Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Form 10-K 35 193K
2: EX-10.13 Settlement Agreement Dated 4/4/1998 23 50K
3: EX-10.40 Five Year Credit Agreement Dated 8/26/1998 70 200K
4: EX-10.41 364-Day Credit Agreement Dated 8/26/1998 74 207K
5: EX-13.1 Annual Report Dated 12/31/1998 52 229K
6: EX-21.1 List of Subsidiaries 1 9K
7: EX-23.1 Consent of Independent Auditors 1 8K
8: EX-27.1 Financial Data Schedule 2 10K
9: EX-99.1 Factors Possibly Affecting Future Results 2 11K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File Number 1-13388
------------------------------------------- ------------------------------
GUIDANT CORPORATION
(Exact name of registrant as specified in its charter)
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111 MONUMENT CIRCLE
29TH FLOOR
INDIANA 35-1931722 INDIANAPOLIS, INDIANA 46204
(State or other jurisdiction of (IRS Employer (Address of principal (Zip Code)
incorporation or organization) Identification No.) executive offices)
Registrant's telephone number, including area code: 317-971-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock New York Stock Exchange
Pacific Exchange, Inc.
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock of the registrant held by non-
affiliates as of March 1, 1999 (Common Stock) was approximately $16.8 billion.
The number of shares of Common Stock outstanding as of March 1, 1999:
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CLASS NUMBER OF SHARES OUTSTANDING
Common 301,861,099
Portions of the following documents have been incorporated by reference into
this report:
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DOCUMENT PARTS INTO WHICH INCORPORATED
Registrant's Annual Report to Shareholders Parts I, II and IV
for fiscal year ended December 31, 1998
Registrant's Proxy Statement for the Annual Part III
Meeting of Shareholders to be held May 17, 1999
Part I
Item 1. BUSINESS
Overview
Guidant Corporation (the "Company")* was incorporated in Indiana on
September 9, 1994 to be the parent of five of the nine businesses in the Medical
Devices and Diagnostics ("MDD") Division of Eli Lilly and Company ("Lilly").
Prior to the consummation of the initial public offering of the Company's common
stock on December 20, 1994 (the "Offering"), the Company was a wholly-owned
subsidiary of Lilly. Pursuant to the Offering, 19.8 percent of the Company's
common stock was issued to the public. Lilly continued to own 80.2 percent of
the Company's common stock after the Offering. On September 25, 1995, Lilly
disposed of its remaining ownership interest in the Company by means of a tax-
free split-off, an exchange offer pursuant to which Lilly shareholders were
given the opportunity to exchange some, all or none of their Lilly common stock
for the Company's common stock owned by Lilly (the "Exchange Offer"). The
consummation of the Exchange Offer resulted in Lilly distributing all of its
Company common stock to Lilly shareholders. As a result, Lilly no longer owns
any Company common stock.
The Company is a multinational company that designs, develops, manufactures
and markets a broad range of innovative, high quality, therapeutic medical
devices for use in cardiac rhythm management ("CRM"), vascular intervention
("VI"), and cardiac and vascular surgery ("CVS"). In CRM, the Company is a
worldwide leader in automatic implantable cardioverter defibrillator ("AICD")
systems used in the detection and treatment of abnormally fast heart rhythms.
The Company also designs, manufactures and markets a full line of implantable
pacemaker systems used in the treatment of slow or irregular heart rhythms. On
February 1, 1999, the Company acquired Intermedics, Inc. the electrophysiology
business of Sulzer Medica for an aggregate cost of approximately $810 million.
This includes $200 million required to settle the Company's intellectual
property litigation with Intermedics, payable regardless of the consummation of
the acquisition. Intermedics is a global leader in the design, development,
manufacture and distribution of pacemakers and pacemaker leads, with 1998
revenues of approximately $305 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 significantly increase the Company's sales presence with
cardiologists, which will benefit the Company in its direct sale of pacemakers.
Also, Intermedics has an intellectual property 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 profiles, and a wider range of sizes.
As of about December 1998, the DUET was the top selling stent in Europe and the
United States. In CVS, the Company develops, manufactures and markets products
for use in minimally invasive cardiac and vascular surgery. The Company's net
sales for the year ended December 31, 1998 were $1,897 million.
The Company's business strategy is to design, develop, manufacture and
market innovative, high quality therapeutic products principally for use in
treating cardiovascular disease, the leading cause of death in the United
States, resulting in improved quality of patient care and reduced treatment
costs. In implementing this strategy, the Company focuses on the following three
areas, which the Company believes are critical to its future success: (1) global
product innovation, (2) economic partnerships with customers worldwide, and (3)
organizational excellence.
----------------
* The terms, "Company," "Guidant," and "Registrant" are used interchangeably
herein to refer to Guidant Corporation or to Guidant Corporation and its
consolidated subsidiaries, as the context requires.
2
The Company will continue to pursue a strategy that includes the potential
acquisition of businesses in the medical device industry. The Company plans to
acquire technologies that are complementary to its existing technology base,
products that serve the Company's existing customer base and businesses that
expand its geographical presence. However, the Company cannot assure you that
any acquisition 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
abnormally fast, abnormally slow or irregular heart rhythms or arrhythmias. The
Company's CRM product line is organized into two major product categories:
tachycardia ("Tachy") and bradycardia ("Brady"). The Tachy product category
includes AICDs, endocardial defibrillation leads, programmers and accessories
used primarily in the treatment of abnormally fast arrhythmias. The Brady
product category includes pacemaker pulse generators, endocardial pacing leads,
programmers and accessories used primarily in the treatment of slow or irregular
arrhythmias. Customers for Brady products include electrophysiologists,
implanting cardiologists and cardiovascular surgeons. Customers for Tachy
products are primarily electrophysiologists. Sales of the Company's CRM
products, as a percentage of the Company's total consolidated net sales for the
years ended December 31, 1998, 1997 and 1996, were 43%, 50% and 55%,
respectively.
Tachy
AICD systems, or Tachy products, are used to detect and treat potentially
fatal, abnormally fast heart rhythms by delivering electrical energy to the
heart and, in so doing, restoring the heart's normal rhythm. Tachyarrhythmias
often result from the presence of abnormal cardiac tissue which interferes with
the normal electrical activity of the heart.
The Company's Tachy products offer multiple therapeutic options (tiered-
therapy). Tiered-therapy devices use a staged process for treating multiple
arrhythmias by first providing lower intensity pacing pulses, or antitachycardia
pacing, to the patient in an attempt to correct the abnormal rhythm. If
antitachycardia pacing is unsuccessful or if the arrhythmia requires more
aggressive therapy, then the device can progress to low or high energy shocks.
Brady
Cardiac pacemaker systems, or Brady products, are generally used to manage
a slow or irregular heartbeat caused by disorders that disrupt the heart's
normal electrical conduction system. This often results in a heart rate
insufficient to provide adequate blood flow through the body, creating symptoms
including fatigue, dizziness and fainting. Brady products range from
conventional single chamber devices to more sophisticated adaptive-rate dual
chamber devices.
Brady products are used to treat patients whose natural pacemaker, the
sinus node, is malfunctioning, or patients suffering from a disruption in the
electrical conduction system. Normally, the sinus node, located in the upper
atrial portion of the heart, sends electrical signals through the atrium to the
atrioventricular ("AV") node, which in turn sends signals down to the lower
(ventricular) chambers of the heart. The patient population needing pacemakers
can be divided roughly in half: those with malfunctioning sinus nodes, or Sick
Sinus Syndrome, and those suffering from malfunctioning AV nodes, or AV Block.
3
On February 1, 1999, the Company purchased Intermedics, Inc. the
electrophysiology business of Sulzer Medica, Ltd. for an aggregate cost of
approximately $810 million. This includes $200 million required to settle the
Company's intellectual property litigation with Intermedics, payable regardless
of the consummation of the acquisition. Intermedics is a global leader in the
design, development, manufacture and distribution of pacemakers and pacemaker
leads, with 1998 revenues of approximately $305 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 increase the Company's
sales presence with cardiologists, which will benefit the Company in its direct
sale of pacemakers. Intermedics also has an intellectual property 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
development of devices for the treatment of atrial arrhythmias, for $137.5
million in cash. The acquisition was accounted for under the purchase method of
accounting and resulted in a pre-tax charge of $90 million, which represented
the appraised value of in-process research and development. This charge reflects
the unproven status of this technology. The Company must complete research and
testing related to this innovative technology and obtain FDA approval to market
any resulting product.
Vascular Intervention
The Company offers its customers a wide range of VI products, including
stent systems, coronary dilatation catheters, guide wires, guiding catheters,
atherectomy catheters and related accessories. Customers for VI products are
primarily interventional cardiologists. Sales of VI products, as a percentage of
the Company's total consolidated net sales for the years ended December 31,
1998, 1997 and 1996 were 53%, 45% and 40%, respectively.
More than six million Americans have been diagnosed with coronary artery
disease ("CAD"), which is the formation of blood flow restrictions
(atherosclerotic lesions) within the coronary arteries. If untreated, CAD can
lead to a heart attack, or cause chest pain that may interfere with normal
activities. Worldwide, over one million patients annually undergo minimally
invasive CAD interventions (angioplasty, stenting, atherectomy or mechanical or
laser ablation), which are less invasive and less expensive alternatives to
coronary artery bypass graft surgery.
