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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, 1996
Commission File Number 1-13388
GUIDANT CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1931722
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
111 MONUMENT CIRCLE, 29TH FLOOR
INDIANAPOLIS, INDIANA 46204
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: 317-971-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ----------------------
Common Stock New York Stock Exchange
Pacific Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Stock Exchange
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 3, 1997 (Common Stock) was
approximately $4.8 billion.
The number of shares of Common Stock outstanding as of March 3, 1997:
CLASS NUMBER OF SHARES OUTSTANDING
Common 74,099,252
Portions of the following documents have been incorporated by
reference into this report:
DOCUMENT PARTS INTO WHICH INCORPORATED
Registrant's Annual Report to Parts I, II and IV
Shareholders for fiscal year
ended December 31, 1996
Registrant's Proxy Statement Part III
for the Annual Meeting of Shareholders
to be held May 19, 1997
Part I
Item 1. BUSINESS
Overview
Guidant Corporation (the "Company")* was incorporated in
Indiana on September 9, 1994 to be the parent of five of the nine
businesses in the Medical Devices and Diagnostics ("MDD") Division
of Eli Lilly and Company, an Indiana corporation ("Lilly"). Prior
to the consummation of the initial public offering of the Company's
common stock on December 20, 1994 (the "Offering"), the Company
was a wholly-owned subsidiary of Lilly. Pursuant to the
Offering, approximately 19.8 percent of the Company's common
stock was issued to the public. Lilly continued to own
approximately 80.2 percent of the Company's common stock after
the Offering. On September 25, 1995, Lilly disposed of its
remaining ownership interest in the Company by means of a split-
off, an exchange offer pursuant to which Lilly shareholders were
given the opportunity to exchange some, all or none of their
Lilly common stock for the Company's common stock owned by Lilly
(the "Exchange Offer"). The consummation of the Exchange Offer
resulted in Lilly distributing all of its Company common stock to
Lilly shareholders. As a result, Lilly no longer owns any
Company common stock.
The Company is a multinational company that designs,
develops, manufactures and markets a broad range of products for
use in cardiac rhythm management ("CRM"), vascular intervention
("VI"), and other forms of minimally invasive systems ("MIS").
In CRM, the Company is a worldwide leader in automatic
implantable cardioverter defibrillator ("AICD") systems. The
Company also designs, manufactures and markets a full line of
implantable pacemaker systems used in the treatment of slow or
irregular arrhythmias. In VI, the Company is a worldwide leader
in minimally invasive procedures used for opening blocked
coronary arteries. In addition, the Company develops,
manufactures and markets products for use in MIS procedures with
products for access, vision, dissection, retraction and fixation,
focusing on laparoscopic market opportunities in general and
cardiovascular surgeries. The Company's net sales for the year
ended December 31, 1996 were $1,048.5 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
and performing minimally invasive surgical procedures, resulting
in improved quality of patient care and reduced treatment costs.
Cardiovascular disease is the leading cause of death in the
United States. In implementing this strategy, the Company
focuses on the following three areas, which the Company believes
are critical to its future success: (1) global product
innovation, (2) economic partnership with customers worldwide and
(3) organizational excellence.
The Company recently decided to pursue a strategy that
includes the potential acquisition of one or more businesses in
the medical device industry. The Company plans to acquire
technologies that are complementary to its existing technology
base, products that serve the Company's existing customer base
and businesses that expand its geographical presence. However,
there can be no assurance that any acquisition will be
consummated or, if consummated, as to the timing and terms of any
transaction.
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*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.
Cardiac Rhythm Management
In the CRM market, implantable device systems are used to
detect and treat abnormally fast and abnormally slow or irregular
heart rhythms or arrhythmias. The Company's CRM product line is
organized into two major product categories. The tachycardia
("Tachy") product category includes AICDs, endocardial
defibrillation leads, programmers and accessories used primarily
in the treatment of fast arrhythmias. The bradycardia ("Brady")
product category includes pacemaker pulse generators, endocardial
pacing leads, programmers and accessories used primarily in the
treatment of slow or irregular arrhythmias. Customers for Brady
products include electrophysiologists, implanting cardiologists
and cardiovascular surgeons. Customers for Tachy products are
primarily electrophysiologists. Sales of the Company's CRM
products, as a percentage of the Company's total consolidated net
sales for the years ended December 31, 1996, 1995 and 1994, were
55%, 49% and 44%, respectively.
Tachycardia ("Tachy")
AICD systems, or Tachy products, are used to detect and
treat potentially fatal, abnormally fast heart rhythms by
delivering electrical energy to the heart and, in so doing,
restoring the heart's normal rhythm. Tachyarrhythmias often
result from the presence of abnormal cardiac tissue. This tissue
interferes with the normal electrical activity of the heart.
Approximately 34,000 AICDs were implanted worldwide during 1996.
Tachy products range from shock-only devices to more complex
devices and systems, including tiered-therapy devices offering
multiple therapeutic options. 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.
The Company is also developing electrophysiology catheters
and systems to diagnose and treat cardiac arrhythmias using
minimally invasive procedures. The Company believes that these
systems may be able to cure certain types of tachyarrhythmias by
locating and destroying the tissue that causes the arrhythmia.
