents specified in the Senior Indenture, including an opinion of
counsel or a ruling of the Internal Revenue Service to the effect that such
deposit, defeasance or Discharge will not cause the Holders of the Senior Debt
Securities of such series to recognize income, gain or loss for federal income
tax purposes. Notwithstanding the foregoing, if the Company exercises its
covenant defeasance option and an Event of Default under the provisions of the
Senior Indenture relating to certain events of bankruptcy or insolvency or
event which with the giving of notice or lapse of time, or both, would become
an Event of Default under such bankruptcy or insolvency provisions shall have
occurred and be continuing on the 91st day after the date of such deposit, the
obligations of the Company referred to under the definition of covenant
defeasance option with respect to such Senior Debt Securities shall be
reinstated in full.
PAYMENT AND PAYING AGENTS
If Senior Debt Securities of a series are issuable only as Registered
Securities, the Company will maintain in each Place of Payment for such series
an office or agency where Senior Debt Securities of that series may be
presented or surrendered for payment, where Senior Debt Securities of that
series may be surrendered for registration of transfer or exchange and where
notices and demands to or upon the Company in respect of the Senior Debt
Securities of that series and the Senior Indenture may be served.
If Senior Debt Securities of a series are issuable as Bearer Securities, the
Company will maintain or cause to be maintained (A) in the Borough of
Manhattan, The City and State of New York, an office or agency where any
Registered Securities of that series may be presented or surrendered for
payment, where any Registered Securities of that series may be surrendered for
registration of transfer, where Senior Debt Securities of that series may be
surrendered for exchange or redemption and where notices and demands to or upon
the Company in respect of the Senior Debt Securities of that series and the
Senior Indenture may be served and where Bearer
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Securities of that series and related Coupons may be presented or surrendered
for payment in the circumstances described in the following paragraph (and not
otherwise), (B) subject to any laws or registration applicable thereto, in a
Place of Payment for that series which is located outside the United States, an
office or agency where Senior Debt Securities of that series and related
Coupons may be presented and surrendered for payment (including payment of any
additional amounts payable on Senior Debt Securities of that series, if so
provided in such series); provided however, that if the Senior Debt Securities
of that series are listed on The Stock Exchange of the United Kingdom and the
Republic of Ireland, the Luxembourg Stock Exchange or any other stock exchange
located outside the United States and such stock exchange shall so require, the
Company will maintain a Paying Agent for the Senior Debt Securities of that
series in London, Luxembourg or any other required city located outside the
United States, as the case may be, so long as the Senior Debt Securities of
that series are listed on such exchange, and (C) subject to any laws or
regulations applicable thereto, in a Place of Payment for that series located
outside the United States, an office or agency where any Registered Securities
of that series may be surrendered for registration of transfer, where Senior
Debt Securities of that series may be surrendered for exchange or redemption
and where notices and demands to or upon the Company in respect of the Senior
Debt Securities of that series and the Senior Indenture may be served. The
Company will give prompt written notice to the Trustee of the locations, and
any change in the locations, of such offices or agencies. If at any time the
Company shall fail to maintain any such required office or agency or shall fail
to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the corporate trust
office of the Trustee, except that Bearer Securities of that series and the
related Coupons may be presented and surrendered for payment at the offices
specified in the applicable Senior Debt Security and the Company has appointed
the Trustee (or in the case of Bearer Securities may appoint such other agent
as may be specified in the applicable Prospectus Supplement) as its agent to
receive all presentations, surrenders, notices and demands.
No payment of principal, premium or interest on Bearer Securities shall be
made at any office or agency of the Company in the United States or by check
mailed to any address in the United States or by transfer to an account
maintained with a bank located in the United States; provided however, that, if
the Senior Debt Securities of a series are denominated and payable in U.S.
dollars, payment of principal of and any premium and interest on Senior Debt
Securities of such series, if specified in the applicable Prospectus
Supplement, shall be made at the office of the Company's Paying Agent in the
Borough of Manhattan, The City and State of New York, if (but only if) payment
in U.S. dollars of the full amount of such principal, premium, interest or
additional amounts, as the case may be, at all offices or agencies outside the
United States maintained for the purpose by the Company in accordance with the
Senior Indenture is illegal or effectively precluded by exchange controls or
other similar restrictions.