In a percutaneous transluminal coronary angioplasty ("PTCA") procedure, a
local anesthetic is administered and a small incision is made in the patient's
groin area to gain access to the femoral artery. The physician inserts a guiding
catheter through the femoral artery into the entrance of the coronary blood
vessel and then advances a small guide wire through the inside of the guiding
catheter, into the blood vessel and across the site of the blockage. Then a
dilatation catheter is delivered over the guide wire through the inside of the
guiding catheter into the blood vessel and across the site of the blockage. The
dilatation catheter is then inflated to compress the atherosclerotic plaque
against the artery wall, thereby enlarging the opening of the vessel and
increasing blood flow to the heart. At the end of the PTCA procedure, all of the
devices are withdrawn.
The major clinical challenge to PTCA is clinical restenosis, the
renarrowing of the blood vessel at the site of the initial treatment, generally
requiring another intervention within six months of the initial procedure. A
number of other technologies have evolved to reduce the occurrence of this
condition, often in combination with a coronary dilatation catheter, including
stenting, atherectomy and ablation. Like coronary dilatation catheters, coronary
stents, atherectomy catheters and ablation catheters are delivered through a
guiding catheter and over a guide wire.
4
Coronary stents are metal tubes or coils that are mounted on coronary
dilatation catheters. Coronary stents are permanently deployed at the blockage
by inflating the coronary dilatation catheter to expand the stent in the artery.
When the coronary dilatation catheter is removed from the artery, the stent
stays in place, which provides a "mechanical" way of keeping the artery open. In
October 1997, the Company received approval to market the ACS RX MULTI-LINK
Coronary Stent System in the United States and in November, 1998 the Company
received approval to market the ACS MULTI-LINK DUET Coronary Stent System in the
United States.
Atherectomy is the excision and removal of blockages by catheters with
miniature cutting systems. Ablation is the mechanical or laser reduction of
blockages without the removal of the tissue.
In May 1997, the Company acquired the assets of Neocardia, LLC.
("Neocardia"), a privately held development-stage company for an initial price
of $57.4 million. On April 27, 1998, the conditions which required the payment
of additional consideration for the asset acquisition of NeoCardia were met and
the Company paid $28.7 million which represents additional purchase price. The
Company could also pay subsequent additional bonus and royalty payments
contingent upon achieving certain product development and sales goals. These
additional payments are accounted for as goodwill. Neocardia, which currently
does not have any products available for commercial sale, has pioneered the use
of radiation therapy to reduce the occurrence of restenosis. Although the
Company has clinical studies ongoing in this area radiation technology is still
in the development stage and no assurance can be given that the Company will
obtain the regulatory approvals necessary for commercial marketing.
Cardiac and Vascular Surgery
The Company is involved in the development and marketing of innovative
surgical devices and systems which alter the surgeon's approach to surgical
procedures and may provide improved clinical benefit, reduced procedure time and
better patient outcomes. In May 1996, the Company announced that the strategic
focus for its minimally invasive surgery business would be on cardiovascular
applications and, in December 1997, the business group was renamed the Cardiac
and Vascular Surgery Group. The primary customers for the Company's CVS products
are cardiac and vascular surgeons, and general surgeons. Sales of the Company's
CVS products, as a percentage of the Company's total consolidated net sales for
the years ended December 31, 1998, 1997 and 1996, were 4%, 5% and 5%,
respectively. These percentages include other minimally invasive surgery
products sold by the Company with a focus on laparoscopic market opportunities
in the field of general surgery. Certain of these devices were developed for and
manufactured under original equipment manufacturer (OEM) distribution
arrangements.
In December 1997, the Company completed its acquisition of EndoVascular
Technologies, Inc. ("EVT"). EVT designs, develops and manufactures minimally
invasive systems to repair diseased or damaged vascular structures. EVT is
currently developing a product, the ANCURE system, to provide catheter-based
delivery and implantation of a specialized vascular prosthesis to repair
abdominal aortic aneurysms which would represent a less invasive alternative to
the open surgical procedure performed today. The ANCURE system is approved for
marketing in Europe and Australia and 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.
The Company believes that CVS product systems may significantly decrease
the patient's postoperative pain, hospital stay and recovery period by reducing
the resulting trauma caused by more invasive surgical techniques.
On June 4, 1996, General Surgical Innovations, Inc. ("GSI") filed suit
against the Company's Origin Medsystems, Inc. ("Origin") subsidiary alleging
that the VASOVIEW Balloon Dissection System and Preperitoneal Distention Balloon
Systems infringe a patent owned by GSI. On February 8, 1999, the jury in this
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case returned a verdict that Origin infringed GSI's patent that covers the
VASOVIEW and these general surgery products and found that Origin should pay
$12.9 million in damages to GSI. The jury also found certain claims of the
patent to have been willfully 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 was held on March 2,
1999. While Origin may appeal the decision once a judgment 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, the Company
also reassessed the recoverability of its general surgery assets using a
discounted cash flow analysis performed in accordance with generally accepted
accounting principles. The Company's revised analysis indicated that a reduced
level of future cash flows was likely and that a non-cash impairment charge of
$40 million became necessary which was taken for the year ended 1998.
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:
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Category Description Product Name Date of Commercial Release
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First
U.S. International
Release Release
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Tiered- AICDs that provide VENTAK MINI IV Dec. 1998 Dec. 1998
Therapy low and high energy VENTAK MINI III HE Dec. 1998 Dec. 1998
shock therapy, Brady VENTAK AV III DR Sept. 1998 Oct. 1998
pacing and VENTAK AV II DR March 1998 Sept. 1997
antitachycardia VENTAK MINI III Jan. 1998 Oct. 1997
pacing. 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 ENDURANCE EZ (1) Nov. 1998
Defibrillation inserted through a ENDURANCE RX (1) Apr. 1998
Leads vein into the heart, ENDURANCE Sept. 1998 Feb. 1998
which allow energy to ENDOTAK DSP Jan. 1996 Oct. 1994
be transmitted to ENDOTAK 70 Series Aug. 1994 Nov. 1992
and from the implanted
AICD, allowing arrhythmias
to be detected and treated.
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(1) This product is not currently available in the United States. There can be
no assurance that the Company will obtain the regulatory approval necessary
for commercial marketing of this product in the United States.
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Brady Products
The Company offers a broad array of Brady products ranging from
conventional single chamber devices to more sophisticated adaptive-rate, dual
chamber devices as set forth in the following chart:
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Category Description Product Name Date of Commercial Release
-------- ----------- ------------ --------------------------
First
U.S. International
Release Release
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Single Pacemakers that pace PULSAR SSI (1) March 1998
Chamber (SSI) one chamber of the MERIDIAN SSI May 1998 March 1998
heart, typically the VIGOR SSI March 1995 May 1993
ventricle, at a VISTA VVI Apr. 1988 Dec. 1987
programmed rate.
Single Pacemakers that pace PULSAR MAX SP (1) Oct. 1998
Chamber one chamber of the PULSAR SR (1) March 1998
Adaptive-Rate heart, and incorporate DISCOVERY SR May 1998 March 1998
(SSIR) a sensor that modifies MERIDIAN SR May 1998 March 1998
the pacing rate in VIGOR SR June 1995 May 1993
response to physical
activity.
Dual Chamber Pacemakers that pace PULSAR DDD (1) March 1998
(DDD) both chambers of the MERIDIAN DDD May 1998 March 1998
heart, thereby VIGOR DDD Oct. 1994 May 1993
improving heart VISTA DDD June 1990 Oct. 1989
synchronization and
cardiac output.
Dual Chamber Pacemakers that PULSAR MAX DR (1) Oct. 1998
Adaptive-Rate pace both chambers PULSAR DR (1) March 1998
(DDDR) of the heart, and DISCOVERY DR May 1998 March 1998
incorporate a sensor MERIDIAN DR May 1998 March 1998
that modifies the VIGOR DR June 1995 May 1993
pacing rate in
response to physical
activity.
Endocardial Insulated wires, SELUTE PICOTIP (1) Oct. 1998
Pacemaker inserted through a ATRIAL
Leads vein into the heart, SWEET PICO RX (1) May 1998
which allow energy SELUTE PICOTIP April 1998 Sept. 1997
to be transmitted to SWEET TIP RX Oct. 1998 June 1997
and from the SELUTE ATRIAL (1) Oct. 1996
implanted pacemaker. SELUTE May 1996 Dec. 1994
SELUTE ATRIAL (1) June 1996
SWEET TIP RX (1) June 1996
(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 electrophysiologists, cardiovascular
surgeons, 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
distributors, who cover more than 80 countries. Intermedics products include
dual-chamber pacemakers such as the Cosmos 3, dual-chamber, rate-responsive
pacemakers such as the Relay, Marathon DR and Momentum DR, single-chamber rate-
responsive pacemakers such as Dash and Marathon SR, and single-chamber rate-
responsive pacemakers such as the Unity-C and the Unity.
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Vascular Intervention Products
The Company offers its customers a wide range of VI products, including
coronary 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:
[Download Table]
Date of U.S.
Commercial
Category Description Product Name Release
-------- ----------- ------------ ------------
CORONARY:
Stents Stents are ACS MULTI-LINK OTW DUET Nov. 1998
implantable metal ACS MULTI-LINK RX DUET Nov. 1998
devices that are ACS OTW MULTI-LINK HP April 1998
permanently ACS OTW MULTI-LINK April 1998
deployed to provide ACS RX MULTI-LINK HP Feb. 1998
a "mechanical" way ACS RX MULTI-LINK Oct. 1997
to keep an artery
open.