However, there can be no assurance that these products will be
successful or that the Company will obtain the regulatory
approvals necessary for commercial marketing of these products.
In May 1996, the U.S. Food and Drug Administration ("FDA")
approved expanded product labeling claims for the Company's AICD
systems. The new labeling claims cover patients identified by
the Multicenter Automatic Defibrillator Implantation Trial
("MADIT") to be at high risk for sudden cardiac death. The
Company believes that it is the only manufacturer to currently
have approval for these labeling claims. MADIT is the first
large, randomized clinical trial comparing implantable
defibrillators with conventional antiarrhythmia drug therapy.
The study was terminated in March 1996 because of the significant
improvement in survival of patients with implantable
defibrillators. According to the principal investigator of the
study, Arthur J. Moss, M.D., professor of medicine and director
of the Heart Research Follow-Up Program at the University of
Rochester Medical Center, patients with implantable
defibrillators had 54% fewer deaths and significantly better
overall survival than patients who did not receive the device.
Dr. Moss estimates that about 800,000 Americans survive a heart
attack each year and, of those who survive, approximately 40,000-
60,000 could benefit from an AICD.
Bradycardia ("Brady")
Cardiac pacemaker systems, or Brady products, are generally
used to manage a slow or irregular heartbeat caused by disorders
that disrupt the heart's normal electrical conduction system.
This often results in a heart rate insufficient to provide
adequate blood flow through the body, creating symptoms including
fatigue, dizziness and fainting. Brady products range from
conventional single chamber devices to more sophisticated
adaptive-rate dual chamber devices. Approximately 467,000
pacemakers were implanted worldwide during 1996.
Brady products are used to treat patients whose natural
pacemaker, the sinus node, is malfunctioning, or patients
suffering from a disruption in the electrical conduction system.
Normally, the sinus node, located in the upper atrial portion of
the heart, sends electrical signals through the atrium to the
atrioventricular ("AV") node, which in turn sends signals down to
the lower (ventricular) chambers of the heart. The patient
population needing pacemakers can be divided roughly in half:
those with malfunctioning sinus nodes, or Sick Sinus Syndrome,
and those suffering from malfunctioning AV nodes, or AV Block.
Vascular Intervention
The Company offers its customers a wide range of VI
products, including coronary dilatation catheters, stent systems,
atherectomy catheters, guide wires, guiding catheters and related
accessories. Customers for VI products are primarily
interventional cardiologists. Sales of VI products, as a
percentage of the Company's total consolidated net sales for the
years ended December 31, 1996, 1995 and 1994 were 41%, 48% and
54%, 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 a minimally invasive
CAD intervention (angioplasty, stenting, atherectomy or
mechanical or laser ablation), which are less invasive and less
expensive alternatives to coronary artery bypass graft surgery.
In a percutaneous transluminal coronary angioplasty ("PTCA")
procedure, a local anesthetic is administered and a small
incision is made in the patient's groin area to gain access to
the femoral artery. The physician inserts a guiding catheter
through the femoral artery into the entrance of the coronary
blood vessel and then advances a small guide wire through the
inside of the guiding catheter, into the blood vessel and across
the site of the blockage. Then a dilatation catheter is
delivered over the guide wire through the inside of the guiding
catheter into the blood vessel and across the site of the
blockage. The dilatation catheter is then inflated to compress
the atherosclerotic plaque against the artery wall, thereby
enlarging the opening of the vessel and increasing blood flow to
the heart. At the end of the PTCA procedure, all of the devices
are withdrawn.
The major clinical challenge to PTCA is clinical restenosis,
the renarrowing of the blood vessel at the site of the initial
treatment requiring another intervention within six months of the
initial procedure. Clinical restenosis occurs in approximately
20% to 30% of patients undergoing PTCA procedures. A number of
other technologies have evolved to treat these conditions, often
in combination with a coronary dilatation catheter, including
stenting, atherectomy and ablation. Like coronary dilatation
catheters, coronary stents, atherectomy catheters and ablation
catheters are delivered through a guiding catheter and over a
guide wire.
Coronary stents are metal tubes or coils that are mounted on
coronary dilatation catheters. Coronary stents are permanently
deployed at the blockage by inflating the coronary dilatation
catheter to expand the stent in the artery. When the coronary
dilatation catheter is removed from the artery, the stent stays
in place, which provides a "mechanical" way of keeping the artery
open. In August 1996, the Company completed enrollment of more
than 1,000 patients at 59 North American sites in a randomized
clinical trial of the Company's ACS OTW MULTI-LINK Coronary Stent
System. In addition, in December 1996, the Company received
Investigational Device Exemption (IDE) approval from the FDA to
clinically evaluate its ACS RX MULTI-LINK Coronary Stent System
in the U.S. However, no assurance can be given that the Company
will obtain the regulatory approval necessary for commercial
marketing of these products 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.
