<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
Commission File Number 1-13388
GUIDANT CORPORATION
(Exact name of Registrant as specified in its charter)
INDIANA 35-1931722
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 MONUMENT CIRCLE, 29TH FLOOR
INDIANAPOLIS, INDIANA 46204-5129
(Address of principal executive offices)
Registrant's telephone number, including area code: (317) 971-2000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
The number of shares of common stock outstanding as of April 29, 1999:
Class Number of Shares Outstanding
----- ----------------------------
Common 302,137,698
1
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
GUIDANT CORPORATION and Subsidiaries
Consolidated Statements of Income
(In millions, except per-share data)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------ --------
Net sales................................... $590.1 $ 470.3
Cost of products sold....................... 146.4 107.4
------ --------
Gross profit.............................. 443.7 362.9
Research and development.................... 82.3 62.0
Purchased research and development.......... 49.0 --
Sales, marketing, and administrative........ 171.0 135.1
------ --------
302.3 197.1
------ --------
Other income (expenses):
Interest, net............................. (12.6) (3.4)
Royalties, net............................ (14.0) (9.2)
Amortization.............................. (8.7) (3.7)
Litigation settlement charge.............. -- (60.0)
Other, net................................ 12.9 (4.0)
------ --------
(22.4) (80.3)
------ --------
Income before income taxes and cumulative
effect of change in accounting principle... 119.0 85.5
Income taxes................................ 63.6 30.2
------ --------
Income before cumulative effect of change
in accounting principle.................... 55.4 55.3
Cumulative effect of change in accounting
principle, net............................. (3.3) --
------ --------
Net income................................ $ 52.1 $ 55.3
====== ========
Earnings per share.......................... $ 0.18 $ 0.19
====== ========
Earnings per share - assuming dilution...... $ 0.17 $ 0.18
====== ========
Dividends paid per share.................... $ -- $0.00625
====== ========
See notes to consolidated financial statements.
2
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GUIDANT CORPORATION and Subsidiaries
Consolidated Balance Sheets
(Dollars in millions)
March 31, December 31,
1999 1998
----------- ------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................... $ 33.7 $ 15.6
Accounts receivable, net of allowances
of $35.7(1999) and $19.5(1998)............ 490.2 435.4
Other receivables............................ 10.3 8.3
Inventories.................................. 282.2 193.4
Deferred income taxes........................ 138.6 83.3
Prepaid expenses............................. 60.3 27.5
-------- --------
Total Current Assets...................... 1,015.3 763.5
OTHER ASSETS
Goodwill, net of allowances
of $85.5(1999) and $78.9(1998)............ 628.8 202.6
Other intangible assets, net of allowances
of $18.6(1999) and $16.6(1998)............ 75.5 44.3
Deferred income taxes........................ 70.6 73.8
Investments.................................. 66.8 62.5
Sundry....................................... 35.5 33.6
Property and equipment....................... 697.6 651.5
Less accumulated depreciation................ 280.1 262.3
-------- --------
Property and equipment, net.................. 417.5 389.2
-------- --------
$2,310.0 $1,569.5
======== ========
See notes to consolidated financial statements.
3
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GUIDANT CORPORATION and Subsidiaries
Consolidated Balance Sheets
(Dollars in millions)
MARCH 31, DECEMBER 31,
1999 1998
-------------- -------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................. $ 81.5 $ 65.3
Employee compensation........................ 81.6 129.5
Other liabilities............................ 234.1 137.9
Current portion of long-term debt............ 240.0 54.5
Payable to Sulzer Medica..................... -- 200.0
-------- --------
Total Current Liabilities................. 637.2 587.2
NONCURRENT LIABILITIES
Long-term debt............................... 992.6 390.0
Other........................................ 114.6 38.4
-------- --------
1,107.2 428.4
Commitments and contingencies................ -- --
SHAREHOLDERS' EQUITY
Common stock-no par value:
Authorized shares: 500,000,000............
Issued shares: 302,138,000 (1999)
301,848,000 (1998)......... 192.9 192.5
Additional paid-in capital................... 171.8 197.0
Retained earnings............................ 305.1 253.0
Deferred cost, ESOP.......................... (40.7) (41.3)
Treasury stock, at cost:
Shares: 391,840 (1999)..................
671,618 (1998).................. (24.8) (27.0)
Accumulated other comprehensive income....... (38.7) (20.3)
-------- --------
565.6 553.9
-------- --------
$2,310.0 $1,569.5
======== ========
See notes to consolidated financial statements.
4
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GUIDANT CORPORATION and Subsidiaries
Consolidated Statements of Cash Flow
(In millions)
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------- ------
(unaudited)
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income............................................. $ 52.1 $ 55.3
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation........................................... 19.0 12.0
Amortization of goodwill and other intangible assets... 8.7 3.7
Purchased research and development..................... 49.0 --
Change in deferred income taxes........................ 7.8 (24.6)
Other noncash expenses, net............................ 3.8 14.4
------- ------
140.4 60.8
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Receivables, increase.................................. (25.1) (1.3)
Inventories, increase.................................. (19.5) (7.4)
Prepaid expenses and other assets, decrease............ 3.2 7.2
Accounts payable and accrued expenses, decrease........ (39.7) (41.5)
Income taxes, increase................................. 71.0 24.7
Other liabilities, (decrease) increase................. (7.9) 2.7
Payable to C.R. Bard................................... -- 60.0
------- ------
NET CASH PROVIDED BY OPERATING ACTIVITIES................ 122.4 105.2
INVESTING ACTIVITIES:
Additions of property and equipment, net............... (38.9) (19.1)
Purchases of available-for-sale securities............. -- (0.7)
Sale/maturity of available-for-sale securities......... -- 7.1
Additions of other assets, net......................... (5.1) --
Acquisition, net of cash acquired...................... (798.0) --
------- ------
NET CASH USED FOR INVESTING ACTIVITIES................... (842.0) (12.7)
FINANCING ACTIVITIES:
Proceeds from long-term borrowings..................... 346.4 --
Increase (decrease) in borrowings, net................. 444.1 (69.1)
Dividends.............................................. -- (1.8)
Purchases of common stock, net of proceeds
from exercise of stock options........................ (50.8) (16.1)
------- ------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES...... 739.7 (87.0)
Effect of Exchange Rate Changes on Cash.................. (2.0) (0.1)
------- ------
NET INCREASE IN CASH AND CASH EQUIVALENTS................ 18.1 5.4
Cash and Cash Equivalents at Beginning of Period......... 15.6 17.7
------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 33.7 $ 23.1
======= ======
See notes to consolidated financial statements.