BOOK-ENTRY SENIOR DEBT SECURITIES
The Senior Debt Securities of a series may be issued in whole or in part in
global form that will be deposited with, or on behalf of, a depositary
identified in the applicable Prospectus Supplement. Global Securities may be
issued in either registered or bearer form and in either temporary or permanent
form (each a "Global Security"). Payments of principal of (premium, if any) and
interest on Senior Debt Securities represented by a Global Security will be
made by the Company to the Trustee and then by the Trustee to the depositary.
If specified in the applicable Prospectus Supplement, any Global Securities
will be deposited with, or on behalf of, The Depository Trust Company, New
York, New York ("DTC"), as depositary, or such other depositary as may be
specified in the applicable Prospectus Supplement. In the event that DTC acts
as depositary with respect to any Global Securities, the Company anticipates
that such Global Securities will be registered in the name of DTC's nominee,
and that the following provisions will apply to the depositary arrangements
with respect to any such Global Securities. Additional or differing terms of
the depositary arrangements, if any, applicable to the Offered Securities, will
be described in the accompanying Prospectus Supplement.
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So long as DTC or its nominee is the registered owner of a Global Security,
DTC or its nominee, as the case may be, will be considered the sole Holder of
the Senior Debt Securities represented by such Global Security for all purposes
under the Senior Indenture. Except as provided below, owners of beneficial
interests in a Global Security will not be entitled to have Senior Debt
Securities represented by such Global Security registered in their names, will
not receive or be entitled to receive physical delivery of Senior Debt
Securities in certificated form and will not be considered the owners or
Holders thereof under the Senior Indenture. The laws of some states require
that certain purchasers of securities take physical delivery of such securities
in certificated form; accordingly, such laws may limit the transferability of
beneficial interests in a Global Security.
If DTC is at any time unwilling or unable to continue as depositary and a
successor depositary is not appointed by the Company within 90 days, the
Company will issue individual Senior Debt Securities in certificated form in
exchange for the Global Securities. In addition, the Company may at any time,
and in its sole discretion, determine not to have any Senior Debt Securities
represented by one or more Global Securities and, in such event, will issue
individual Senior Debt Securities in certificated form in exchange for the
relevant Global Securities. If Registered Securities of any series shall have
been issued in the form of one or more Global Securities and if an Event of
Default with respect to the Senior Debt Securities of such series shall have
occurred and be continuing, the Company will issue individual Senior Debt
Securities in certificated form in exchange for the relevant Global Securities.
The following is based on information furnished by DTC:
DTC is a limited-purpose trust company organized under the Banking Law of the
State of New York, a "banking organization" within the meaning of the Banking
Law of the State of New York, a member of the Federal Reserve System, a
clearing corporation within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of section
17A of the Exchange Act. DTC holds securities that its participants
("Participants") deposit with DTC. DTC also facilitates the settlement among
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations ("Direct Participants"). DTC is owned by a number of its Direct
Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as securities brokers and
dealers, banks and trust companies that clear through or maintain a custodial
relationship with a Direct Participant, either directly or indirectly
("Indirect Participants"). The rules applicable to DTC and its Participants are
on file with the Commission.
Purchases of Senior Debt Securities under the DTC system must be made by or
through Direct Participants, which will receive a credit for the Senior Debt
Securities on DTC's records. The ownership interest of each actual purchaser of
each Senior Debt Security ("Beneficial Owner") is in turn recorded on the
Direct and Indirect Participants' records. A Beneficial Owner does not receive
written confirmation from DTC of its purchase, but such Beneficial Owner is
expected to receive a written confirmation providing details of the
transaction, as well as periodic statements of its holdings, from the Direct or
Indirect Participant through which such Beneficial Owner entered into the
transaction. Transfers of ownership interests in Senior Debt Securities are
accomplished by entries made on the books of Participants acting on behalf of
Beneficial Owners. Beneficial Owners do not receive certificates representing
their ownership interests in the Senior Debt Securities, except in the event
that use of the book-entry system for the Senior Debt Securities is
discontinued.