Minimally Invasive Systems
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 operative time and better patient outcomes. The
primary customers for the Company's MIS products are surgeons who
specialize in general, gynecological, urologic and vascular
surgery. Sales of the Company's MIS products, as a percentage of
the Company's total consolidated net sales for the years ended
December 31, 1996 and 1995, were 4% and 3%, respectively. Prior
to 1995, the percentage was less than 3%. Certain of these
devices were developed for and manufactured under original
equipment manufacturer (OEM) distribution arrangements.
MIS uses small incisions to gain access to the surgical
site. Minimally invasive surgical techniques significantly
decrease the patient's postoperative pain, hospital stay and
recovery period by limiting the size of incisions required to
gain access to the primary surgical site as well as reducing the
resulting trauma caused by more invasive techniques. In May
1996, the Company announced that the strategic focus for its MIS
business would be on cardiovascular applications.
Products
Tachy Products
The Company offers a broad array of Tachy products ranging from
shock-only devices to more complex devices and systems offering
multiple therapeutic options as set forth in the following chart.
The Company's key Tachy products include:
Category Description Product Name Date of Commercial Release
- -------- ----------- ------------ --------------------------
First
U.S. International
Release Release
---------- -------------
Shock-Only AICDs that provide VENTAK MINI+HC/S May 1996 Dec. 1995
low and high energy VENTAK MINI+S Jan. 1996 Dec. 1995
shock therapy, VENTAK P3 Sep. 1995 Oct. 1994
but do not provide
antitachycardia
pacing. Some
devices also
provide Brady
pacing.
Tiered- AICDs that provide VENTAK AV (1) Nov. 1996
Therapy low and high VENTAK MINI II+ July 1996 June 1996
energy shock VENTAK MINI II July 1996 June 1996
therapy, Brady VENTAK MINI+HC May 1996 Dec. 1995
pacing and VENTAK MINI HC May 1996 Dec. 1995
antitachycardia VENTAK MINI + Jan. 1996 Dec. 1995
pacing. VENTAK MINI Jan. 1996 Dec. 1995
VENTAK PRx III May 1995 Oct. 1994
Endocardial Insulated wires, ENDOTAK DSP Jan. 1996 Oct. 1994
Defibril- inserted through ENDOTAK 70 Series Aug. 1994 Nov. 1992
lation a vein into the
Leads heart, which allow
energy to be trans-
mitted to and from
the implanted AICD,
allowing arrhythmias
to be detected and
treated.
- --------------
(1) This product is not currently available in the United States. There can be
no assurance that the Company will obtain the regulatory approval necessary
for commercial marketing of this product in the United States.
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. The Company's key Brady
products include:
Category Description Product Name Date of Commercial Release
- -------- ----------- ------------ --------------------------
First
U.S. International
Release Release
--------- ---------
Single Pacemakers that VIGOR SSI March 1995 May 1993
Chamber pace one chamber VISTA VVI Apr. 1988 Dec. 1987
(SSI) of the heart,
typically the
ventricle, at a
programmed rate.
Single Pacemakers that VIGOR SR June 1995 May 1993
Chamber pace one chamber
Adaptive- of the heart,
Rate and incorporate
(SSIR) a sensor that
modifies the pacing
rate in response
to physical
activity.
Dual Chamber Pacemakers that VIGOR DDD Oct. 1994 May 1993
(DDD) pace both chambers VISTA DDD June 1990 Oct. 1989
of the heart,
thereby improving
heart synchroni-
zation and
cardiac output.
Dual Chamber Pacemakers that VIGOR DR June 1995 May 1993
Adaptive- pace both chambers
Rate (DDDR) of the heart, and
incorporate a
sensor that
modifies the pacing
rate in response
to physical
activity.
Endocardial Insulated wires, SELUTE May 1996 Dec. 1994
Pacemaker inserted through SELUTE Atrial (1) June 1996
Leads a vein into the SWEET TIP RX (1) June 1996
heart, which allow
energy to be
transmitted to and
from the implanted
pacemaker.
- ----------------------
(1) This product is not currently available in the United States. There can be
no assurance that the Company will obtain the regulatory approval necessary
for commercial marketing of this product in the United States.
Vascular Intervention Products
The Company offers its customers a wide range of VI products, including
coronary dilatation catheters, stents, atherectomy catheters, guide wires and
accessories. The Company's key VI products include:
Date of U.S.
Commercial
Category Description Product Name Release
- -------- ----------- ------------ ------------
Perfusion Perfusion coronary ACS OTW LIFESTREAM Dec. 1995
Coronary dilatation catheters ACS RX LIFESTREAM Mar. 1995
Dilatation allow continuous ACS RX FLOWTRACK Mar. 1993
Catheter blood flow during ACS RX PERFUSION Dec. 1990
the PTCA procedure,
offering flexibility
in inflation times.
Perfusion catheters
are available in RX
and OTW configurations.
Rapid RX coronary ACS RX COMET VP Feb. 1997
Exchange dilatation catheters ACS RX COMET Nov. 1996
("RX") allow for easy RX ELIPSE Oct. 1993
Coronary exchange of the
Dilatation catheter without
Catheter removing the
original guide wire.