5
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GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
(In millions)
(unaudited)
NOTE 1 -- GENERAL INFORMATION
Guidant Corporation (Guidant or the Company) operates in one reportable segment:
the development, manufacture, and marketing of a broad range of innovative,
high-quality therapeutic medical devices for the treatment of cardiovascular and
vascular diseases. Guidant is a leader in minimally invasive procedures used
for opening blocked coronary arteries using coronary stents, coronary balloon
dilatation catheters, and related accessories. The Company is also a leader in
automatic implantable cardioverter defibrillator systems, which are used to
detect and treat abnormally fast heart rhythms (tachycardia). The Company
designs, manufactures, and markets a full line of implantable pacemaker systems
used to manage slow or irregular heart rhythms (bradycardia). In addition,
Guidant develops, manufactures, and markets products for use in minimally
invasive cardiac and vascular surgeries. Guidant is a global company with
principal operations in the United States, Western Europe, and Japan. The
Company markets its products in over 100 countries through a direct sales force
in the United States and a combination of direct sales representatives and
independent distributors in international markets.
NOTE 2 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
necessary for a fair presentation of results of operations, financial position,
and cash flows in conformity with generally accepted accounting principles. In
the opinion of management, the consolidated financial statements reflect all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation of the Company's results for the periods presented. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, expenses, and
related disclosures at the date of the financial statements and during the
reporting period. Actual results could differ from these estimates.
For further information, refer to the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
NOTE 3 -- INVENTORIES
Inventories consisted of the following:
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
Finished products $106.7 $ 89.9
Work in process 86.1 51.9
Raw materials and supplies 89.4 51.6
------ ------
$282.2 $193.4
====== ======
6
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GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 4 - ACQUISITION
On February 1, 1999, the Company completed its acquisition of the
electrophysiology business of Sulzer Medica, Ltd. (Sulzer), which includes
Intermedics, Inc. (Intermedics), a leader in the manufacture and distribution of
bradycardia pacemakers, for an aggregate cost of $810 million in cash. The
purchase price was based on the aggregate sales volume produced by independent
U.S. representatives of Sulzer who agreed to become Guidant employees prior to
closing. The acquisition was accounted for using the purchase method. The
consolidated financial statements include the Intermedics operating results from
the date of acquisition.
The aggregate purchase price includes $200 million required to settle the
Company's intellectual property litigation with Intermedics, which was payable
regardless of the consummation of the acquisition. This litigation settlement
charge was recorded in the third quarter of 1998. The remaining purchase price
has been allocated on a preliminary basis to the assets acquired and liabilities
assumed based on their estimated fair values at the date of acquisition. The
final purchase price and allocation therefore, is subject to final closing
balance sheet adjustments based on a defined level of Intermedics net worth as
well as other conditions. Adjustments to purchase price will be made subsequent
to receipt of an audited closing balance sheet of Intermedics, based on net
worth and final valuation of certain assets acquired. Management believes,
based on an analysis of preliminary Intermedics' balance sheet information, that
the aforementioned net worth adjustment will reduce the aggregate purchase
price. Final adjustments should be made over the next few quarters, and will
reduce goodwill recorded in connection with this transaction.
In addition, the Company recognized $87 million of liabilities relative to the
announced closing of the acquired facilities and termination of various
contractual commitments. The facilities will be closed after a transition
period of approximately twelve months. Intangible assets related to developed
technology, the sales network, assembled work force, and the excess of cost over
net assets acquired (goodwill) will be amortized over their estimated useful
lives. Developed technology will be amortized over ten years, and all other
intangible assets will be amortized over twenty years. The preliminary
aggregate purchase price allocation is as follows:
Litigation settlement $200
Developed technology 28
Purchased research and development 49
Sales network and assembled workforce 101
Net assets 98
Excess of cost over net assets acquired 334
----
$810
====
Liabilities recognized are included in net assets as follows:
Workforce reductions $ 50
Contractual commitments 37
----
$ 87
====
The majority of these costs will be incurred by the end of the first quarter
of 2000.
7
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GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 4 -- ACQUISITION (Continued)
The Company recorded a $49 million charge in the first quarter of 1999 related
to the ascribed value of Intermedics' in-process technology. The valuation of
this technology was based upon guidelines provided by the Securities and
Exchange Commission and involved an analysis of those projects which had not
reached technological feasibility and had no alternative future use. This
charge reflects the unproven status of these technologies.
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company and Intermedics as if the acquisition had
occurred at the beginning of each period presented, with pro forma adjustments
to give effect to amortization of intangibles, purchased research and
development, and an increase in interest expense related to acquisition
financing.
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
---------- ----------
Net sales $607.8 $542.7
Net income (loss) 34.6 (16.0)
Net income (loss) per share -- assuming dilution $ 0.11 $(0.05)
NOTE 5 -- BORROWINGS
As of March 31, 1999, the Company's outstanding borrowings consisted of:
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
Commercial paper $ 609.5 $230.5
Bank borrowings 276.7 214.0
Long-term notes 346.4 --
-------- ------
$1,232.6 $444.5
======== ======
Bank borrowings represent short-term uncommitted credit facilities with various
commercial banks. The Company expects that a minimum of $993 million in
borrowings will remain outstanding throughout the next twelve months and,
accordingly, has classified that portion as long-term at March 31, 1999. The
weighted average interest rate on borrowings outstanding at March 31, 1999, was
5.21% compared to 5.39% at December 31, 1998.
The acquisition of Intermedics was initially financed with commercial paper. On
February 11, 1999, the Company issued seven-year 6.15% notes with a $350 million
principal amount to replace a portion of the commercial paper. In order to
support the additional commercial paper, the Company increased its credit
facilities with certain banks. At March 31, 1999, the Company has two credit
facilities, a $400 million facility that permits borrowings through August 2003
and a $450 million facility that permits borrowings through August 1999 that
would not be due and payable until August 2000. There are currently no
outstanding borrowings under these arrangements which carry a variable market
rate of interest. Restrictive covenants in the borrowing agreements are
unchanged from year end.