To facilitate subsequent transfers, the Senior Debt Securities are registered
in the name of DTC's partnership nominee, Cede & Co. The deposit of the Senior
Debt Securities with DTC and their registration in the name of Cede & Co.
effects no change in beneficial ownership. DTC has no knowledge of the actual
Beneficial Owners of the Senior Debt Securities; DTC records reflect only the
identity of the Direct Participants to whose accounts Senior Debt Securities
are credited, which may or may not be the Beneficial Owners. The Participants
remain responsible for keeping account of their holdings on behalf of their
customers.
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Delivery of notices and other communications by DTC to Direct Participants,
by Direct Participants to Indirect Participants, and by Direct Participants and
Indirect Participants to Beneficial Owners are governed by arrangements among
them, subject to any statutory or regulatory requirements as may be in effect
from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the Senior
Debt Securities. Under its usual procedures, DTC mails a proxy (an "Omnibus
Proxy") to the issuer as soon as possible after the record date. The Omnibus
Proxy assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Senior Debt Securities are credited on the
record date (identified on a list attached to the Omnibus Proxy).
Principal and interest payments on the Senior Debt Securities will be made to
DTC. DTC's practice is to credit Direct Participants' accounts on the payable
date in accordance with their respective holdings as shown on DTC's records
unless DTC has reason to believe that it will not receive payment on the
payable date. Payments by Participants to Beneficial Owners will be governed by
standing instructions and customary practices, as is the case with securities
held for the accounts of customers in bearer form or registered in "street
name," and will be the responsibility of such Participant and not of DTC, the
Paying Agent or the Company, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of principal and
interest to DTC is the responsibility of the Company or the Paying Agent,
disbursement of such payments to Direct Participants is the responsibility of
DTC, and disbursement of such payments to the Beneficial Owners will be the
responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as securities depositary with
respect to the Senior Debt Securities at any time by giving reasonable notice
to the Company or the Paying Agent. Under such circumstances, in the event that
a successor securities depositary is not appointed, Senior Debt Security
certificates are required to be printed and delivered.
The Company may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depositary). In that event,
Senior Debt Security certificates will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources (including DTC) that the Company believes to be
reliable, but the Company takes no responsibility for the accuracy thereof.
Unless stated otherwise in the applicable Prospectus Supplement, the
underwriters or agents with respect to a series of Senior Debt Securities
issued as Global Securities will be Direct Participants in DTC.
None of the Company, any underwriter or agent, the Trustee or any applicable
Paying Agent will have the responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial interests in a
Global Securities, or for maintaining, supervising or reviewing any records
relating to such beneficial interests.
THE TRUSTEE UNDER THE SENIOR INDENTURE
The Company and its Subsidiaries maintain ordinary banking relationships with
Citibank, N.A. and its affiliates and a number of other banks. Citibank, N.A.
and its affiliates, along with a number of other banks, have extended credit
facilities to the Company and its Subsidiaries. In addition, Citibank, N.A.
acts as the Company's issuing and paying agent in connection with the Company's
commercial paper program.
GOVERNING LAW
The Senior Indenture, the Senior Debt Securities and the Coupons for all
purposes will be governed by and construed in accordance with the laws of the
State of New York.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the Senior
Indenture. Reference is made to the Senior Indenture for the full definition of
all such terms.
"Attributable Debt" means, as of any particular time, with respect to a Sale
and Leaseback Transaction with respect to any Principal Property, the lesser of
(a) the fair market value of such property (as determined in good faith by the
Board of Directors) or (b) the present value of the total net amount of rent
required to be paid under such lease during the remaining term thereof
(excluding any amounts payable by the lessee for maintenance, property taxes
and insurance, and including any period for which such lease has been extended
or may, at the option of the lessor, be extended), discounted at the rate of
interest set forth or implicit in the terms of such lease (or, if not
practicable to determine such rate, the weighted average interest rate per
annum borne by Senior Debt Securities then outstanding) compounded semi-
annually.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's capital stock or equity, including,
without limitation, all Common Stock and Preferred Stock.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's common stock, whether now outstanding or
issued after the date of the Senior Indenture, including, without limitation,
all series and classes of such common stock.