Over the OTW coronary ACS Tx2000 Nov. 1996
Wire dilatation catheters ACS ENDURA Mar. 1996
("OTW") are delivered ACS CONCORDE Feb. 1996
Coronary over a separate ACS OMEGA Mar. 1992
Dilatation guide wire to PINKERTON .018 Sept. 1989
Catheter position the balloon
across the lesion.
Fixed-Wire Fixed-wire catheters SLALOM PLUS Jan. 1991
Coronary permit access
Dilatation through tortuous and
Catheter very small vessels.
Stents Stents are ACS OTW MULTI-LINK (1)
implantable metal ACS RX MULTI-LINK (1)
devices that are ACS RX MULTI-LINK HP (1)
permanently
deployed to provide
a "mechanical" way
to keep an artery
open.
Vascular Intervention Products (continued)
Date of U.S.
Commercial
Category Description Product Name Release
- -------- ----------- ------------ ---------
Guide wires Individual ACS HI-TORQUE IRON MAN Jan. 1997
guide wires are HI-TORQUE BALANCE Oct. 1994
inserted through ACS HI-TORQUE EXTRA S'PORT Sept. 1994
coronary and HI-TORQUE EXTRA SUPPORT Feb. 1992
peripheral vessels HI-TORQUE TRAVERSE Nov. 1991
before the dilatation DOC Feb. 1988
catheter, facilitating HI-TORQUE FLOPPY II June 1986
the placement of the
dilatation catheter
or atherectomy
catheter.
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.
Accessories Accessories are INDEFLATOR 20/30 Sept. 1996
products that ACS ANCHOR Apr. 1996
facilitate the TOURGUIDE Dec. 1995
delivery or INDEFLATOR 20/20 March 1990
operation of a
device.
Imaging Imaging systems SONICATH (2) Dec. 1996
that allow for an MICRORAIL (2) Dec. 1996
ultrasound scan MICROVIEW (2) Dec. 1996
of the coronary ULTRACROSS (2) Dec. 1996
arteries.
- --------------
(1) This product is released in select international markets and is not
currently available in the United States. There can be no assurance that
the Company will obtain the regulatory approval necessary for commercial
marketing of this product in the United States.
(2) The products are offered by the Company through a distribution agreement
with Hewlett Packard Company. The product names are trademarks of Boston
Scientific Corporation.
MIS Products
The Company markets a broad portfolio of minimally invasive systems
products ranging from basic laparoscopic tools to innovative enabling
technologies. The Company's key MIS products include:
Date of
First
Commercial
Category Description Product Name Release
- -------- ----------- ------------ -------
Access Trocars provide CHOICE TIP Trocar System Oct. 1996
minimally invasive Sensing Tip Trocars Nov. 1993
access to the GASLESS Trocars June 1993
abdominal cavity. Blunt Tip Trocars Apr. 1993
CLASSIC TIP Trocars Jan. 1993
Balloon Balloon dissection EXTRA VIEW Balloons Jan. 1996
Dissection/ atraumatically -Oval
Stabilization creates -Round
extraperitoneal Structural Balloons Sept. 1994
working space PDB 1000 Dec. 1993
that facilitates PDB 2 Nov. 1993
advanced
laparoscopic
procedures.
Fixation Devices utilized ORIGIN STAT-TACK Sept. 1996
to position and ORIGIN TACKER Sept. 1995
secure prosthetic Polypropylene Mesh May 1995
materials.
Retraction Devices that employ AIRLIFT Jr. Balloon Retractor Nov. 1996
a mechanical arm EXTRAHAND Balloon Retractor Nov. 1996
and retractors AIRLIFT Balloon Retractor May 1995
to lift the LAPAROFAN Retractors Sept. 1993
abdominal wall LAPAROLIFT Mechanical Arm Dec. 1992
to create working
space.
Vessel Devices for VASOVIEW Balloon Sept. 1996
Harvesting minimally invasive Dissection System
access to the VASOVIEW 5mm Sept. 1996
saphenous vein. Endoscope
Wound Closure Multiple fire clip ACUCLIP Right Angle Nov. 1992
appliers dispense Clip Applier
titanium clips that
ligate vessels and
ducts during
laparoscopic
procedures.
Sales and Marketing
The Company has a broad product line which requires a sales
and marketing strategy that is tailored to its customers in order
to deliver high quality, cost-effective products and services to
all of its customer segments worldwide. Because of the diverse
needs of the global market that the Company serves, the Company's
distribution system includes both direct sales forces and
independent distributors. The Company utilizes separate sales
forces to sell its CRM, VI and MIS products in order to take
advantage of specific clinical and technical expertise. In many
cases, members of the sales forces are present during procedures
in order to provide technical consultation to the physician in
the use of the Company's products. The Company is not dependent
on any single customer and no single customer accounted for more
than 5% of the Company's net sales in 1996.
Sales personnel work closely with the primary decision
makers who purchase the Company's products, whether physicians,
material managers, biomedical staff, hospital administrators or
purchasing managers. Additionally, the sales forces actively
pursue approval of the Company as a qualified supplier for
hospital group purchasing organizations that negotiate contracts
with suppliers of medical products. The Company already has
contracts with a number of national buying groups and is working
with a growing number of regional buying groups that are emerging
in response to cost containment pressures and health care reform.