8
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GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 -- Earnings Per Share
The following table sets forth the computation of earnings per share:
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------- -------
Income before cumulative effect of
accounting change............................. $ 55.4 $ 55.3
Cumulative effect of accounting change, net... (3.3) --
------- -------
Net income.................................... $ 52.1 $ 55.3
======= =======
Weighted-average common shares outstanding.... 295.14 294.52
Effect of employee stock options.............. 11.06 7.36
------- -------
Weighted-average common shares outstanding
and assumed conversions....................... 306.20 301.88
======= =======
Earnings per share:
Income before cumulative effect of
accounting change............................. $ 0.19 $ 0.19
Cumulative effect of accounting change, net... (0.01) --
------- -------
Earnings per share............................ $ 0.18 $ 0.19
======= =======
Earnings per share - assuming dilution:
Income before cumulative effect of
accounting change............................. $ 0.18 $ 0.18
Cumulative effect of accounting change, net... (0.01) --
------- -------
Earnings per share - assuming dilution........ $ 0.17 $ 0.18
======= =======
Note 7 -- COMPREHENSIVE INCOME
Comprehensive income comprises net income adjusted for the changes in unrealized
gains or losses on available-for-sale securities and foreign currency
translation adjustments. For the first quarter of 1999 and 1998, comprehensive
income was $33.7 million and $53.0 million, respectively.
9
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GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 8 -- START-UP COSTS
Effective January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position (SOP) 98-5, Reporting on the
Costs of Start-Up Activities, which requires that all start-up costs, as defined
by the statement, are expensed as incurred. This change in accounting principle
resulted in a pretax cumulative effect adjustment (charge) of $5.3 million ($3.3
million after tax; $0.01 per share). Prior to this quarter, these costs were
capitalized and depreciated over periods of up to five years.
NOTE 9 -- SEGMENT INFORMATION
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
-------- ------
Geographic Information:
Net Sales(1):
United States $ 425.4 $358.0
International 164.7 112.3
-------- ------
$ 590.1 $470.3
======== ======
(1) Revenues are attributed to countries based on location of the customer.
MARCH 31, DECEMBER 31,
LONG-LIVED ASSETS: 1999 1998
-------- ------
United States $1,154.0 $678.4
International 70.1 53.8
-------- ------
$1,224.1 $732.2
======== ======
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
-------- ------
NET SALES OF CLASSES
OF SIMILAR PRODUCTS:
Vascular intervention $ 324.4 $267.0
Cardiac rhythm management 245.6 185.4
Cardiac & vascular surgery 20.1 17.9
-------- ------
$ 590.1 $470.3
======== ======
10
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GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 10 -- CONTINGENCIES
The Company is a party to various legal actions which have arisen in the normal
course of business.
In a lawsuit originally filed on May 31, 1994, in the Northern District of
California, SciMed Life Systems, Inc., (SciMed) a subsidiary of Boston
Scientific Corporation, (BSC) alleges that the ACS RX ELIPSE Coronary Dilatation
Catheter 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 monetary
damages.
On May 3, 1996, Pacesetter, Inc., filed suit against Cardiac Pacemakers, Inc., a
wholly owned subsidiary of the Company, in the District Court for Minnesota. The
complaint, as subsequently amended, alleges infringement of certain Pacesetter
patents by certain CPI pacemaker models and programmers for pacemakers and
defibrillators. The lawsuit seeks injunctive relief, unspecified monetary
damages, and an award of attorneys' fees. On December 16, 1998, following a
trial on the merits, the jury of the District Court of Minnesota returned a
verdict finding no liability by CPI on two of the three patents asserted by
Pacesetter, and infringement by software in CPI programmers for certain
pacemakers and defibrillators of the third patent. The jury awarded Pacesetter
damages in the amount of $9.7 million, which the Company has accrued. The court
is currently considering Pacesetter's request for an injunction and the
Company's request that Pacesetter's patent be declared unenforceable.
On May 3, 1996, Angeion Corporation filed a lawsuit against CPI in the United
States District Court of Minnesota. The complaint, as subsequently amended,
alleged infringement of certain Angeion defibrillator patents by CPI's MINI I
and MINI II defibrillator models. On September 15, 1998, CPI filed suit against
Angeion Corporation in the United States District Court of Minnesota. The
complaint alleged infringement of certain CPI defibrillator patents by Angeion's
defibrillator products. On April 8, 1999 the Company announced that it had
settled these two suits and been granted a royalty-free nonexclusive license to
all of Angeion's current patents and patent applications covering cardiac
stimulation devices in exchange for $35 million. The $35 million will be
recorded in the second quarter of 1999 as an intangible asset and will be
amortized over twelve years.
On June 4, 1996, General Surgical Innovations, Inc., (GSI) filed suit against
Origin MedSystems, Inc., (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 judgement of infringement was granted on October 29, 1998, and a trial
was held on the validity of the GSI patent, willful infringement and damages.
On February 9, 1999, the jury determined the patent to be valid and infringement
to be willful, and awarded GSI approximately $12.9 million in damages. GSI filed
post-trial motions seeking injunctive relief, trebling of damages and a
declaration that the case was exceptional so as to provide a basis for an award
of attorneys fees. By an order and judgment entered on April 14, 1999, the
court declined GSI's requests to increase damages and to declare the case
exceptional. An injunction was issued enjoining sales of the
11
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GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 10 -- CONTINGENCIES (Continued)
Origin products for use in the United States, but the implementation was stayed
until November 15, 1999 as to customers who were users of the products as of
February 8, 1999, subject to Origin paying to GSI a 30% royalty. Origin has
appealed, and this appeal relates to this injunctive relief as well as to
liability.
On September 24, 1997, GSI filed a second suit against Origin in the Northern
District of California alleging that Origin's VASOVIEW Balloon Dissection System
infringes another patent owned by GSI. GSI is seeking injunctive relief and
monetary damages.
On October 3, 1997, Cordis Corporation (Cordis), a subsidiary of Johnson and
Johnson, filed suit against the Company and Advanced Cardiovascular Systems,
Inc., (ACS) the Company's wholly owned subsidiary, in the District Court of
Delaware, alleging that the sale of the ACS MULTI-LINK Coronary Stent infringes
certain patents licensed to Cordis. In addition, on October 8, 1997, Cordis
filed a motion for a preliminary injunction in this lawsuit seeking to prevent
the Company from selling the ACS MULTI-LINK Coronary Stent other than in certain
limited circumstances and subject to certain conditions. On October 22, 1997,
Cordis amended its complaint to include Arterial Vascular Engineering, Inc.
(AVE) and BSC as co-defendants. A hearing on the motion for a preliminary
injunction was held in February 1998 and in July 1998, Cordis' motion 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 reexamination filed by
Cordis. On April 1, 1999, Cordis filed a motion to again amend its complaint to
add allegations of infringement of the reexamined patent and a new patent that
has yet to issue, and to add the ACS MULTI-LINK DUET Coronary and MEGALINK
Peripheral Stents as well. In the lawsuit, Cordis is seeking injunctive relief
and monetary damages.