Rapid Exchange RX coronary ACS RX GEMINI Jan. 1999
("RX") dilatation catheters ACS RX SOLARIS Nov. 1998
Coronary allow for easy exchange ACS RX ROCKET Nov. 1997
Dilatation of the catheter ACS RX COMET VP Feb. 1997
Catheter without removing the ACS RX COMET Nov. 1996
original guide wire. RX ELIPSE Oct. 1993
Perfusion Perfusion coronary ACS RX ESPRIT Apr. 1998
Coronary dilatation catheters ACS OTW LIFESTREAM Dec. 1995
Dilatation allow continuous ACS RX LIFESTREAM Mar. 1995
Catheter blood flow during ACS RX FLOWTRACK Mar. 1993
the PTCA procedure, ACS RX PERFUSION Dec. 1990
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") catheters are ACS Tx2000 VP April 1997
Coronary delivered over a ACS Tx2000 Nov. 1996
Dilatation separate guide wire to
Catheter position the balloon
across the lesion.
Atherectomy Catheters which ATHEROCATH-BANTAM Dec. 1996
Products allow for the ATHEROCATH-GTO Sept. 1994
excision and removal ATHEROCATH SCA-EX Sept. 1992
of atherosclerotic
plaque.
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Vascular Intervention Products (continued)
[Download Table]
Date of U.S.
Commercial
Category Description Product Name Release
-------- ----------- ------------ -------
Guide wires Individual ACS HI-TORQUE BALANCE Nov. 1998
guide wires are HEAVYWEIGHT
inserted through ACS HI-TORQUE CROSS-IT Sept. 1998
coronary and ACS HI-TORQUE ALL STAR Sept. 1997
peripheral vessels ACS HI-TORQUE BALANCE
facilitating the MIDDLEWEIGHT Aug. 1997
subsequent placement ACS HI-TORQUE IRON MAN Feb. 1997
of the dilatation HI-TORQUE BALANCE Oct. 1994
catheter or ACS HI-TORQUE EXTRA S'PORT Sept. 1994
atherectomy HI-TORQUE EXTRA SUPPORT Feb. 1992
catheter. HI-TORQUE TRAVERSE Nov. 1991
DOC Feb. 1988
HI-TORQUE FLOPPY II June 1986
Accessories Accessories are ACS VIKING Nov. 1997
products that INDEFLATOR 20/30 Sept. 1996
facilitate the delivery ACS ANCHOR Apr. 1996
or operation of a TOURGUIDE Dec. 1995
device. INDEFLATOR 20/20 March 1990
PERIPHERAL:
Stents See above. MEGALINK March 1999
Guide Wires See above. SUPRACORE July 1998
Accessories See above. EZPATH GUIDING CATHETER May 1998
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CVS Products
The Company markets the VASOVIEW balloon dissection system for minimally
invasive access to, and removal of, the saphenous vein as of February, 1999. The
saphenous vein is used in coronary artery bypass graft surgery ("CABG").
However, as a result of a jury verdict on February 8, 1999 in the GSI
litigation, GSI is seeking an injunction against future sales by the Company of
this product. (See Item 3 LEGAL AND REGULATORY PROCEEDINGS.) The Company also
markets a cardiac stabilizer which enables immobilization of the anastomotic
site on a beating heart during CABG procedures. In addition, as a result of the
Company's acquisition of EVT, the Company markets the ANCURE system in Europe
and Australia. The ANCURE system is a catheter-based product that delivers and
implants a specialized vascular prosthesis to repair abdominal aortic aneurysms.
The Company also markets a number of other minimally invasive surgery products
for access, retraction and fixation, focusing on laparoscopic market
opportunities in general surgery. These products include the ORIGIN TACKER
fixation device.
Sales and Marketing
The Company has a broad product line which requires a sales and marketing
strategy that is tailored to its customers in order to deliver high quality,
cost-effective products and services to all of its customer segments worldwide.
Because of the diverse needs of the global market that the Company serves, the
Company's distribution system includes a direct sales force 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 force 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 both the Company's direct sales force and independent
distributors of Brady products. The addition of Intermedics' experienced sales
force and their valuable relationships should bolster the Company's overall
worldwide 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 to accounts with whom the Company does little, if any, business. The
Company is not dependent on any single customer and no single customer accounted
for more than 5% of the Company's net sales in 1998.
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 force
actively pursues approval of the Company as a qualified supplier for hospital
group purchasing organizations that negotiate contracts with suppliers of
medical products. The Company already has contracts with a number of national
buying groups and is working with a growing number of regional buying groups
that are emerging in response to cost containment pressures and health care
reform. In addition, the Company has contracted with a number of hospitals to
provide products under a predictable procedural cost program.
United States
In the United States, the Company sells substantially all of its products
through its direct sales force. The different uses of the Company's product
lines and the different physicians performing the corresponding procedures
necessitate focused sales organizations that can utilize their specific clinical
and technical knowledge. In 1998, 73% of the Company's consolidated net sales
were derived from sales to customers in the United States.
The Company's direct sales operations for its CRM and VI products are
divided into three geographic areas within the United States, under a single
10
management structure to which all sales operations report. The Company believes
this geographic organizational structure provides the opportunity to leverage
the Company's resources across the individual business unit sales organizations
by facilitating rapid decision making and development of sales and marketing
strategies at the customer level, while retaining its clinical focus.
International
In 1998, 27% of the Company's net sales were derived from its international
operations through its direct sales force and independent distributors. The
Company sells its products in over 100 countries. Major international markets
for the Company's products include: Japan, Germany, France, Spain, Italy, the
United Kingdom, Australia, Belgium, The Netherlands, and Canada. The sales and
marketing approach in international markets varies depending on market size and
stage of development. The Company believes that its geographic-based sales
organization gives the Company greater flexibility in responding to each of
these markets.
Manufacturing
The Company's manufacturing operations are carried out in facilities in
Menlo Park, Santa Clara and Temecula, California; St. Paul, Minnesota; and
Dorado, Puerto Rico. 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
environment setting or "cleanroom." Such a manufacturing environment helps
ensure that products meet all cleanliness standards and requirements. In
addition, manufacturing employees are trained in the necessary production
operations, the Quality System Regulation requirements (regulations adopted by
the United States Food and Drug Administration ("FDA") in October, 1996 which
replace the requirements previously known as Good Manufacturing Practices) and
ISO 9001 and EN46001 international quality system standards applicable to the
production process. The Company uses various production and quality performance
measures to provide high manufacturing quality and efficiency.
The Company vertically integrates its operations where it believes such
integration provides significant cost, supply or quality benefits. In some
areas, the Company is highly vertically integrated. In other cases, the Company
purchases components. In all cases, the Company attempts to work closely with
its suppliers to ensure the cost-effective delivery of high quality materials
and components. The Company's major considerations used in the selection and
retention of suppliers are supplier technology, quality, reliability, consistent
on-time deliveries, value-added services and cost. The Company tries to select
and build long-term relationships with suppliers who have demonstrated a
commitment to these factors. To date, the Company has been able to obtain all
required components and materials for all market released products and for all
products under development.
Raw Materials
The Company purchases certain of the materials and components used in
manufacturing its products, some of which are custom-made for the Company. In
addition, the Company purchases certain supplies from single sources due to
quality considerations, costs or constraints resulting from regulatory
requirements. In the past, certain suppliers have announced that, in an effort
to reduce potential product liability exposure, they intend to limit or
terminate sales to the medical device industry. In addition, agreements with
certain suppliers can be terminated by either party upon short notice. The
Company has agreed to indemnify certain suppliers against certain potential
product liability
11
exposure. The establishment of additional or replacement suppliers for certain
components or materials cannot be accomplished quickly, largely due to the FDA
approval system and the complex nature of manufacturing processes employed by
many suppliers. Enactment of the Biomaterials Access Assurance Act of 1998, by
addressing the inequities in United States tort law, is expected to help ensure
a continued supply of raw materials and component parts essential to the
manufacture of Company products. It is not possible to assess the impact this
new law will have on the continued availability of raw materials, and the
inability to develop satisfactory alternatives, if required, or a reduction or
interruption in supply or a significant increase in the price of materials or
components, could have a material adverse effect on the Company.
Patents, Trademarks, Proprietary Rights and Licenses
The Company believes that patents and other proprietary rights are
important to its business. The Company also relies upon trade secrets, know-how,
continuing technological innovations and licensing opportunities to develop and
maintain its competitive position. The Company reviews third-party patents and
patent applications in an effort to develop an effective patent strategy,
identify licensing opportunities and monitor the patent claims of others.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. From time to time,
the Company is subject to claims of, and legal actions alleging, infringement by
the Company of the patent rights of others. The Company believes that it has
been vigilant in reviewing the patents of others with regard to the Company's
products. However, an adverse outcome with respect to any one or more of these
claims or actions could have a material adverse effect on the Company.
The Company owns numerous patents and has numerous patent applications
pending in the United States and in certain foreign countries which relate to
aspects of the technology used in many of the Company's products. The Company's
policy is generally to file patent applications in the United States and foreign
countries where rights are available and the Company believes it is commercially
advantageous to do so. In addition, the Company is 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
payments. The Company has also granted various rights in its own patents to
others under license agreements. There can be no assurance that pending patent
applications will result in issued patents, that patents issued to or licensed
by the Company will not be challenged or circumvented by competitors, that such
patents will not be found to be invalid or that such patents will be found to be
sufficiently broad to protect the Company's technology or provide the Company
with a competitive advantage.