In addition, the Company has contracted with a number of
hospitals to provide VI products under a predictable procedural
cost program.
The sales organization compensation and incentive packages
includes a mix of base salary, commissions and bonus plans that
are based upon specific targets and/or corporate goals and are
tailored to meet local market needs and business practices.
United States
In the United States, the Company sells substantially all of
its products through its direct sales forces. The different uses
of the Company's product lines and the different physicians
performing the corresponding procedures necessitate focused sales
organizations that can utilize their specific clinical and
technical knowledge. In 1996, 61% of the Company's consolidated
net sales were derived from sales in the United States.
The Company's sales operations for its CRM and VI products
are divided into three geographic areas within the United States,
under a single management structure to which all sales and
distribution 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 1996, 39% of the Company's net sales were derived from
its international operations through its direct sales forces and
independent distributors. The Company sells its products in over
70 countries. Major international markets for the Company's
products include: Japan, Germany, France, Spain, Italy, the
United Kingdom, Australia, Belgium, The Netherlands, and Canada.
The sales and marketing approach in international markets varies
depending on market size and stage of development. The Company's
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; Dorado, Puerto Rico; and Basingstoke,
England.
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 and in the Quality System Regulation requirements
(regulations adopted by the FDA in October, 1996 which replace
the requirements previously known as Good Manufacturing
Practices) applicable to the production process. The Company
uses various production and quality performance measures to
provide high manufacturing quality and efficiency.
The Company vertically integrates its operations where it
believes such integration provides significant cost, supply or
quality benefits. In some areas, the Company is highly
vertically integrated. In other cases, the Company purchases
components. In all cases, the Company attempts to work closely
with its suppliers to ensure the cost-effective delivery of high
quality materials and components. The Company's major
considerations used in the selection and retention of suppliers
are supplier technology, quality, reliability, consistent on-time
deliveries, value-added services and cost. The Company tries to
select and build long-term relationships with suppliers who have
demonstrated a commitment to these factors. To date, the Company
has been able to obtain all required components and materials for
all market released products and for all products under
development.
Raw Materials
The Company purchases certain of the materials and
components used in manufacturing its products, some of which are
custom-made for the Company. In addition, the Company purchases
certain supplies from single sources due to quality
considerations, costs or constraints resulting from regulatory
requirements. In the past, certain suppliers have announced
that, in an effort to reduce potential product liability
exposure, they intend to limit or terminate sales to the medical
device industry. In addition, agreements with certain suppliers
can be terminated by either party upon short notice. The Company
has agreed to indemnify certain suppliers against certain
potential product liability exposure. The establishment of
additional or replacement suppliers for certain components or
materials cannot be accomplished quickly, largely due to the FDA
approval system and the complex nature of manufacturing processes
employed by many suppliers. The inability to develop
satisfactory alternatives, if required, or a reduction or
interruption in supply or a significant increase in the price of
materials or components could have a material adverse effect on
the Company.
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.
The Company owns numerous patents and has numerous patent
applications pending in the United States and in certain foreign
countries which relate to aspects of the technology used in many
of the Company's products. The Company's policy is generally to
file patent applications in the United States and foreign
countries where rights are available and the Company believes it
is commercially advantageous to do so. In addition, the Company
is party to several license agreements with unrelated third
parties pursuant to which it has obtained, for varying terms, the
exclusive or non-exclusive rights to certain patents held by such
third parties in consideration for cross-licensing rights or
royalty payments. The Company has also granted various rights in
its own patents to others under license agreements. There can be
no assurance that pending patent applications will result in
issued patents, that patents issued to or licensed by the Company
will not be challenged or circumvented by competitors, that such
patents will not be found to be invalid or that such patents will
be found to be sufficiently broad to protect the Company's
technology or provide the Company with a competitive advantage.
The Company actively monitors the products of its
competitors for possible infringement of the Company's owned
and/or licensed patents. Historically, litigation has been
necessary to enforce certain patent rights held by the Company
and the Company plans to continue to defend and prosecute its
rights with respect to such patents. There can be no assurance,
however, that the Company's efforts in this regard will be
successful. In addition, patent litigation could result in
substantial cost to and diversion of effort by the Company. The
Company also relies upon trade secrets for protection of its
confidential and proprietary information. There can be no
assurance that others will not independently develop
substantially equivalent proprietary information or techniques or
that third parties will not otherwise gain access to the
Company's trade secrets.
It is the Company's policy to require certain of its
employees, consultants and other parties to execute
confidentiality and invention assignment agreements upon the
commencement of employment or consulting relationships with the
Company. There can be no assurance, however, that these
agreements will provide meaningful protection against, or
adequate remedies for, the unauthorized use or disclosure of the
Company's trade secrets.