On November 6, 1997, Medtronic, Inc., filed suit against ACS in the District
Court for Minnesota, alleging that the ACS MULTI-LINK Coronary Stent infringes a
patent owned by Medtronic. Medtronic has filed a motion for leave to amend the
complaint to add allegations of infringement by the ACS MULTI-LINK DUET Coronary
and MEGALINK Peripheral stents. In the lawsuit, Medtronic is seeking injunctive
relief and monetary damages.
On December 2, 1997, Cordis filed suit against Guidant and ACS in the District
Court 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 patents. In this separate
lawsuit, Cordis is seeking injunctive relief and monetary damages.
On February 18, 1998, AVE filed suit against ACS in the District Court of
Delaware alleging that the sale of the ACS MULTI-LINK Coronary Stent infringes
certain patents owned by AVE. The lawsuit also alleges misappropriation of
trade secrets and breach of a confidentiality agreement by ACS. In the lawsuit,
AVE is seeking injunctive relief, monetary damages, and to invalidate certain
ACS stent patents.
12
<PAGE>
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 10 -- CONTINGENCIES (Continued)
An arbitration was held between SciMed and the Company in May 1998, to determine
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 December 4, 1998, the
Arbitration Panel 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 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 MULTI-LINK RX DUET Coronary Stent Systems. SciMed is
seeking injunctive relief and monetary damages.
On January 13, 1999, SciMed filed suit against the Company, ACS, and Guidant
Sales Corporation 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 monetary damages.
On June 4, 1998, Cordis filed suit against the Company and ACS in the District
Court for the Eastern District of Virginia, alleging that the sale of the ACS
MULTI-LINK Coronary Stent infringes two patents owned by Cordis. On August 7,
1998, the court granted the Company's motion to transfer the case to the
Northern District of California. Based on defenses asserted by the Company,
Cordis agreed to dismiss this case without prejudice, and a stipulation was
filed with the Court requesting that all claims and counterclaims be dismissed.
The Court entered an Order dismissing the case in its entirety, without
prejudice, on April 5, 1999.
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.
On March 31, 1999, Pacesetter, Inc. filed suit against Guidant Sales
Corporation, Inc. and CPI in the Central District of California, alleging that
the VIGOR SR and VIGOR DR pacemakers infringe two patents owned by Pacesetter.
In the lawsuit, Pacesetter is seeking injunctive relief and monetary damages.
The Company believes that it has substantial and meritorious defenses against
the above infringement claims and intends to vigorously contest them. The
Company has filed suit and has lawsuits and other legal actions currently
outstanding against most of the companies discussed above. While it is not
possible to predict or determine the outcomes of the legal actions brought
against it, or to provide an estimate of any additional losses, if any, that may
arise, the Company believes the costs associated with all of these actions will
not have a material adverse effect on its consolidated financial position or
liquidity, but could possibly be material to the consolidated results of
operations of any one period.
13
<PAGE>
GUIDANT CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 10 -- CONTINGENCIES (Continued)
Further, product liability claims may be asserted in the future relative to
events currently unknown to management. Management believes that the Company's
risk-management practices, including insurance coverage, are reasonably adequate
to protect against potential product liability losses.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Guidant Corporation (Guidant or the Company), is a global company that designs,
develops, manufactures, and markets a broad range of innovative, high-quality
therapeutic devices for use in: (i) vascular intervention (VI), (ii) cardiac
rhythm management (CRM), and (iii) cardiac and vascular surgery (C&VS). Guidant
is a worldwide leader in minimally invasive devices used for opening blocked
coronary arteries, such as coronary stents and coronary balloon dilatation
catheters. The Company is also a worldwide leader in automatic implantable
cardioverter defibrillator (AICD) systems, used to detect and treat abnormally
fast heart rhythms (tachycardia). The Company designs, manufactures, and
markets a full line of implantable pacemaker systems used to manage slow or
irregular heart rhythms (bradycardia). In addition, the Company develops,
manufactures, and markets devices principally for use in minimally invasive
cardiac and vascular surgeries.
Cardiovascular disease continues to be the leading cause of death in the United
States. Guidant's business strategy is to design, develop, manufacture, and
market innovative, high-quality therapeutic products principally for use in
treating cardiovascular and vascular diseases which result in improved quality
of patient care and reduced treatment costs. In implementing this strategy, the
Company focuses on the following three areas, which it believes are critical to
its future success: (i) global product innovation, (ii) economic partnerships
with customers worldwide, and (iii) organizational excellence.
15
<PAGE>
The following tables are summaries of the Company's net sales and major costs
and expenses excluding the impact of special items. For purposes of analysis
and discussion herein, the Company employs a concept of operating income, which
is defined as income before special items, and excludes the items under the
category, "other income (expenses)", as set forth on the consolidated statements
of income on page 2, and accounting changes.
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
-------- -------
(Dollars in millions)
(unaudited)
Vascular intervention $324.4 $267.0
Cardiac rhythm management 245.6 185.4
Cardiac & vascular surgery 20.1 17.9
------ ------
Total net sales $590.1 $470.3
Cost of products sold 139.5 107.4
------ ------
Gross profit 450.6 362.9
Research and development 81.8 62.0
Sales, marketing, and administrative 170.1 135.1
------ ------
251.9 197.1
Operating income $198.7(1) $165.8
====== ======
AS A PERCENT OF NET SALES
-------------------------
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
-------- -------
Vascular intervention 55.0% 56.8%
Cardiac rhythm management 41.6 39.4
Cardiac & vascular surgery 3.4 3.8
------ ------
Total net sales 100.0% 100.0%
Cost of products sold 23.6 22.8
------ ------
Gross profit 76.4 77.2
Research and development 13.9 13.2
Sales, marketing, and administrative 28.8 28.7
------ ------
42.7 41.9
Operating income 33.7%(1) 35.3%
====== ======
(1) Excludes purchased research and development charges of $49.0 million in
1999. Also excludes the impact of stay-pay and the cost of products sold
impact of the purchase accounting write-up of acquired Intermedics
inventory sold in the first quarter for a total of $8.3 million. Therefore,
the cost of products sold, gross profit, research and development, and
sales, marketing, and administrative lines displayed above do not agree to
the reported consolidated statement of income presentation.
16
<PAGE>
OPERATING RESULTS -- THREE MONTHS ENDED MARCH 31, 1999
The Company had all-time record worldwide net sales of $590.1 million for the
three months ended March 31, 1999, reflecting an increase of $119.8 million or
25% over the same period in 1998. Significant growth in unit volume of 32% was
partially offset by net sales price declines of 7%, which includes the effect of
changes in product mix. The impact of foreign currency exchange rate
fluctuations was not significant.