The Company actively monitors the products of its competitors for possible
infringement of the Company's owned and/or licensed patents. Historically,
litigation has been necessary to enforce certain patent rights held by the
Company and the Company plans to continue to defend and prosecute its rights
with respect to such patents. There can be no assurance, however, that the
Company's efforts in this regard will be successful. In addition, patent
litigation could result in substantial cost to and diversion of effort by the
Company. The Company also relies upon trade secrets for protection of its
confidential and proprietary information. There can be no assurance that others
will not independently develop substantially equivalent proprietary information
or techniques or that third parties will not otherwise gain access to the
Company's trade secrets.
It is the Company's policy to require certain of its employees, consultants
and other parties to execute confidentiality and invention assignment agreements
upon the commencement of employment or consulting relationships with the
Company. There can be no assurance, however, that these agreements will provide
meaningful protection against, or adequate remedies for, the unauthorized use or
disclosure
12
of the Company's trade secrets.
The Company has the following registered trademarks that are referred to
herein: 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, SLALOM PLUS, 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 DUET, ACS MULTI-LINK RX DUET, ACS OTW LIFESTREAM, ACS OTW
MULTI-LINK, ACS RX MULTI-LINK , ACS RX MULTI-LINK HP, ACS RX FLOWTRACK, ACS RX
PERFUSION, ACS RX ROCKET, ACS Tx 2000, ACS Tx 2000 VP, 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 industry 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 industry is
characterized by rapid product development and technological change. The present
or future products of the Company could be rendered obsolete or uneconomical by
technological advances by one or more of the Company's present or future
competitors or by other therapies such as drugs. The Company must continue to
develop and acquire new products and technologies to remain competitive with
other developers of medical devices and therapies.
The Company faces substantial competition from a number of companies in the
markets for its products. The Company's primary competitors in 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 acquired AVE). With respect to CVS devices, the
principal competitors of the Company are United States Surgical Corporation,
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
regulation by the FDA and, in some jurisdictions, by state and foreign
governmental authorities. These regulations govern the introduction of new
medical devices, the observance of certain standards with respect to the design,
manufacture, testing, labeling and promotion of such devices, the maintenance of
certain records, the ability to track devices, the reporting of potential
product defects, the export of devices and other matters. The Company believes
that it is in substantial compliance with these governmental regulations.
From time to time, the Company has received notifications from the FDA or
other authorities of alleged deficiencies in the Company's compliance with
applicable regulatory requirements. These include FDA warning letters and
adverse inspection reports. To date, the Company has been able to address or
correct such deficiencies to the satisfaction of the FDA or other authorities
and, to the extent deficiencies arise in the future, the Company expects to be
able to so correct them, but there can be no assurance that this will be the
case. In addition, from time to time, the Company has recalled, or issued safety
alerts or advisory notices on, certain of its products. To date, no such recall
or safety alert has had a material adverse effect on the Company, but there can
be no assurance that a future recall or safety alert would not have such an
effect.
The Company's medical devices introduced in the United States market are
required by the FDA, as a condition of marketing, to secure a premarket
notification clearance pursuant to Section 510(k) of the federal Food, Drug and
13
Cosmetic Act, an approved pre-market approval ("PMA") application or a
supplemental PMA. Alternatively, the Company may seek United States market
clearance through a Product Development Protocol approved by the FDA.
Establishing and completing a Product Development Protocol, or obtaining a PMA
or supplemental PMA, can take up to several years and can involve preclinical
studies and clinical testing. In order to perform clinical testing in the United
States on an unapproved product, the Company is also required to obtain an
investigational device exemption from the FDA. In addition to requiring
clearance for new products, FDA rules may require a filing and FDA approval,
usually through a PMA supplement or a 510(k) pre-market notification clearance,
prior to marketing products that are modifications of existing products.
While the FDA Modernization Act of 1997, when fully implemented, is
expected to inject more predictability into the product review process,
streamline post-market surveillance, and promote the global harmonization of
regulatory procedures, the process of obtaining such clearances can be onerous
and costly. There can be no assurance that all the necessary approvals,
including approval for product improvements and new products, will be granted on
a timely basis, if at all. Delays in receipt of or failure to receive such
approvals could have a material adverse effect on the Company's business.
Moreover, after clearance is given, if the product is shown to be hazardous or
defective, the FDA and foreign regulatory agencies have the power to withdraw
such clearance or require the Company to change the device, its manufacturing
process or its labeling, to supply additional proof of its safety and
effectiveness or to recall, repair, replace or refund the cost of the medical
device. In addition, federal, state and foreign regulations regarding the
manufacture and sale of medical devices are subject to future changes. The
Company cannot predict what impact, if any, such changes might have on its
business. However, such changes could have a material impact on the Company's
business.
The Company is also required to register with the FDA as a device
manufacturer. As such, the Company is subject to periodic inspection by the FDA
for compliance with the FDA's Quality System Regulation and other regulations.
These regulations require that the Company manufacture its products and maintain
its documents in a prescribed manner with respect to design, manufacturing,
testing and control activities. Further, the Company is required to comply with
various FDA requirements for labeling and promotion. The Medical Device
Reporting regulation requires that the Company provide information to the FDA
whenever there is evidence to reasonably suggest that one of its devices may
have caused or contributed to a death or serious injury or, if a malfunction
were to recur, could cause or contribute to a death or serious injury. In
addition, the FDA prohibits the Company from promoting a medical device before
marketing clearance has been received or promoting an approved device for
unapproved indications. If the FDA believes that a company is not in compliance
with applicable regulations, it can institute proceedings to detain or seize
products, issue a warning letter, issue a recall order, impose operating
restrictions, enjoin future violations and assess civil penalties against the
company, its officers or its employees and can recommend criminal prosecution to
the Department of Justice. Other regulatory agencies may have similar powers.
Medical device laws are also in effect in many of the countries in which
the Company does business outside the United States. These laws range from
comprehensive device approval requirements for some or all of the Company's
medical device products to simpler requests for product data or certifications.
The number and scope of these requirements are increasing. In addition, the
Company is required to notify the FDA if it exports to certain countries medical
devices manufactured in the United States that have not been approved by the FDA
for distribution in the United States. The Company is also required to maintain
certain records relating to exports and make the records available to the FDA
for inspection, if required.
14
Health Care Cost Containment and Third-Party Reimbursement
During the past several years, the major third-party payers of hospital
services in the United States (Medicare, Medicaid, private health care insurance
and managed care plans) have substantially revised their policies, methodologies
and formulae in an attempt to contain health care costs. The introduction of
various Medicare cost containment incentives, combined with closer scrutiny of
health care expenditures by both private health insurers and employers, has
resulted in increased contractual adjustments and discounts in hospital charges
for services performed and in the shifting of services from inpatient to
outpatient settings. If hospitals respond to such pressures by substituting
lower cost products or therapies for the Company's products, the Company could
be adversely affected. Moreover, third-party payers may deny reimbursement if
they determine that a device was not used in accordance with cost-effective
treatment 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. Implementation of
health care reforms now under consideration in Japan, Germany, France and other
countries, may limit the price of, or the level at which reimbursement is
provided for, the Company's products.
The ability of customers to obtain appropriate reimbursement for their
products and services from government and third-party payers is critical to the
success of all medical device companies around the world. Several foreign
governments have attempted to dramatically reshape reimbursement policies
affecting medical devices. Further restrictions on reimbursement of the
Company's customers will likely have an impact on the products purchased by
customers and the prices they are willing to pay.
Product Liability and Insurance
The design, manufacture and marketing of medical devices of the types
produced by the Company entail an inherent risk of product liability claims. The
Company's products are often used in intensive care settings with seriously ill
patients. In addition, many of the medical devices manufactured and sold by the
Company are designed to be implanted in the human body for long periods of time
or indefinitely. The occurrence of a problem with one of the Company's products
could result in product liability claims and/or a recall of, or safety alert or
advisory notice relating to, the product. While the amount of product liability
insurance maintained by the Company has been adequate in relation to claims made
against the Company in the past, there can be no assurance that the amount of
such insurance will be adequate to satisfy claims made against the Company in
the future or that the Company will be able to obtain insurance in the future at
satisfactory rates or in adequate amounts. Product liability claims or product
recalls in the future, regardless of their ultimate outcome, could have a
material adverse effect on the Company's business, financial condition and
reputation, and on the Company's ability to attract and retain customers for its
products.
Environmental Compliance
The Company is subject to various federal, state and local laws and
regulations relating to the protection of the environment. In the course of its
business, the Company is involved in the handling, storage and disposal of
certain chemicals. While the Company continues to make capital and operational
expenditures 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.
15
Research and Development
The Company is engaged in ongoing research and development to introduce
clinically advanced new products, to enhance the effectiveness, ease of use,
safety and reliability of its existing products and to expand the applications
for which the uses of its products are appropriate. The Company is dedicated to
developing novel technologies that will furnish health care providers with a
more complete line of products to treat medical conditions through minimally
invasive procedures.
The Company's research and development activities are carried out primarily
in facilities located in Santa Clara, Menlo Park, and Temecula, California; St.
Paul, Minnesota; Redmond, Washington; Houston, Texas; and Brussels, Belgium. The
Company's research and development staff is focused on product design and
development, quality, clinical research and regulatory compliance. To pursue
primary research efforts, the Company has developed alliances with several
leading research institutions and universities. The Company also works with
leading clinicians around the world in conducting scientific studies on the
Company's products. These studies include clinical trials which provide data for
use in regulatory submissions and post market approval studies involving
applications of the Company's products.
The Company evaluates developing technologies in areas where it may have
technological or marketing expertise for possible investment or acquisition. The
Company has invested in several start-up ventures. In return for funding and
technology, the Company has received equity interests in these ventures.