The Company has registered trademarks in the following names
and products that are referred to herein: ACS, ACS EDGE, ACS
OMEGA, ACUCLIP, AICD, ATHEROCATH, ATHEROCATH-GTO, CPI, DOC,
ENDOTAK, ENDOTAK DSP, EXCEL, HI-TORQUE BALANCE, HI-TORQUE EXTRA
SUPPORT, HI-TORQUE FLOPPY II, HI-TORQUE TRAVERSE, INDEFLATOR,
LAPAROFAN, LAPAROLIFT, ORIGIN, PDB, PRx, RX ELIPSE, SELUTE,
SLALOM PLUS, VENTAK, VIGOR and VISTA. The following are
trademarks of the Company: ACS ANCHOR, ACS CONCORDE, ACS ENDURA,
ACS HI-TORQUE EXTRA S'PORT, ACS HI-TORQUE IRON MAN, ACS OTW
LIFESTREAM, ACS OTW MULTI-LINK, ACS RX MULTI-LINK, ACS RX MULTI-
LINK HP, ACS OTW LIFESTREAM, ACS RX FLOWTRACK, ACS RX LIFESTREAM,
ACS RX PERFUSION, ACS RX COMET, ACS Tx 2000, AIRLIFT, AIRLIFT
JR., ATHEROCATH-BANTAM, CLASSIC TIP, CHOICE TIP, EXTRAHAND,
EXTRAVIEW, GASLESS, INDEFLATOR PLUS 20, INDEFLATOR 20/30, ORIGIN
TACKER, PINKERTON .018, SCA-EX, STAT-TACK, SWEET TIP RX,
TOURGUIDE, VASOVIEW and VENTAK MINI.
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.
Competition
The medical devices market is highly competitive. The
Company competes with many companies, some of which may have
access to greater financial and other resources than the Company.
Furthermore, the medical devices market is characterized by rapid
product development and technological change. The present or
future products of the Company could be rendered obsolete or
uneconomic by technological advances by one or more of the
Company's present or future competitors or by other therapies
such as drugs. The Company must continue to develop and acquire
new products and technologies to remain competitive with other
developers of medical devices and therapies.
The Company faces substantial competition from a number of
other companies in the markets for its products. The Company's
primary competitors in the Brady pacemaker market are Medtronic,
Inc., Pacesetter, Inc. (St. Jude Medical, Inc.), Sulzer
Intermedics, Inc. (Sulzer Brothers Ltd.) and Telectronics Pacing
Systems (St. Jude Medical). In the Tachy market, the Company
competes primarily with Medtronic, Inc. and Ventritex, Inc. The
Company's primary competitors in VI are SciMed Life Systems, Inc.
and Heart Technologies, Inc. (Boston Scientific), Cordis
Corporation and Johnson & Johnson Interventional Systems (Johnson
& Johnson), Schneider (Pfizer), USCI (C. R. Bard, Inc.), and
Medtronic, Inc. With respect to MIS devices, the principal
competitors of the Company are the United States Surgical
Corporation and Ethicon Endo-Surgery, Inc. (Johnson & Johnson).
The Company believes that it competes primarily on the basis of
product features, product quality, customer support, field
services and cost-effectiveness.
Government Regulation
As a manufacturer of medical devices, the Company is subject
to extensive regulation by the FDA and, in some jurisdictions, by
state and foreign governmental authorities. These regulations
govern the introduction of new medical devices, the observance of
certain standards with respect to the design, manufacture,
testing, labeling and promotion of such devices, the maintenance
of certain records, the ability to track devices, the reporting
of potential product defects, the export of devices and other
matters. The Company believes that it is in substantial
compliance with such governmental regulations.
From time to time, the Company has received notifications,
including warning letters, from the FDA of alleged deficiencies
in the Company's compliance with FDA requirements. To date, the
Company has been able to address or correct such deficiencies to
the satisfaction of the FDA 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 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.
All of the Company's medical devices introduced in the
United States market since 1976, which include substantially all
of the Company's products, are required by the FDA, as a
condition of marketing, to secure a premarket notification
clearance pursuant to Section 510(k) of the federal Food, Drug
and Cosmetic Act, an approved pre-market approval ("PMA")
application or a supplemental PMA. Obtaining a PMA or even a
supplemental PMA can take up to several years and can involve
preclinical studies and clinical testing. 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.
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 marketing approved devices 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
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 these exports and make the records available to the FDA for
inspection, if required.
Health Care Cost Containment; Third-Party Reimbursement
During the past several years, the major third-party payors
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
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 payors may deny reimbursement if they determine that
a device was not used in accordance with cost-effective treatment
methods as determined by the payor, 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 reform may limit the price of, or
the level at which reimbursement is provided for, the Company's
products.
The ability of customers to obtain appropriate reimbursement
for their products and services from government and third-party
payors 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
relating to, the product. While the amount of product liability
insurance maintained by the Company has been adequate in relation
to claims made against the Company in the past, there can be no
assurance that the amount of such insurance will be adequate to
satisfy claims made against the Company in the future or that the
Company will be able to obtain insurance in the future at
satisfactory rates or in adequate amounts. Product liability
claims or product recalls in the future, regardless of their
ultimate outcome, could have a material adverse effect on the
Company's business, financial condition and reputation, and on
the Company's ability to attract and retain customers for its
products.