Net sales of VI products for the three months ended March 31, 1999, were a
record $324.4 million, an increase of $57.4 million or 21.5%, from the same
period in 1998. This sales growth was due to the continued enthusiastic
customer acceptance of the ACS MULTI-LINK DUET Coronary Stent System, released
to the U.S. market in November 1998. The ACS MULTI-LINK DUET System, the
Company's newest generation coronary stent, is available on high performance
over-the-wire and rapid exchange (RX) delivery systems. The DUET was designed
specifically to deliver, deploy, and post-dilate the stent with lower delivery
profiles, enhanced radiopacity, increased radial strength, and flexibility. In
February, the Company received approval to market a 2.5mm diameter DUET in the
United States. This product also contributed to the first quarter's sales
growth.
Coronary stent sales experienced growth in all major markets. Worldwide
coronary stent sales during the first quarter of 1999 were $241.7 million,
compared to $183.8 million in the first quarter of 1998. Sales of coronary
stents in the United States of $186.6 million increased 17.4%, compared to the
first quarter of last year. International sales of coronary stents also
contributed to the Company's first quarter 1999 sales growth, due to continued
strong sales of the ACS MULTI-LINK RX DUET Coronary Stent System in Europe, 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. Sales
of coronary stents in international markets more than doubled in the first
quarter to $55.1 million, compared to $24.7 million for the same period in 1998.
Total angioplasty sales, which include coronary balloon dilatation catheters,
during the first quarter of 1999 of $78.8 million slightly declined compared to
17
<PAGE>
the first quarter of 1998. Management believes utilization of balloons in stent
procedures is decreasing due to the current prevalence of high pressure -
capable delivery systems for stents. As a result, post-dilatation balloon units
have declined.
Comparing the first quarter of 1999 to the first quarter of 1998, the Company
experienced pricing pressure on VI products, such as coronary balloon dilatation
catheters and, to a lesser extent, coronary stents. Coronary stent prices,
however, have remained consistent with the fourth quarter of 1998. The Company
believes that pricing pressures on non-stent VI products may continue.
Sales of CRM products of $245.6 million during the first quarter of 1999
increased $60.2 million or 32.5% from the same period in 1998. Pacemaker
products experienced substantial sales growth during this period, particularly
in the United States and Europe where sales of these products increased 97.4%
and 76.0%, respectively, over the first quarter of 1998. Excluding the
incremental sales effect of Intermedics pacemakers, Guidant's sales of
pacemakers in the first quarter increased 47.3% in the United States and 26.4%
in Europe relative to the same period in 1998. This sales growth, exclusive of
Intermedics, was driven by the U.S. market release of the DISCOVERY and MERIDIAN
devices in May 1998 and the European market release of these devices in March
1998. These 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. Worldwide pacemaker sales growth during
the first quarter of 1999 was 93.8%. The Intermedics acquisition accounted for
approximately $30 million of pacemaker sales in February and March 1999.
Excluding Intermedics, worldwide pacing sales grew 38.2% in the first quarter.
AICD systems also contributed to sales growth with the VENTAK AV III DR,
released in the United States in September 1998; strong sales of the VENTAK MINI
IV, released to the U.S. market in December 1998; the VENTAK AV II DR, released
in the United States in March 1998; and, the VENTAK MINI III, released in the
United States in February 1998. The VENTAK AV III DR, 20% smaller than its
predecessor product, is a rate responsive dual-chamber pacemaker/AICD. Sales of
AICD systems increased 6.3% over the first quarter of 1998. Although Management
believes sales of AICD systems in the second quarter of 1999 will be
18
<PAGE>
comparable to the first quarter of 1999, they may decline relative to the second
quarter of 1998, when the Company had record levels of AICD sales.
Net sales of C&VS products in the first quarter of 1999 were $20.1 million,
which represents 12.3% growth over the same period in 1998. Sales growth
occurred in the United States and was driven primarily by the VASOVIEW Balloon
Dissection System. In the fourth quarter of 1998, the Company recorded a $40
million non-cash impairment charge on Guidant's general surgery long-lived
assets as a result of a previously reported judgement rendered against a
subsidiary of the Company, and management's strategic redirection of this
business away from general surgery applications. The Company is currently
reviewing its options to transition out of this business. Sales of general
surgery products were over $15 million in the first quarter of 1999. The C&VS
group is focused on the ANCURE product family for the treatment of abdominal
aortic aneurysm (AAA), the thirteenth leading cause of death in the United
States. The Pre-market Approval (PMA) application for ANCURE was submitted to
the FDA in March 1999.
The Company experienced sales growth both in the United States and international
markets in the first quarter of 1999. Net sales in the United States of $425.4
million increased 18.8%, while international net sales of $164.7 million
increased 46.7%, compared to the first quarter of 1998. U.S. net sales growth
was primarily due to sales of the ACS MULTI-LINK DUET Coronary Stent System,
sales of pacemaker systems such as DISCOVERY and MERIDIAN, the incremental sales
due to the Intermedics acquisition and, to a lesser extent, increased sales of
AICD devices such as VENTAK AV III DR and VENTAK MINI IV. International net
sales growth was primarily driven by the ACS MULTI-LINK RX DUET in Europe, ACS
RX MULTI-LINK in Japan, VENTAK MINI IV, VENTAK AV III DR, and ACS RX GEMINI.
The ACS RX GEMINI Coronary Dilatation Catheter was released in the U.S. in
January 1999.
Cost of products sold was $146.4 million for the quarter ended March 31, 1999,
and represented 24.8% of net sales versus 22.8% for the same period in 1998.
Cost of products sold in the first quarter of 1999 includes the impact of
purchase accounting adjustments related to the inventory write-up of acquired
Intermedics inventory sold in the first quarter. It also includes the impact of
stay-pay for Intermedics manufacturing personnel in the first quarter of
19
<PAGE>
1999. The impact of these two items was $6.9 million. Excluding these charges,
costs of products sold represented 23.6% of net sales. This increase over the
first quarter of 1998 primarily reflects the impact of the sale of Intermedics
products, which have higher manufacturing costs.
The Company continued its commitment to achieving long-term growth by investing
significant resources in research and development. Research and development
spending as a percentage of net sales was 13.9% and 13.2% in the first quarters
of 1999 and 1998, respectively. Research and development expenses of $82.3
million increased $20.3 million or 32.7% during the first quarter of 1999
compared to the same period in 1998, and established a new record for the
Company. Increased research and development spending during the period resulted
primarily from: (i) new product development costs related to future generations
of AICDs, pacemakers, coronary stents, and dilatation catheters; (ii) the
acquisition of Intermedics and its related incremental spending; (iii)
development of radiation therapy devices for coronary restenosis; (iv)
development of stent technology for other parts of the vascular anatomy, such as
peripheral and carotid arteries; (v) development of treatment for atrial
arrhythmias; and (vi) clinical evaluation of implantable device systems for
treatment of congestive heart failure. The Company intends to maintain its
commitment to bring new technologies to the market and provide cost-effective
therapies to people who suffer from cardiovascular diseases.