Quality Assurance Systems
The Company is committed to providing high quality products to its
customers. To meet this commitment, the Company has implemented modern quality
systems and concepts throughout the organization. The Company's quality system
starts with the initial product specification and continues through the design
of the product, component specification process and the manufacturing, sales and
servicing of the product. The quality system is designed to build in quality and
to utilize continuous improvement concepts throughout the product life.
Certain of the Company's operations are certified under ISO 9001, ISO 9002,
ISO 13485, EN46001 and EN46002 international quality system standards. ISO 9001
and 9002 require, among other items, an implemented quality system that applies
to component quality, supplier control and manufacturing operations. In
addition, ISO 9001 and EN46001 require an implemented quality system that
applies to product design. Such certification can be obtained only after a
complete audit of a company's quality system by an independent outside auditor.
These certifications require that these facilities undergo periodic
reexamination.
16
Executive Officers of the Company
Name Position Age
---- -------- ---
James M. Cornelius Chairman of the Board of Directors 55
and Director
Ronald W. Dollens President, Chief Executive Officer 52
and Director
J.B. King Vice President, General Counsel 69
and Director
Bruce J Barclay Deputy General Counsel 42
and Secretary
James R. Baumgardt President, Guidant Sales Corporation 51
Keith E. Brauer Vice President, Finance and 50
Chief Financial Officer
A. Jay Graf President, Cardiac Rhythm Management 51
Ginger L. Graham President, Vascular Intervention 43
Cynthia L. Lucchese Treasurer 38
Roger Marchetti Corporate Controller and 41
Chief Accounting Officer
Rodney R. Nash Vice President Corporate 57
Resources & Policy
Richard M. van Oostrom President of Operations, Europe, 54
Middle East and Africa
F. Thomas (Jay) Watkins, III President, Cardiac and Vascular 46
Surgery
A brief summary of the recent business and professional experience of each
executive officer is set forth below.
James M. Cornelius Mr. Cornelius is Chairman of the Board of Directors and
a Director of the Company. Previously, he was Vice President, Finance and Chief
Financial Officer of Lilly from 1983 until his retirement in October 1995 and
was a Director for Lilly. Mr. Cornelius has served as Treasurer of Lilly and as
President of IVAC Corporation, a former Lilly medical device subsidiary. He
joined Lilly in 1967. Mr. Cornelius is a director of American United Life
Insurance Company, Chubb Corporation, Lilly Industries, Inc., and the National
Bank of Indianapolis. Mr. Cornelius also serves as a Trustee of the University
of Indianapolis and the Indianapolis Museum of Art.
Ronald W. Dollens Mr. Dollens is President, Chief Executive Officer and a
Director of the Company. Previously, he served as President of Lilly's MDD
Division from 1991 until 1995. Mr. Dollens served as Vice President of Lilly's
MDD Division and Chairman of the Company's subsidiary, Advanced Cardiovascular
Systems, Inc. ("ACS"), from 1990 to 1991. He also held the position of President
and Chief Executive Officer of ACS. Mr. Dollens joined Lilly in 1972. Mr.
Dollens currently serves on the boards of Beckman Coulter, Inc., the Health
Industry Manufacturers Association (Chairman), the Eiteljorg Museum, St. Vincent
Hospital Foundation, and the Indiana State Symphony Society Board. He is also
the President of the Indiana Health Industry Forum.
17
J. B. King Mr. King is Vice President, General Counsel and a Director of
the Company. Mr. King also acts as counsel to the law firm of Baker & Daniels,
which provides legal services to the Company. He previously was Vice President
and General Counsel for Lilly, a position he held from 1987 until he retired in
1995. Before joining Lilly, Mr. King was a partner and chairman of the
management committee of Baker & Daniels. Mr. King is a director of the Indiana
Legal Foundation, IWC Resources, Inc., and the James Whitcomb Riley Memorial
Association.
Bruce J Barclay Mr. Barclay is Deputy General Counsel and Secretary of the
Company. Previously, Mr. Barclay served as Vice President, Secretary and General
Counsel of Vascular Intervention and Cardiac and Vascular Surgery. He was named
Vice President and General Counsel of Advanced Cardiovascular Systems, Inc.
("ACS") in 1992. Prior to that he served as Patent Counsel for ACS. Mr. Barclay
also had responsibility for Business Development at Vascular Intervention. Prior
to working at ACS, Mr. Barclay worked for Lilly first in pharmaceutical research
and later as a patent attorney. Mr. Barclay joined Lilly in 1978 and is a
registered patent attorney.
James R. Baumgardt Mr. Baumgardt is a Vice President of the Company and
President, Guidant Sales Corporation. Previously he held the position of
President, Western Hemisphere Sales. Prior to that he held the position of Vice
President, Corporate Resources from 1994 to 1995. Mr. Baumgardt has also served
as Executive Director of Human Resources and Business Development for the MDD
Division of Lilly from 1992 to 1994. Mr. Baumgardt was Director of Personnel for
Lilly from 1990 to 1992 and Director of Sales for Lilly's Select Product
Division from 1988 to 1990. He joined Lilly in 1970. Mr. Baumgardt is a director
of the Rose-Hulman Institute of Technology.
Keith E. Brauer Mr. Brauer is Vice President, Finance and Chief Financial
Officer for the Company. Previously, he served as Executive Director of Finance
and Chief Accounting Officer of Lilly from 1992 to 1994. Mr. Brauer was
Executive Director of International Finance of Lilly from 1988 to 1992 and
Director of Corporate Affairs of Lilly from 1986 to 1988. Additionally, he held
the positions of Vice President of Finance and Treasurer for Physio-Control
Corporation, and Controller for Elizabeth Arden, both former Lilly subsidiaries.
Mr. Brauer joined Lilly in 1974. Mr. Brauer is a director of the Indiana Chamber
of Commerce. Mr. Brauer also serves on the University of Michigan Business
School Corporate Advisory Board.
A. Jay Graf Mr. Graf is a Vice President of the Company and President of
Cardiac Rhythm Management. He has been President and Chief Executive Officer of
the Company's subsidiary, Cardiac Pacemakers, Inc. ("CPI"), since 1992. He
joined CPI as Executive Vice President and Chief Operating Officer in 1990. Mr.
Graf has also held the position of Senior Vice President of Operations at
Physio-Control Corporation. Additionally, Mr. Graf held the positions of Vice
President of Sales and Technical Services, and Vice President of Marketing and
Communications at Physio-Control Corporation. Mr. Graf joined Lilly in 1976. Mr.
Graf is a director of ATS Corporation and Advanced BioSurfaces, Inc.
Ginger L. Graham Ms. Graham is a Vice President of the Company and
President of Vascular Intervention. She has been President and Chief Executive
Officer of ACS since 1993. She served as a Director of Pharmaceutical Sales for
Lilly in 1992 and was Director of Corporate Pharmaceutical Strategic Planning
from 1989 to 1991. Ms. Graham joined Lilly in 1979. Ms. Graham is a director of
Amylin Pharmaceuticals, Inc. and the California Healthcare Institute. She is
also a member of the Committee of 200.
Cynthia L. Lucchese Ms. Lucchese is Treasurer of the Company. She served as
Worldwide Treasury Planning Manager for Lilly from 1992 to 1994. She served as
Audit Manager for Lilly from 1990 to 1992. Ms. Lucchese joined Lilly in 1987.
Prior to joining Lilly, she was on the audit staff of Ernst & Young LLP from
1982
18
to 1986. Ms. Lucchese is a Certified Public Accountant. She is also a director
for Ballet Internationale.
Roger Marchetti Mr. Marchetti is Corporate Controller and Chief Accounting
Officer of the Company. He has been in this position since 1994. He served as
Manager of Finance for Lilly's Indianapolis pharmaceutical manufacturing
operations from 1992 to 1994, and Manufacturing Controller for ACS from 1990 to
1992. Mr. Marchetti joined ACS in 1988 as General Accounting Manager. Prior to
joining ACS, Mr. Marchetti was on the audit staff of Touche Ross & Co.
(currently Deloitte & Touche LLP) from 1980 to 1986. Mr. Marchetti is a
Certified Public Accountant.
Rodney R. Nash Mr. Nash is Vice President of Corporate Resources & Policy
for the Company. Previously he was the senior vice president of corporate
affairs. Mr. Nash served for four years as the president of Guidant Japan and
Pacific Rim Operations. He joined Lilly in 1972 and has held various assignments
in sales, marketing and general management, including director of marketing, Eli
Lilly (Philippines); district sales manager, Long Island, New York; general
manager, Eli Lilly (Taiwan); executive director of international sales and
marketing, IVAC Corporation; and president of the Medical Devices and
Diagnostics Division (MDD), Eli Lilly Japan. While in Tokyo, he served as vice
chairman and later chairman of the American Chamber of Commerce in Japan's
Medical Equipment and Supply subcommittee, dealing with U.S./Japan medical
equipment trade issues.
Richard M. van Oostrom Mr. van Oostrom is a Vice President of the Company
and President of Operations, Europe, Middle East and Africa. He served as Vice
President of European Operations for Lilly's MDD Division from 1984 to 1994. Mr.
van Oostrom was an Executive Director of Marketing for Lilly from 1981 to 1984
and President and General Manager of Eli Lilly Canada Inc. from 1980 to 1981. He
joined Lilly in 1971. Mr. van Oostrom is a board member of Isotis B.V., Impella
and the European trade association for medical prosthesis manufacturers.