Environmental Compliance
The Company is subject to various federal, state and local
laws and regulations relating to the protection of the
environment. In the course of its business, the Company is
involved in the handling, storage and disposal of certain
chemicals. While the Company continues to make capital and
operational expenditures for protection of the environment, it
does not anticipate that those expenditures will have a material
adverse effect on its business.
Research and Development
The Company is engaged in ongoing research and development
to introduce clinically advanced new products, to enhance the
effectiveness, ease of use, safety and reliability of its
existing products and to expand the applications for which the
uses of its products are appropriate. The Company is dedicated
to developing novel technologies that will furnish health care
providers with a more complete line of products to treat medical
conditions through minimally invasive procedures.
The Company's research and development activities are
carried out primarily in facilities located in Santa Clara, Menlo
Park, and Temecula, California; St. Paul, Minnesota; and
Basingstoke, England. 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, including
a CRM research laboratory at the University of Alabama at
Birmingham. 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 and 9002 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 requires 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. The
Company's CRM facilities have been audited by British Standards
Institute and have obtained and continue to maintain ISO 9001 and
9002 certifications. These certifications require that these
facilities undergo periodic reexamination. The Company's VI
facilities in California and England have been audited and
approved for ISO 9001 certification. The Company's MIS
facilities have also received ISO 9001 certification.
Executive Officers of the Company
Name Position Age
- ---- -------- ---
James M. Cornelius Chairman of the Board of 53
Directors and Director
Ronald W. Dollens President, Chief Executive 50
Officer and Director
J.B. King Vice President, 67
General Counsel,
Secretary and Director
James R. Baumgardt President, Western Hemisphere 49
Sales
Keith E. Brauer Vice President, Finance and 48
Chief Financial Officer
A. Jay Graf President, Cardiac Rhythm 49
Management Group
Ginger L. Howard President, Vascular 41
Intervention Group
Cynthia L. Lucchese Treasurer 36
Roger Marchetti Corporate Controller and 39
Chief Accounting Officer
Richard M. van Oostrom President of Operations, 52
Europe, Middle East and Africa
F. Thomas (Jay) President, Minimally Invasive 44
Watkins, III Systems Group
Joseph A. Yahner Vice President, Human Resources 49
and Corporate Affairs
A brief summary of the recent business and professional
experience of each executive officer is set forth below.
JAMES M. CORNELIUS Mr. Cornelius is Chairman of the Board
of Directors and a Director of the Company. Previously, he was
Vice President, Finance and Chief Financial Officer of Lilly from
1983 until his retirement in October 1995 and was a Director for
Lilly. Mr. Cornelius has served as Treasurer of Lilly and as
President of IVAC Corporation, a former Lilly medical device
subsidiary. He joined Lilly in 1967. Mr. Cornelius is a
director of American United Life Insurance Company, Lilly
Industries, Inc., and the National Bank of Indianapolis. Mr.
Cornelius also serves as a trustee of the University of
Indianapolis.
RONALD W. DOLLENS Mr. Dollens is President, Chief Executive
Officer and a Director of the Company. Previously, he served as
President of Lilly's MDD Division from 1991 until 1995. Mr.
Dollens served as Vice President of Lilly's MDD Division and
Chairman of the Company's subsidiary, Advanced Cardiovascular
Systems, Inc. ("ACS") from 1990 to 1991. He also held the
position of President and Chief Executive Officer of ACS. Mr.
Dollens joined Lilly in 1972. Mr. Dollens currently serves on the
boards of Physio-Control International Corporation, the Health
Industry Manufacturers Association, the Eiteljorg Museum, and the
Indiana State Symphony Society Board. He is also the President
of the Indiana Health Industry Forum.
J. B. KING Mr. King is Vice President, General Counsel,
Secretary and a Director of the Company. Mr. King also acts as
counsel to the law firm of Baker & Daniels, which provides legal
services to the Company. He previously was Vice President and
General Counsel for Lilly, a position he held from 1987 until he
retired in 1995. Before joining Lilly, Mr. King was a partner
and chairman of the management committee of Baker & Daniels. Mr.
King is a director of Bank One, Indianapolis, N.A., the Indiana
Legal Foundation, IWC Resources, Inc., and the James Whitcomb
Riley Memorial Association.
JAMES R. BAUMGARDT Mr. Baumgardt is a Vice President of the
Company and President, Western Hemisphere Sales. Previously he
held the position of Vice President, Corporate Resources from
1994 to 1995. Mr. Baumgardt has also served as Executive
Director of Human Resources and Business Development for the MDD
Division of Lilly from 1992 to 1994. Mr. Baumgardt was Director
of Personnel for Lilly from 1990 to 1992 and Director of Sales
for Lilly's Select Product Division from 1988 to 1990. He joined
Lilly in 1970. Mr. Baumgardt is a director of the Rose-Hulman
Institute of Technology.