"Consolidated Net Tangible Assets" means, at the time of determination, the
total assets appearing on the most recently prepared consolidated balance sheet
of the Company and its Subsidiaries as of the end of a fiscal quarter of the
Company, prepared in accordance with generally accepted accounting principles,
less all current liabilities as shown on such balance sheet (excluding the
amount of those which are by their terms extendable or renewable at the option
of the obligor to a date more than 12 months after the date as of which the
amount is being determined) and intangible assets. Intangible assets means the
value (net of any applicable reserves) as shown on or reflected in such balance
sheet of all trade names, trademarks, licenses, patents, copyrights, goodwill,
unamortized debt discount and expense and other like intangibles.
"Consolidated Net Worth" means, at any date, shareholders' equity, less any
amounts attributable to Redeemable Stock or any equity security convertible
into or exchangeable for Debt and the cost of treasury stock, as set forth on
the most recently available quarterly or annual consolidated balance sheet of
the Company and its Subsidiaries prepared in conformity with generally accepted
accounting principles.
" Debt" means, with respect to any Person, indebtedness of such Person for
borrowed money and all Debt of other Persons guaranteed by such Person.
"Discharged" means that the Company shall be deemed to have paid and
discharged the entire indebtedness represented by, and obligations under, the
Senior Debt Securities of such series and to have satisfied all the obligations
under the Senior Indenture relating to the Senior Debt Securities of such
series, except (i) the rights of Holders of Senior Debt Securities of such
series to receive, from the trust fund described under "Discharge, Legal
Defeasance and Covenant Defeasance" above, payment of the principal of (and
premium, if any) and interest on such Senior Debt Securities when such payments
are due, (ii) the Company's obligations with respect to the Senior Debt
Securities of such series under the provisions relating to exchanges, transfers
and replacement of Senior Debt Securities, the maintenance of an office or
agency of the Company and the defeasance trust fund, the provisions relating to
compensation and reimbursement of the Trustee and (iii) the rights, powers,
trusts, duties and immunities of the Trustee thereunder.
"Funded Debt" means Debt of the Company or its Restricted Subsidiaries which
by its terms matures at, or can be extended or renewed at the option of the
obligor to, a date more than twelve months after the date of the creation of
such Debt.
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"Lien" means any mortgage, lien, pledge. security interest, conditional sale
or other title retention agreement or other security interest or encumbrance of
any kind (including any agreement to give any security interest).
"Person" means an individual, a corporation, a partnership, a trust, a joint
venture, an association, a joint stock company, an unincorporated organization
or a government or any agency or political subdivision thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference stock, whether
now outstanding or issued after the date of the Senior Indenture, including,
without limitation, all series and classes of such preferred or preference
stock.
"Principal Property" means any parcel of real property and related fixtures
or improvements (now owned or hereafter acquired) which (a) is owned by the
Company or any Subsidiary; (b) is located within any of the present 50 states
of the United States (or the District of Columbia); (c) has not been determined
in good faith by the Board of Directors of the Company not to be materially
important to the total business conducted by the Company and its Subsidiaries
as a whole; and (d) has an aggregate book value of which, less accumulated
depreciation, on the date of determination exceeds $5,000,000.
"Redeemable Stock" means any class or series of Capital Stock of any Person
that by its terms or otherwise is (i) required to be redeemed prior to the
maturity date of any of the then outstanding Senior Debt Securities, (ii)
redeemable at the option of the holder of such class or series of Capital Stock
at any time prior to the maturity date of any of the then outstanding Senior
Debt Securities, or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Debt having principal scheduled to
mature or which can be required to be repaid prior to the maturity date of any
of the then outstanding Senior Debt Securities.
"Restricted Subsidiary" means any Subsidiary which owns or leases any
Principal Property.
"Sale and Leaseback Transaction" means any arrangement with any Person
providing for the leasing by the Company or any Restricted Subsidiary of any
Principal Property which has been or is to be sold or transferred by the
Company or such Restricted Subsidiary to such Person; provided, however, that
"Sale and Leaseback Transactions" shall not include such arrangements that were
existing on the date of the Senior Indenture.
"Subsidiary" means any corporation or other entity of which a majority of
outstanding stock having voting power under ordinary circumstances for the
election of the board of directors is at the time directly or indirectly owned
by the Company.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States for the payment of which its full faith and
credit is pledged, or (ii) obligations of a person controlled or supervised by
and acting as an agency or instrumentality of the United States the payment of
which is unconditionally guaranteed as a full faith and credit obligation by
the United States, which, in either case under clause (i) or (ii), are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian
with respect to any such U.S. Government Obligation or a specific payment of
interest on (or principal of) any such U.S. Government Obligation held by such
custodian for the account of the holder of a depository receipt; provided that
(except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depository receipt from
any amount received by the custodian in respect of the U.S. Government
Obligation or the specific payment of interest on or principal of the U.S.