F. Thomas (Jay) Watkins, III Mr. Watkins is a Vice President of the Company
and President of Cardiac and Vascular Surgery. He has also been President of the
Company's subsidiary, Origin Medsystems, Inc. ("Origin"), since 1995. Mr.
Watkins joined Origin in 1989. Previously, he has served in management positions
in several start-up companies, including Microgenics Corporation, and was a
consultant with the international consulting firm of McKinsey & Company, Inc.
Employees
As of December 31, 1998, the Company had approximately 6,310 full-time
employees, including approximately 800 employees outside the United States. The
Company maintains compensation, benefits, equity participation and work
environment policies intended to assist in attracting and retaining qualified
personnel. The Company believes that the success of its business will depend, in
significant part, on its ability to attract and retain such personnel. In
addition, the Company contracts for services where appropriate. The contract
labor provides management with flexibility in dealing with fluctuations in
volume during periods of high sales growth and through new product transfers to
manufacturing.
None of the Company's employees are represented by a labor union. The
Company has never experienced an organized work stoppage or strike and considers
its relations with its employees to be excellent.
19
Financial Information Relating to Classes of Products
Financial information relating to classes of products, set forth in the
Company's 1998 Annual Report to Shareholders under "Management's Discussion and
Analysis of Results of Operations and Financial Condition," at page 22, is
incorporated herein by reference.
Due to several factors, including the introduction of new products by the
Company and other manufacturers, the relative contribution of any particular
Company product to consolidated net sales is not necessarily constant from year
to year, and its contribution to consolidated net income is not necessarily the
same as its contribution to consolidated net sales.
Financial Information Relating to Foreign and Domestic Operations
Financial information relating to foreign and domestic operations, set
forth in the Company's 1998 Annual Report to Shareholders at page 42 under
"Notes to Consolidated Financial Statements, Note 12 - Segment Information," is
incorporated herein by reference.
Local restrictions on the transfer of funds from branches and subsidiaries
located abroad (including the availability of dollar exchange) have not to date
been a significant deterrent in the Company's overall operations abroad. The
Company cannot predict what effect these restrictions or the other risks
inherent in foreign operations, including possible nationalization, might have
on its future operations or what other restrictions may be imposed in the
future.
20
Item 2. PROPERTIES
As of December 31, 1998, the Company owned or leased the following
principal facilities:
[Download Table]
Approximate Leased or
Location Type of Facility Square Feet Owned
------------------- --------------------------------- ----------- ---------
Basingstoke, UK Administration 24,000 Leased
Brussels, Belgium Administration and CRM research 17,000 Leased
Clonmel, Ireland Manufacturing 155,000 Owned
Dorado, PR CRM manufacturing and 54,000 Owned
administration
Houston, TX VI research and development 22,500 Leased
and 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 100,000 Leased
administration
St. Paul, MN CRM packaging, shipping and 25,000 Leased
warehouse
Temecula, CA VI manufacturing and 500,000 Owned
research and development;
CRM research and development
Tokyo, Japan Administration 10,000 Leased
The Company currently maintains its executive offices at 111 Monument
Circle, 29th Floor, Indianapolis, Indiana. Subject to normal expansion, the
Company believes that its facilities are adequate to meet its present and
reasonably foreseeable needs.
The Company believes that none of its properties is subject to any
encumbrance, easement or other restriction that would detract materially from
its value or materially impair its use in the operation of the business of the
Company. The buildings owned by the Company are of varying ages and are in good
condition.
Item 3. LEGAL AND REGULATORY PROCEEDINGS
The Company is currently a party to various legal actions which have
occurred in the normal course of its business. The litigation includes disputes
over intellectual property, product liability, employment litigation and general
commercial matters.
21
The Company currently has a number of disputes with Boston Scientific
Corporation ("BSC") and its subsidiary, SciMed Life Systems, Inc. ("SciMed").
These include the following:
A. In a lawsuit originally filed on May 31, 1994, in the Northern
District of California, SciMed alleges that the ACS RX ELIPSE coronary
dilatation catheter infringes 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.
B. On October 10, 1995, Advanced Cardiovascular Systems, Inc. ("ACS"), a
wholly-owned subsidiary of the Company, filed suit against SciMed
alleging that the SciMed Express Plus and Express Plus II coronary
dilatation catheters infringe certain patents of ACS. In addition, on
March 12, 1996, ACS filed a separate lawsuit alleging that these
products infringe another patent of ACS. These lawsuits were filed in
the Northern District of California and ACS is seeking injunctive
relief and monetary damages.
C. On March 12, 1996, ACS filed suit against SciMed in the Northern
District of California alleging that SciMed's Trio/Bandit line of
coronary dilatation catheters infringes a patent of ACS. In the
lawsuit, ACS is seeking injunctive relief and monetary damages.
D. On September 17, 1997, ACS filed suit against SciMed and BSC in the
Northern District of California alleging that the SciMed Rebel rapid
exchange coronary dilatation catheter infringes certain patents of
ACS. In the lawsuit, ACS is seeking injunctive relief and monetary
damages.
E. 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 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 reconsideration of the Draft
Determination 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.
F. 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.
G. 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 system. SciMed is seeking injunctive relief and monetary
damages.
H. 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.
22
The Company currently has a number of disputes with Medtronic, Inc.
("Medtronic"), including the following:
A. On October 10, 1995, ACS filed suit against Medtronic alleging that
the Medtronic Falcon coronary dilatation catheter infringes certain
patents of ACS. On March 12, 1996, ACS filed another suit against
Medtronic alleging that the Medtronic Falcon coronary dilatation
catheter infringes another patent 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.
B. On November 6, 1997, Medtronic filed suit against ACS in the United
States District Court for Minnesota alleging that the ACS MULTI-LINK
coronary stent infringes a patent owned by Medtronic. In the lawsuit,
Medtronic is seeking injunctive relief and monetary damages.
The Company currently has a number of disputes with J&J and its subsidiary,
Cordis Corporation ("Cordis"), including the following:
A. On August 26, 1997, J&J and Expandable Grafts Partnership ("EGP")
filed suit against the Company's subsidiary Guidant Canada Corporation
in the Federal Court of Canada alleging that the sale of the ACS
MULTI-LINK coronary stent in Canada infringes patents licensed to J&J
by EGP. In the lawsuit, J&J and EGP seek injunctive relief and
monetary damages.
B. On October 3, 1997, Cordis filed suit against the Company and ACS, in
the District Court for the District of Delaware alleging that the sale
of the ACS MULTI-LINK coronary stent by ACS infringes certain patents
licensed to Cordis. In addition, on October 8, 1997, Cordis filed a
motion for a preliminary injunction in this lawsuit seeking to prevent
ACS from selling the ACS MULTI-LINK coronary stent other than in
certain limited circumstances and subject to certain conditions. On
October 22, 1997, the complaint was amended to include BSC and AVE as
co-defendants. The complaint was re-filed on February 6, 1998 to
include EGP as a plaintiff. A hearing on the motion for a preliminary
injunction was held in February 1998 and in July, 1998 Cordis's 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 a reexamination filed by Cordis. In the lawsuit, Cordis is
seeking injunctive relief and monetary damages.
C. On December 2, 1997, Cordis filed suit against Guidant and ACS in the
United States District Court for the District of Delaware alleging
that the ACS RX ROCKET coronary dilatation catheter infringes patents
owned by Cordis. Cordis 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 and monetary damages. 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.
D. 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 monetary damages.
23
E. On February 22, 1999, ACS filed suit against Cordis in the United
States District Court for the Northern District of California alleging
infringement of several ACS patents by the Cordis CROWN stent. In the
lawsuit, ACS is seeking injunctive relief and monetary damages.
The Company currently has a number of disputes with General Surgical
Innovations, Inc. ("GSI"), including the following:
A. On May 28, 1996, Origin Medsystems, Inc. ("Origin"), a wholly-owned
subsidiary of the Company, filed suit against GSI in the Northern
District of California alleging that GSI's Spacemaker balloon products
infringe a patent of Origin. In the lawsuit, Origin is seeking
injunctive relief and monetary damages. 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.
Origin has appealed both decisions.
B. 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 $12.9M in damages. The jury
also held certain claims of the patent to have been willfully
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 was held on March 2.
Once post-trial matters have been resolved and a judgment is entered,
Origin may appeal.
C. On September 24, 1997, GSI filed suit against Origin in the Northern
District of California alleging that Origin's VASOVIEW Balloon
Dissection System infringes another patent owned by GSI. GSI is
seeking injunctive relief and monetary damages.
The Company currently has a number of disputes with Arterial Vascular
Engineering ("AVE"), including the following:
A. On December 24, 1997, ACS filed suit against AVE in the United States
District Court for the Northern District of California alleging
infringement of three patents of ACS by certain AVE stents. This case
was subsequently transferred 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 lawsuits, ACS is
seeking injunctive relief and monetary damages.
B. On February 18, 1998, AVE filed suit against ACS in the District Court
of Delaware alleging that the sale of the ACS MULTI-LINK Coronary
Stent infringes certain patents licensed to AVE. The lawsuit also
alleges misappropriation of trade secrets and breach of a
confidentiality agreement by ACS. In the lawsuit, AVE is seeking
injunctive relief, monetary damages, and to invalidate certain ACS
stent patents.
The Company currently has a number of disputes with St. Jude Medical, Inc.