On February 1, 1999, the Company completed the acquisition of Intermedics, a
leading designer, manufacturer, and marketer of cardiac rhythm management
products. Intermedics' products include bradycardia pacemakers, implantable
cardioverter defibrillators, leads, and programmers. The aggregate purchase
price of the Intermedics acquisition of $810 million has been allocated on a
preliminary basis to the assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition. Intangible assets recorded on
this acquisition will be amortized over their estimated useful lives. Developed
technology will be amortized over ten years, while sales network, assembled work
force, and the excess of cost over net assets acquired will be amortized over
twenty years.
The income approach was used in analyzing the in-process and developed
technology. The underlying premise of this approach is that the value of an
20
<PAGE>
asset can be measured by the present value of the net cash flows to be received.
The valuation of purchased research and development represents the estimated
fair value related to incomplete projects. The in-process technology acquired in
the Intermedics acquisition consists of two research and development projects
which will be integrated into existing Guidant products. These projects involve
work on certain new bradycardia technologies. The new bradycardia technology
relates to increased longevity, expanded diagnostics, connector technology, and
pacing technology. Management anticipates that these technologies will be on the
market in late 2000 and will cost approximately $20 - $30 million to complete.
In addition, Guidant acquired the THINLINE pacing lead family from Intermedics.
Six projects were in-process at the date of acquisition related to the THINLINE
family. Endocardial pacing leads are insulated wires that carry stimulating
impulses from the pulse generator to the heart. They also carry electrical
signals produced by cardiac activity to the pulse generator. THINLINE II is
presently in clinical trials, will be available in silicone or polyurethane, and
will have even lower profile and improved radiopacity. Management anticipates
that THINLINE II will also be on the market in late 2000 and will cost
approximately $8 - $10 million to complete. At the acquisition date, the
technological feasibility of the new THINLINE products and the new bradycardia
technologies had not been established, and the in-process technology had no
alternative uses. A 20% discount rate was used in calculating the net present
value of the cash flows.
Sales, marketing, and administrative expenses in the first quarter of 1999 grew
$35.9 million or 26.6%, compared to the three month period ended March 31, 1998.
This increase was due to: (i) incremental expenses associated with the inclusion
of Intermedics results; (ii) increased legal costs associated with various
litigation; (iii) costs related to the implementation of direct operations in
certain international markets, such as Japan; and (iv) the impact of stay-pay
for non-manufacturing Intermedics personnel.
Operating income, as previously defined, was $198.7 million in the first quarter
of 1999, or 33.7% of net sales, compared to $165.8 million or 35.3% of net sales
for the three months ended March 31, 1998. This growth of 20% in operating
income was less than the 25% growth in net sales due to the aforementioned
increased cost of products sold and operating expenses.
21
<PAGE>
The Company had net other expenses of $22.4 million, including a one-time gain
on an equity investment of $14.4 million. This one-time gain was recorded in
connection with the merger of CardioGenesis Corporation, in which Guidant had an
equity interest, and Eclipse Surgical Technologies, Inc. Excluding this gain,
net other expenses were $36.8 million for the three months ended March 31, 1999.
Net other expenses for the first quarter of 1998, excluding a $60 million charge
related to an agreement with C.R. Bard, Inc., that settled two patent
infringement lawsuits and granted the Company paid-up licenses to certain
patents, were $20.3 million. The increase in adjusted other expenses of $16.5
million in the first quarter of 1999 was due primarily to increased interest and
amortization expense related to the Intermedics acquisition.
As a result of certain non-deductible special charges in the first quarter of
1999, the Company's effective tax rate was 53.4% compared to 35.3% in the first
quarter of 1998. Excluding the impact of special items, the effective income
tax rate for the three months ended March 31, 1999, was 36.9%. This increase
relates to the non-deductible goodwill amortization expense related to the
acquisition of Intermedics.
Earnings before interest, taxes, depreciation, and amortization (EBITDA),
exclusive of special items in both years, was $202.2 million for the three
months ended March 31, 1999, compared to $164.6 million for the three months
ended March 31, 1998. This 22.8% improvement in EBITDA is primarily driven by
sales growth.
Guidant had reported net income for the three months ended March 31, 1999, of
$52.1 million and diluted net income per share of $0.17. Net income also
includes the net impact of $3.3 million for the cumulative effect of a change in
accounting principle in the first quarter of 1999. Excluding the aforementioned
special items in the first quarter of 1999 and 1998, net income would have been
$102.1 million and $94.1 million, respectively. This 8.5% growth in adjusted net
income reflects the aforementioned higher other expenses and effective income
tax rate. Earnings per share-assuming dilution, exclusive of the above special
items, were $0.33 for the three months ended March 31, 1999, and $0.31 for the
three months ended March 31, 1998.
22
<PAGE>
LIQUIDITY AND FINANCIAL CONDITION
The Company continued to generate cash flows which were more than sufficient to
fund operations during the first quarter. Cash and cash equivalents increased
to $33.7 million at March 31, 1999, from $15.6 million at December 31, 1998;
cash provided by operating activities was $122.4 million in the first quarter of
1999, compared to $105.2 million for the first quarter of 1998.
Working capital of $378.1 million at March 31, 1999, increased by $201.8 million
from the prior year-end level. Acquired Intermedics assets account for
approximately $75 million of this increase at March 31, 1999. In addition,
performance-based compensation payments reduced employee compensation accruals,
which also contributed to the increase in working capital. The current ratio at
March 31, 1999 was 1.6:1 compared to 1.3:1 at December 31, 1998. The Company
believes its cash from operations is sufficient to fund essentially all future
working capital needs and discretionary operating spending requirements.
Net cash used for investing activities totaled $842.0 million for the first
quarter of 1999, compared to $12.7 million for the same period in 1998. The
acquisition of Intermedics, net of cash acquired, was a $798.0 million use of
cash, in the first quarter of 1999. Net additions of property and equipment of
$38.9 million for the first three months of 1999, compared to $19.1 million for
the first three months of 1998, were also a significant use of cash for
investing activities during both periods. This increase in property and
equipment additions is due in part to the Company's announced investment in a
manufacturing facility in Ireland and expansion of certain facilities in both
California and Minnesota.
Net cash provided by financing activities totaled $739.7 million for the first
quarter of 1999. Net proceeds of $346.4 million were received from the issuance
of seven year, 6.15% long-term notes. In addition, commercial paper was issued
to finance the acquisition of Intermedics on February 1, 1999. In the first
quarter of 1998, financing activities decreased cash by $87.0 million.