Government Obligation evidenced by such depository receipt.
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PLAN OF DISTRIBUTION
The Company may sell the Offered Securities in four ways: (i) directly to
purchasers, (ii) through agents, (iii) through underwriters and (iv) through
dealers.
Offers to purchase Offered Securities may be solicited directly by the
Company and sales thereof may be made by the Company directly to institutional
investors or others. The terms of any such sales will be set forth in the
accompanying Prospectus Supplement.
Offers to purchase Offered Securities may be solicited by agents designated
by the Company from time to time. Any such agent, who may be deemed to be an
underwriter as that term is defined in the Securities Act, involved in the
offer or sale of the Offered Securities in respect of which this Prospectus is
delivered will be named, and any commissions payable by the Company to such
agent set forth, in the accompanying Prospectus Supplement. Unless otherwise
indicated in the accompanying Prospectus Supplement, any such agent will be
acting on a reasonable efforts basis for the period of its appointment. Agents
may be entitled under agreements which may be entered into with the Company to
indemnification by the Company against certain civil liabilities, including
liabilities under the Securities Act, and may engage in transactions with or
perform services for the Company in the ordinary course of business.
If any underwriters are utilized in the sale of the Offered Securities in
respect of which this Prospectus is delivered, the Company will enter into an
underwriting agreement with such underwriters at the time of sale to them and
the names of the specific managing underwriter or underwriters, as well as any
other underwriters and the terms of the transaction will be set forth in the
accompanying Prospectus Supplement, which will be used by the underwriters to
make resales of the Offered Securities in respect of which this Prospectus is
delivered to the public. The underwriters may be entitled, under the relevant
underwriting agreement, to indemnification by the Company against certain
liabilities, including liabilities under the Securities Act, and may engage in
transactions with or perform services for, the Company in the ordinary course
of business.
If a dealer is utilized in the sale of the Offered Securities in respect of
which this Prospectus is delivered, the Company will sell such Offered
Securities to the dealer, as principal. The dealer may then resell such Offered
Securities to the public at varying prices to be determined by such dealer at
the time of resale. Dealers may be entitled to indemnification by the Company
against certain liabilities, including liabilities under the Securities Act,
and may engage in transactions with or perform services for the Company in the
ordinary course of business.
Offered Securities may also be offered and sold, if so indicated in the
accompanying Prospectus Supplement, in connection with a remarketing upon their
purchase, in accordance with their terms, by one or more firms ("remarketing
firms"), acting as principals for their own accounts or as agents for the
Company. Any remarketing firm will be identified and the terms of its
agreement, if any, with the Company and its compensation will be described in
the accompanying Prospectus Supplement. Remarketing firms may be entitled under
agreements which may be entered into with the Company to indemnification by the
Company against certain civil liabilities, including liabilities under the
Securities Act, and may engage in transactions with or perform services for the
Company in the ordinary course of business.
If so indicated in the accompanying Prospectus Supplement, the Company will
authorize agents and underwriters or dealers to solicit offers by certain
purchasers to purchase Offered Securities from the Company at the public
offering price set forth in the accompanying Prospectus Supplement pursuant to
delayed delivery contracts providing for payments and delivery on a specified
date in the future. Such contracts will be subject to only those conditions set
forth in the accompanying Prospectus Supplement, and the accompanying
Prospectus Supplement will set forth the commission payable for solicitation of
such offers.
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LEGAL MATTERS
The validity of the Offered Securities will be passed upon for the Company by
Dewey Ballantine LLP, New York, New York, and for any underwriters by counsel
as may be specified in accompanying prospectus supplements. In rendering such
opinion, Dewey Ballantine LLP will be relying as to matters of Indiana law upon
the opinion of Baker & Daniels, Indianapolis, Indiana. J.B. King, Esq., Vice
President, General Counsel, Secretary and a Director of Guidant, also currently
acts as counsel to Baker & Daniels.
EXPERTS
The consolidated financial statements of the Company incorporated by
reference in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
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