("St. Jude"), including the following:
A. On May 3, 1996, Pacesetter, Inc. ("Pacesetter"), a subsidiary of St.
Jude, filed a lawsuit against Cardiac Pacemakers, Inc. ("CPI"), a
wholly-owned subsidiary of the Company, which is currently pending in
the United States District Court for Minnesota. The complaint, as
24
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 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 $9.675 million, and the
court is currently considering Pacesetter's request for an injunction
and CPI's request that Pacesetter's patent be declared unenforceable.
B. 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 Superior Court, State of Indiana, alleging (among other
things) that the Telectronics Agreement did not transfer to Pacesetter
when Pacesetter purchased 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.
C. On November 26, 1996, CPI, GSC and Lilly filed suit against St. Jude,
Pacesetter and Ventritex in the United States District Court for the
Southern District of Indiana alleging that upon consummation of the
merger of Ventritex and Pacesetter, the continued manufacture, use or
sale of certain Ventritex products would infringe certain patents of
CPI and Lilly. The lawsuit seeks declaratory and injunctive relief and
monetary damages. On June 8, 1998, the United States District Court
for the Southern District of Indiana entered an Order staying
proceedings.
D. On December 24, 1996, certain entities affiliated with Telectronics
Holdings Ltd. ("the Telectronics Parties") and Pacesetter filed suit
against the Company, CPI, GSC and Lilly in the United States District
Court for the District of Minnesota alleging that the claims made in
the State Court Case (as defined below) are subject to an arbitration
provision in the license agreement entered 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
arbitration 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
determine what role, if any, Pacesetter should have in the arbitration
proceeding." The Telectronics Parties and the Company have completed
the procedures for selecting an arbitrator and have commenced the
arbitration process.
25
The Company currently has a number of lawsuits with Angeion Corporation,
including:
A. On May 3, 1996, Angeion Corporation filed a lawsuit against CPI which
is currently pending in the United States District Court of Minnesota.
The complaint, as subsequently amended, alleges infringement of
certain Angeion defibrillator 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.
B. 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 SulzerMedica, filed a
lawsuit against CPI which is currently pending in the United States District
Court for Minnesota. The complaint alleges infringement of certain Intermedics
patents by CPI's VENTAK MINI and PRx defibrillator models and certain VIGOR and
EXCEL pacemaker models. (The EXCEL models are not currently manufactured or sold
by CPI). Intermedics is seeking injunctive relief and monetary damages. CPI has
filed counterclaims alleging that certain of its patents are infringed by the
Intermedics Res-Q defibrillator products and certain Intermedics pacemaker
products. On February 1, 1999, the Company completed its acquisition of
Intermedics, including its intellectual property and the above-identified suits
were terminated.
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
related actions, including U.S. patent interferences, European and Japanese
patent oppositions and U.S. patent reexamination proceedings.
While it is not possible to predict or determine the outcome of the legal
actions brought against it, or to provide an estimate of the losses, if any,
that may arise, the Company believes the costs associated with all of these
actions will not have a material adverse effect on the Company's consolidated
financial position or liquidity, but could possibly be material to the
consolidated results of operations of any one period.
Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, no matters were submitted to a vote of
security holders.
26
Part II
Item 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange
("NYSE") and the Pacific Exchange, Inc. ("PCX"). Information relating to the
high and low sales prices per share of the Company's common stock, as reported
in the consolidated transactions reporting system on the NYSE set forth in the
Company's 1998 Annual Report to Shareholders under "Notes to Consolidated
Financial Statements, Note 16 - Selected Quarterly Information (Unaudited)," at
page 45 is incorporated herein by reference.
During each quarter of 1998, 1997 and 1996, the Company paid a quarterly
cash dividend of $0.00625 per share of the Company's common stock, as adjusted
for the Company's two-for-one stock splits which were effective in September
1997 and January 1999. In December 1998, the Company's Board of Directors voted
to discontinue future dividend payments on the Company's common stock.
As of March 1, 1999, the approximate number of record holders of the
Company's common stock was 5,287.
Item 6. SELECTED FINANCIAL DATA
Selected financial data for each of the Company's five most recent fiscal
years, set forth in the Company's 1998 Annual Report to Shareholders under
"Selected Consolidated Financial Data," at page 21, are incorporated herein by
reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Management's Discussion and Analysis of Results of Operations and
Financial Condition, set forth in the Company's 1998 Annual Report to
Shareholders under "Operating Results" (pages 22-27), "Liquidity and Financial
Condition" (pages 27-28), and "Regulatory and Other Matters" (pages 28-30), is
incorporated herein by reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information related to quantitative and qualitative disclosures about
market risk, set forth in the Company's 1998 Annual Report to Shareholders under
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Financial Condition" (pages 27-28), is incorporated
herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries,
listed in Item 14(a)1 and included in the Company's 1998 Annual Report to
Shareholders at pages 31-34 (Consolidated Statements of Income, Consolidated
Balance Sheets, Consolidated Statements of Shareholders' Equity and Consolidated
Statements of Cash Flows), and pages 35-45 (Notes to Consolidated Financial
Statements) and the Report of Independent Auditors set forth in the Company's
1998 Annual Report to Shareholders at page 46, are incorporated herein by
reference.
Information on quarterly results of operations, set forth in the Company's
1998 Annual Report to Shareholders under "Notes to Consolidated Financial
Statements, Note 16 - Selected Quarterly Information (Unaudited)," at page 45,
is
27
incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the Company's directors, set forth in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held on May 17,
1999, under "Election of Directors--Nominees for Election," is incorporated
herein by reference. Information relating to the Company's executive officers is
set forth at pages 17-19 of this Form 10-K under "Executive Officers of the
Company."
Item 11. EXECUTIVE COMPENSATION
Information relating to executive compensation, set forth in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held May 17, 1999,
under "Election of Directors--Executive Compensation," is incorporated herein by
reference, except that the Compensation Committee Report and Performance Graph
are not so incorporated.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to ownership of the Company's common stock by persons
known by the Company to be the beneficial owners of more than 5% of the
outstanding shares of common stock and by management, set forth in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held May 17, 1999,
under "Election of Directors--Ownership of Company Common Stock by Directors and
Executive Officers," and "Election of Directors--Principal Holders of Company
Common Stock," is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries, included in the Company's 1998 Annual Report to Shareholders at
the pages indicated in parentheses, are incorporated by reference in Item 8:
Consolidated Statements of Income--Years Ended December 31, 1998, 1997 and
1996 (page 31)
Consolidated Balance Sheets--December 31, 1998 and 1997 (page 32)
Consolidated Statements of Shareholders' Equity--Years Ended December 31,
1998, 1997 and 1996 (page 33)
28
Consolidated Statements of Cash Flows--Years Ended December 31, 1998, 1997
and 1996 (page 34)
Notes to Consolidated Financial Statements (pages 35-45)
(a)2. Financial Statement Schedules
The following consolidated financial statement schedule of the Company and
its subsidiaries is included in this Form 10-K:
Schedule II Valuation and Qualifying Accounts (page F-1)
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions, are inapplicable or are adequately explained in
the financial statements and, therefore, have been omitted.
Financial statements of interests of 50% or less, which are accounted for
by the equity method, have been omitted because they do not, considered in the
aggregate as a single subsidiary, constitute a significant subsidiary.
The report of the Company's independent auditors with respect to the
schedule listed above is contained herein as part of Exhibit 23.1, Consent of
Independent Auditors.
29
(a)3. Exhibits
3.1 Amended and Restated Articles of Incorporation of the Registrant. (1)
3.2 By-Laws of the Registrant. (1)
4.1 Specimen of Certificate for Common Stock. (1)
10.1 Rights Agreement dated as of October 17, 1994 between the Company and
Bank One, Indianapolis, N.A. (1)
10.2 Form of International Services Agreement between international subsidiary
of Eli Lilly and Company and international subsidiary of the Company. (1)
10.3 United States Services Agreement dated as of October 31, 1994 between Eli
Lilly and Company and the Company. (1)
10.4 Transfer Agreement dated as of November 30, 1994 between Eli Lilly and
Company and the Company. (1)
10.5 Tax Sharing Agreement dated as of November 30, 1994 between Eli Lilly and
Company and the Company. (1)
10.6 Form of International Asset Purchase Agreement between international
subsidiary of Eli Lilly and Company and international subsidiary of the
Company. (1)
10.7 Sublicense Agreement dated as of October 18, 1994 between Eli Lilly and
Company and Cardiac Pacemakers, Inc. (1)
10.8 Purchase and Sale Agreement and Escrow Instructions dated as of October
18, 1994 between Eli Lilly and Company and Advanced Cardiovascular
Systems, Inc. (1)
10.9 Assignment of Leases dated as of October 25, 1985 between Seaport Centre
Venture Phase II and Metropolitan Life Insurance Company. (1)
10.10 Settlement Agreement dated as of December 1, 1991 among Advanced
Cardiovascular Systems, Inc., Eli Lilly and Company and SciMed Life
Systems, Inc. (1)
10.11 Distribution Agreement dated as of December 31, 1992 among Advanced
Cardiovascular Systems, Inc., Peripheral Systems Group and Mallinckrodt
Medical, Inc. (1)
10.12 Settlement Agreement dated as of January 13, 1992 between Advanced
Cardiovascular Systems, Inc. and C. R. Bard, Inc. (1)
10.13 Settlement Agreement dated as of April 4, 1998 between Advanced
Cardiovascular Systems, Inc. and C. R. Bard, Inc.*
10.14 Settlement and License Agreement dated as of December 17, 1991 among
Schneider (Europe) A.G., Schneider (USA) Inc. and Advanced Cardiovascular
Systems, Inc. (1)
10.15 Amendment to Settlement and License Agreement dated as of April 9, 1992
among Schneider (Europe) A.G., Schneider (USA) Inc. and Advanced
Cardiovascular Systems, Inc. (1)
10.16 Amended License Agreement dated as of September 26, 1988 between Paul
Yock, M.D. and Advanced Cardiovascular Systems, Inc. (1)
10.17 First Amendment to Amended License Agreement dated as of January 1, 1992
between Paul Yock, M.D. and Advanced Cardiovascular Systems, Inc. (1)
10.18 Second Amendment to Amended License Agreement dated as of January 13,
1992 between Paul Yock, M.D. and Advanced Cardiovascular Systems, Inc.