At March 31, 1999, the Company had outstanding borrowings of $1,232.6 million
through the issuance of commercial paper, bank borrowings, and approximately
23
<PAGE>
$350 million of 6.15% long-term notes due in 2006. Bank borrowings represent
short-term uncommitted credit facilities with various commercial banks. The
weighted-average interest rate of all debt outstanding at March 31, 1999, was
5.21%. The commercial paper borrowings are supported by two credit facilities
aggregating $850 million. This includes a $400 million facility that permits
borrowings through August 2003 and a $450 million facility that permits
borrowings through August 1999 which would not be required to be repaid until
August 2000. There are currently no outstanding borrowings under these
facilities. The Company expects that approximately $993 million of borrowings
will remain outstanding for the next twelve months and, as a result, this amount
has been classified as long-term at March 31, 1999.
The Company expects its cash from operations to be adequate to meet its
obligations to make interest payments on its debt and other anticipated
operating cash needs including planned capital expenditures. Capital
expenditures are expected to be over $200 million in 1999, primarily due to
investment in the Company's new manufacturing facility in Ireland and expansion
of U.S. administrative and manufacturing facilities. Guidant reached a license
agreement with Angeion Corporation on April 8, 1999, requiring a $35 million
payment in the second quarter of 1999. In addition, Guidant has recorded
liabilities for the discharge of certain obligations related to the Intermedics
acquisition. These liabilities include severance, distributor terminations, and
miscellaneous cancellation fees. The estimated total liabilities recorded
related to the Intermedics acquisition are $87 million, most of which will be
paid in 1999. The Company believes that amounts available through existing
commercial paper programs should be adequate to fund maturities of short-term
borrowings.
The Company has recognized net deferred tax assets aggregating $209.2 million at
March 31, 1999, compared to $157.1 million at December 31, 1998. This increase
is due primarily to the establishment of deferred tax assets as part of the
purchase accounting adjustments on the Intermedics acquisition. In view of the
consistent profitability of its past operations, the Company believes that all
these assets will be substantially recovered and that no significant additional
valuation allowances are necessary.
24
<PAGE>
YEAR 2000
Guidant is taking reasonable steps necessary to confirm that its business
systems, software, and equipment that consider and process date-related
information will continue to function properly after December 31, 1999. In
doing so, Guidant is paying particular attention to assuring compliance with all
regulatory guidelines regarding Year 2000 issues. Guidant's implantable devices
do not contain real-time clocks. As a result, these devices present no Year
2000 issues. The Company's other products have been assessed and found to be
Year 2000 ready with the exception of a few minor adjustments. These
adjustments are limited to programmers and relate to date limitations that
present no adverse health impact to the patient.
Guidant, as a corporation formed in 1994, has many relatively new systems,
including an enterprise-wide operational support system, which has been
certified Year 2000 ready by its developer. As such, Management's focus has
been on assessing and readying manufacturing equipment, facilities
infrastructure, other computer systems, and business partners. This assessment
has been completed for all business critical systems and, necessary actions are
being taken to remediate equipment and systems and develop contingency
arrangements. Guidant believes it will complete any necessary remediation of
business critical equipment, other computer systems, and infrastructure by June
30, 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
second half of 1999. Efforts to confirm the readiness of various business
partners will continue up to and through, January 1, 2000.
The Company has also performed an assessment of two recent acquisitions,
Intermedics, Inc., and InControl, Inc. Like Guidant, the implantable devices
produced by these companies do not contain real-time clocks, and therefore are
not susceptible to Year 2000 issues. Assessments of other business operations
from these acquisitions did not reveal any major deficiencies. Guidant
believes, therefore, that the integration of these enterprises will not
adversely impact Guidant's Year 2000 project schedule.
25
<PAGE>
The Company is devoting 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 periods.
Based upon current assessments, Management believes that the cost of such
actions will not have a material effect on Guidant's operating results or
financial condition. The Company currently expects its total out-of-pocket
costs related to addressing its Year 2000 issues will be approximately $20
million, $8.8 million of which has been incurred to date. Approximately $6
million of this total represents capital expenditures, which will be capitalized
and depreciated over the assets' estimated useful lives.
Recognizing that there are external forces beyond its control, Guidant is
developing contingency plans to address any situations that might occur. The
Guidant Year 2000 Contingency Plan Process is an extension of Guidant's business
continuation planning process. These plans lay out what each reporting unit
will do if, despite best efforts, elements crucial to business are not available
or cease to function properly due to Year 2000 processing problems.
Considerations include: adjusting inventory levels, identifying alternative
sources of supply and services, understanding and anticipating supply and demand
chain readiness, establishing crisis response processes to address unexpected
problems, and defining alternative ways to stabilize business operations quickly
and get the business critical jobs done if a Year 2000 problem arises.
The Year 2000 issue is expected to affect the systems of other external entities
with which the Company interacts. However, the Company cannot reasonably
estimate the potential impact on its financial condition and operations if
critical third parties do not become Year 2000-ready on a timely basis. The
Company is working through various trade associations as well as communicating
directly with its significant suppliers and customers to determine their Year
2000 readiness. In addition, the Company has also begun contingency planning to
handle disruptions with utility providers including electrical and
telecommunications suppliers.
Guidant expects to have contingency plans in place by August 30, 1999. There
can be no guarantee, however, that these efforts will prevent a materially
adverse effect on the Company's financial condition or operations due to the
failure of third parties to become Year 2000-ready.
26
<PAGE>
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995, the Company cautions investors that any forward-looking statements or
projections made by the Company, including those made in this document, are
subject to risks and uncertainties which may cause actual results to differ
materially from those projected. Economic, competitive, governmental,
technological, and other factors which may affect the Company's operations are
discussed Exhibit 99.1 filed herewith.
27
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On May 3, 1996, Angeion Corporation filed a lawsuit against CPI in the United
States District Court of Minnesota. The complaint, as subsequently amended,
alleged infringement of certain Angeion defibrillator patents by CPI's MINI I
and MINI II defibrillator models. On September 15, 1998, CPI filed suit against
Angeion Corporation in the United States District Court of Minnesota. The
complaint alleged infringement of certain CPI defibrillator patents by Angeion's
defibrillator products. On April 8, 1999 the Company announced that it had
settled these two suits and been granted a royalty-free nonexclusive license to
all of Angeion's current patents and patent applications covering cardiac
stimulation devices in exchange for $35 million. The $35 million will be
recorded in the second quarter of 1999 as an intangible asset and will be
amortized over twelve years.