(1)
10.19 Agreement dated as of January 31, 1994 between E. I. DuPont de Nemours
and Company, Cardiac Pacemakers, Inc. and Eli Lilly and Company. (1)
10.20 Agreement dated as of July 1, 1994 between E. I. DuPont de Nemours and
Company, Minco Products, Inc., Cardiac Pacemakers, Inc. and Eli Lilly and
Company. (1)
10.21 Override Agreement between Motorola, Inc., Cardiac Pacemakers, Inc. and
Eli Lilly and Company. (1)
10.22 Material Supply Agreement dated as of January 1, 1995 between Dow Corning
Corporation and Cardiac Pacemakers, Inc. (2)
10.23 Purchase Contract dated as of January 1, 1991 between Wilson Greatbatch
Ltd. and Cardiac Pacemakers, Inc. (1)
10.24 Purchase Contract Extension between Wilson Greatbatch Ltd. and Cardiac
Pacemakers, Inc., effective as of January 1, 1996. (2)
10.25 Exclusive License Agreement dated as of January 30, 1973 between Medrad,
Inc. and Mieczyslaw Mirowski. (1)
10.26 Amendment to Exclusive License Agreement dated as of January 10, 1975
between Medrad, Inc. and Mieczyslaw Mirowski. (1)
30
10.27 First Addendum to the Exclusive License Agreement dated as of June 17,
1974 between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.28 Second Addendum to the Exclusive License Agreement dated as of April 11,
1975 between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.29 Third Addendum to the Exclusive License Agreement dated as of December
22, 1976 between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.30 Fourth Addendum to the Exclusive License Agreement dated as of January 1,
1979 between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.31 Fifth Addendum to the Exclusive License Agreement dated as of June 24,
1981 between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.32 Sixth Addendum to the Exclusive License Agreement dated as of September
16, 1983 between Medrad, Inc., Mieczyslaw Mirowski, Medrad/Intec., Inc.
and Intec Systems, Inc. (1)
10.33 Guidant Corporation 1994 Stock Plan, as amended. (3)
10.34 Guidant Corporation 1998 Stock Plan (7)
10.35 Guidant Corporation Economic Value Added (EVA) Bonus Plan dated January
1, 1995. (2) #
10.36 Stock Purchase Agreement dated as of October 31, 1994 between Eli Lilly
and Company and Advanced Cardiovascular Systems, Inc. (1)
10.37 Standard Form Office Lease dated December 27, 1994 between Zell/Merrill
Lynch Real Estate Opportunity Partners Limited Partnership II and the
Company. (4)
10.38 Guidant Corporation Change in Control Plan for Select Employees. (5)
10.39 Agreement and Plan of Merger, dated as of October 5, 1997, as amended
November 14, 1997, among the Company, Ski Acquisition Corpl. And
EndoVascular Technologies, Inc. (6)
10.40 Five-Year Credit Agreement dated as of August 26, 1998 among the Company,
certain banks, and Morgan Guaranty Trust Company of New York as
Administrative Agent. *
10.41 364-Day Credit Agreement dated as of August 26, 1998, and amended and
restated as of November 17, 1998, among the Company, certain banks, and
Morgan Guaranty Trust Company of New York as Administrative Agent. *
10.42 Agreement and Plan of Merger, dated August 10, 1998 by and among Guidant,
Pegasus Acquisition Corporation and InControl (8)
10.43 Stock and Asset Purchase Agreement, dated September 20, 1998, as amended
February 1, 1999, between Guidant and Sulzer (9)
10.44 Underwriting Agreement, dated February 11, 1999 among the Company and
certain Underwriters relating to the issuance and sale by the Company of
$350,000,000 aggregate principal amount of its 6.15% notes dues 2006.
(10)
11.1 Statement regarding computation of per share earnings, set forth in the
Company's 1998 Annual Report to Shareholders under "Notes to Consolidated
Financial Statements, Note 7-Earnings (Loss) Per Share," at page 39, is
incorporated herein by reference.
13.1 Annual Report to Shareholders for the year ended December 31, 1998
(portions incorporated by reference into this Form 10-K). *
21.1 Subsidiaries of the Registrant. *
23.1 Consent of Independent Auditors. *
27.1 Financial Data Schedule. *
99.1 Factors Affecting Future Operating Results. *
-----------------
(1) Incorporated herein by reference to the identical exhibit filed as part
of the Company's Registration Statement on Form S-1, File No. 33-83934.
(2) Incorporated herein by reference to the identical exhibit filed as part
of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
(3) Incorporated herein by reference to the identical exhibit filed as part
of the Company's Annual Report on Form 10-K for the fiscal year December
31, 1996.
(4) Incorporated herein by reference to the identical exhibit filed as part
of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
(5) Incorporated herein by reference to the identical exhibit filed as part
of the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1995.
(6) Incorporated herein by reference to the identical exhibit filed as part
of the Company's Registration Statement on Form S-4, File No. 333-06363.
(7) Incorporated herein by reference to the identical exhibit filed as part
of the Company's 1998 Proxy Statement.
(8) Incorporated herein by reference to the identical exhibit filed as part
of the Company's Form 8-K dated September 28, 1998
(9) Incorporated herein by reference to the identical exhibit filed as part
of the Company's Form 8-K dated February 4, 1999.
(10) Incorporated herein by reference to the identical exhibit filed as part
of the Company's Form 8-K dated February 17, 1999.
* Filed herewith.
# Management compensation plan.
31
(b) Reports on Form 8-K
The Company did not file any Reports on Form 8-K in the fourth quarter of
1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Guidant Corporation
By /s/James M. Cornelius
----------------------------
James M. Cornelius,
Chairman of the Board
March 22, 1999
32
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
[Download Table]
SIGNATURE TITLE DATE
--------------------------- ------------------------------ --------------
/s/ James M. Cornelius Chairman of the Board and March 22, 1999
--------------------------- Director (principal executive
James M. Cornelius officer)
/s/ Ronald W. Dollens President, Chief Executive March 22, 1999
--------------------------- Officer and Director
Ronald W. Dollens (principal executive officer)
/s/ Keith E. Brauer Vice President, Finance and March 22, 1999
--------------------------- Chief Financial Officer
Keith E. Brauer (principal financial officer)
/s/ Roger Marchetti Corporate Controller and Chief March 22, 1999
--------------------------- Accounting Officer (principal
Roger Marchetti accounting officer)
/s/ Kim B. Clark, Ph.D. Director March 22, 1999
---------------------------
Kim B. Clark, Ph.D.
/s/ Maurice A. Cox, Jr. Director March 22, 1999
---------------------------
Maurice A. Cox, Jr.
/s/ Enrique C. Falla Director March 22, 1999
---------------------------
Enrique C. Falla
/s/ J.B. King Director March 22, 1999
---------------------------
J.B. King
/s/ Susan B. King Director March 22, 1999
---------------------------
Susan B. King
/s/ J. Kevin Moore Director March 22, 1999
---------------------------
J. Kevin Moore
/s/ Mark Novitch, M.D. Director March 22, 1999
---------------------------
Mark Novitch, M.D.
/s/ Eugene L. Step Director March 22, 1999
---------------------------
Eugene L. Step
/s/ Ruedi E. Wager Director March 22, 1999
---------------------------
Ruedi E. Wager, Ph.D.
33
Guidant Corporation and Subsidiaries
Schedule II. Valuation and Qualifying Accounts
(in millions)
[Enlarge/Download Table]
Col. A Col. B Col. C Col. D Col. E
Balance at Charges Balance at
Beginning and End of
Description of Period Expenses Deductions(1) Period
----------- --------- ---------- ------------ ----------
Year Ended December 31, 1996
Allowance for inventory obsolescence $ 6.3 $29.6 $(12.9) $23.0
Allowance for doubtful accounts 5.7 2.3 (0.6) 7.4
----- ----- ------ -----
Totals $12.0 $31.9 $(13.5) $30.4
===== ===== ====== =====
Year Ended December 31, 1997
Allowance for inventory obsolescence $23.0 $14.7 $(11.9) $25.8
Allowance for doubtful accounts 7.4 5.4 (3.6) 9.2
----- ----- ------ -----
Totals $30.4 $20.1 $(15.5) $35.0
===== ===== ====== =====
Year Ended December 31, 1998
Allowance for inventory obsolescence $25.8 $17.7 $(20.5) $23.0
Allowance for doubtful accounts 9.2 15.4 (5.1) 19.5
----- ----- ------ -----
Totals $35.0 $33.1 $(25.6) $42.5
===== ===== ====== =====
(1) Write-offs of obsolete units or uncollectible accounts.
F-1
Exhibit List
13.1 Annual Report to Shareholders for the Year Ended December 31, 1998
(portions incorporated by reference)
21.1 List of Subsidiaries
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
99.1 Factors Possibly Affecting Future Operating Results
Dates Referenced Herein and Documents Incorporated by Reference
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