On June 4, 1996, General Surgical Innovations, Inc., (GSI) filed suit against
Origin MedSystems, Inc., (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 judgement of infringement was granted on October 29, 1998, and a trial
was held on the validity of the GSI patent, willful infringement and damages.
On February 9, 1999, the jury determined the patent to be valid and infringement
to be willful, and awarded GSI approximately $12.9 million in damages. GSI
filed post-trial motions seeking injunctive relief, trebling of damages and a
declaration that the case was exceptional so as to provide a basis for an award
of attorneys fees. By an order and judgment entered on April 14, 1999, the
court declined GSI's requests to increase damages and to declare the case
exceptional. An injunction was issued enjoining sales of the Origin products
for use in the United States, but the implementation was stayed until November
15, 1999 as to customers who were users of the products as of February 8, 1999,
subject to Origin paying to GSI a 30% royalty. Origin has appealed, and this
appeal relates to this injunctive relief as well as to liability.
On June 4, 1998, Cordis filed suit against the Company and ACS in the District
Court for the Eastern District of Virginia, alleging that the sale of the ACS
MULTI-LINK Coronary Stent infringes two patents owned by Cordis. On August 7,
1998, the court granted the Company's motion to transfer the case to the
Northern District of California. Based on defenses asserted by the Company,
Cordis agreed to dismiss this case without prejudice, and a stipulation was
filed with the Court requesting that all claims and counterclaims be dismissed.
The Court entered an Order dismissing the case in its entirety, without
prejudice, on April 5, 1999.
On March 31, 1999, Pacesetter, Inc. filed suit against Guidant Sales
Corporation, Inc. and CPI in the Central District of California, alleging that
the VIGOR SR and VIGOR DR pacemakers infringe two patents owned by Pacesetter.
In the lawsuit, Pacesetter is seeking injunctive relief and monetary damages.
28
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following documents are filed as exhibits to this
report:
27.1 Financial Data Schedule
99.1 Factors Possibly Affecting Future Operating Results.
(b) Reports on Form 8-K. During the quarter for which this Report on
Form 10-Q is filed, the registrant filed the following current reports on Form
8-K:
Form 8-K Date of Filing Description
- ---------------- ----------------- -----------------------------
Item 2 February 4, 1999 Acquisition of the electro-
physiology business of
Sulzer Medica, Ltd.
Item 5 February 11, 1999 Press release filed by the
Company on February 11, 1999,
explaining a fourth quarter
1998 charge associated with
its Origin subsidiary.
Item 5 February 17, 1999 Underwriting agreement dated
February 11, 1999, relating
to the issuance and sale by
the Company of $350 million,
6.15% notes due 2006.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
GUIDANT CORPORATION
-------------------
(Registrant)
Date May 5, 1999 /s/ Keith E. Brauer
---------------------------
Keith E. Brauer
Vice President, Finance and
Chief Financial Officer
Date May 5, 1999 /s/ Roger Marchetti
---------------------------
Roger Marchetti
Corporate Controller and
Chief Accounting Officer
30
<PAGE>
Exhibit List
27.1 Financial Data Schedule
99.1 Factors Possibly Affecting Future Operating Results.
31
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<BONDS> 993
0
0
<COMMON> 193
<OTHER-SE> 373
<TOTAL-LIABILITY-AND-EQUITY> 2,310
<SALES> 590
<TOTAL-REVENUES> 590
<CGS> 146
<TOTAL-COSTS> 146
<OTHER-EXPENSES> 131
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> 119
<INCOME-TAX> 64
<INCOME-CONTINUING> 55
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 3
<NET-INCOME> 52
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.17
</TABLE>
<PAGE>
GUIDANT CORPORATION
Exhibit 99.1
Factors Possibly Affecting Future Operating Results
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include the following:
1. Economic factors over which the Company has no control, including changes in
inflation, interest rates and foreign currency exchange rates.
2. Delays and uncertainties in the regulatory approval process in the United
States and other countries, resulting in lost market opportunities.
3. Unexpected safety, performance or efficacy concerns arising with respect to
marketed products, whether or not scientifically justified, leading to product
recalls, withdrawals or declining sales.
4. Unexpected interruptions of manufacturing operations as a result of
regulatory enforcement actions by the FDA or other regulatory authorities.
5. The difficulties and uncertainties inherent in new product development,
including new products that appear promising during development but fail to
reach the market as a result of safety, performance or efficacy concerns,
inability to obtain necessary regulatory approvals, unanticipated restrictions
imposed on approved indications, excessive costs to manufacture, infringement of
patents or other intellectual property rights of others, or technological
advances by a competitor of the Company.
6. Litigation and other legal factors which could preclude commercialization of
products or negatively affect the level of sales or profitability of existing
products, including litigation of product liability claims, antitrust
litigation, environmental matters and patent disputes.
7. Future difficulties obtaining necessary components or materials used in
manufacturing the Company's products.
8. Future difficulties obtaining or the inability to obtain appropriate levels
of product liability insurance.
9. Competitive factors including the ability of the Company to obtain patent
rights or other intellectual property rights sufficient to keep competitors from
marketing competing products, the introduction of new products or therapies by
competitors or scientific or medical developments that render the Company's
products obsolete, uneconomical or otherwise non-competitive or the acquisition
of patents by competitors that prevent the Company from selling a product or
including key features in the Company's products.
<PAGE>
10. Governmental factors including laws and regulations, policies and judicial
decisions that affect the regulation and reimbursement of medical devices,
product liability, health care reform or tax laws.
11. Health care industry factors, including increased customer demands for
price concessions, reductions in third-party (Medicare, Medicaid and other
governmental programs, private health care insurance and managed care plans)
reimbursement levels for procedures using the Company's products and limits
imposed by customers on the number of manufacturers or vendors which the
customer will purchase products from.
12. Accounting requirements to write off obsolete inventory or goodwill which
reduces reported earnings or changes in accounting standards applicable to the
Company.
13. Internal factors such as retention of key employees, change in business
strategies and the impact of restructuring and business combinations.
14. The ability of the Company to implement its strategy that includes the
potential acquisition of one or more businesses and difficulties in achieving
the integration of the operations of acquired businesses in a cost-effective
manner and in implementing strategies necessary for the realization of
anticipated synergies.
15. The inability of certain of the Company's, or its Suppliers' or
Customers', computer systems to handle dates beyond the year 1999.
16. The Euro Conversions impact on the competitive environment in which the
Company operates or its impact on the Company's fundamental risk management
philosophy.
17. Factors beyond the control of the Company, including earthquakes
(particularly in light of the fact that the Company has significant facilities
located near major earthquake fault lines), floods, fires or explosions.