KEITH E. BRAUER Mr. Brauer is Vice President, Finance and
Chief Financial Officer for the Company. Previously, he served
as Executive Director of Finance and Chief Accounting Officer of
Lilly from 1992 to 1994. Mr. Brauer was Executive Director of
International Finance of Lilly from 1988 to 1992 and Director of
Corporate Affairs of Lilly from 1986 to 1988. Additionally, he
held the position of Vice President of Finance and Treasurer for
Physio-Control Corporation, a former Lilly subsidiary. Mr.
Brauer joined Lilly in 1974. Mr. Brauer 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 the Cardiac Rhythm Management Group. He has been
President and Chief Executive Officer of the Company's
subsidiary, Cardiac Pacemakers, Inc. ("CPI") since 1992. He
joined CPI as Executive Vice President and Chief Operating
Officer in 1990. Mr. Graf has also held the position of Senior
Vice President of Operations at Physio-Control Corporation.
Additionally, Mr. Graf held the positions of Vice President of
Sales and Technical Services, and Vice President of Marketing and
Communications at Physio-Control Corporation. Mr. Graf joined
Lilly in 1976. Mr. Graf is a director of ATS Corporation and the
St. Paul Area United Way.
GINGER L. HOWARD Ms. Howard is a Vice President of the
Company and President of the Vascular Intervention Group. She
has been President of ACS since 1993. She served as a Director
of Pharmaceutical Sales for Lilly in 1992 and was Director of
Corporate Pharmaceutical Strategic Planning from 1989 to 1991.
Ms. Howard joined Lilly in 1979. Ms. Howard is a director of
Amylin Pharmaceuticals, Inc. and the California Healthcare
Institute. She also serves on the advisory board for the
California Institute for Federal Policy Research and is 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 from
1982 to 1986. Ms. Lucchese is a Certified Public Accountant.
She is also a director for MEDMARC Mutual Insurance Company, Inc.
ROGER MARCHETTI Mr. Marchetti is Corporate Controller and
Chief Accounting Officer of the Company. He served as Manager of
Finance for Lilly's Indianapolis pharmaceutical manufacturing
operations from 1992 to 1994, and Manufacturing Controller for
ACS from 1990 to 1992. Mr. Marchetti joined ACS in 1988 as
General Accounting Manager. Prior to joining ACS, Mr. Marchetti
was on the audit staff of Touche Ross & Co. (currently Deloitte &
Touche LLP) from 1980 to 1986. Mr. Marchetti is a Certified
Public Accountant.
RICHARD M. VAN OOSTROM Mr. van Oostrom is a Vice President
of the Company and President of Operations, Europe, Middle East
and Africa. He served as Vice President of European Operations
for Lilly's MDD Division from 1984 to 1994. 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 the European trade association for medical
prosthesis manufacturers.
F. THOMAS (JAY) WATKINS, III Mr. Watkins is a Vice
President of the Company and President of the Minimally Invasive
Systems Group. He has also been President of the Company's
subsidiary, Origin Medsystems, Inc. ("Origin") since 1995. Mr.
Watkins joined Origin in 1989. Previously, he has served in
management positions in several start-up companies, including
Microgenics Corporation, and was a consultant with the
international consulting firm of McKinsey & Company, Inc. He is
a director of Gynecare, Inc. and CardioGenesis Corporation.
JOSEPH A. YAHNER Mr. Yahner is Vice President of Human
Resources and Corporate Affairs for the Company. Previously, he
was Vice President of Human Resources for CPI and U.S.
Operations, positions he held from 1992 and 1994, respectively,
to 1995. He served as Director of Operations at Lilly's
Tippecanoe Laboratories from 1988 to 1992. Mr. Yahner has also
served in various positions in Personnel, Research,
Manufacturing, Quality Control and Technical Services for Lilly.
Mr. Yahner joined Lilly in 1971.
Employees
As of December 31, 1996, the Company had 4,449 full-time
employees. The Company maintains compensation, benefits, equity
participation and work environment policies intended to assist in
attracting and retaining qualified personnel. The Company
believes that the success of its business will depend, in
significant part, on its ability to attract and retain such
personnel. In addition, the Company contracts for services where
appropriate. The contract labor provides management with
flexibility in dealing with fluctuations in volume during periods
of high sales growth and through new product transfers to
manufacturing.
None of the Company's employees are represented by a labor
union. The Company has never experienced an organized work
stoppage or strike and considers its relations with its employees
to be excellent.
Prior Relationship with Lilly
The Company was incorporated on September 9, 1994 as a
wholly-owned subsidiary of Lilly. In November 1994, Lilly
transferred all of its outstanding capital stock of ACS, CPI and
Devices for Vascular Intervention, Inc. to the Company in
exchange for shares of the Company's common stock. As part of
this transfer, the Company agreed to indemnify Lilly for any
losses arising out of or otherwise related to the ownership or
operation at any time of the businesses conducted by the Company.
Also in November 1994, the Company purchased from Lilly all of
the capital stock of Heart Rhythm Technologies Incorporated and
Origin and certain assets used in the Company's international
businesses. In connection with these transactions, the Company
and Lilly also entered into a Tax Sharing Agreement which
provides, among other things, that should the Exchange Offer,
which was intended to qualify as a tax-free distribution pursuant
to Section 355 of the Internal Revenue Code of 1986, subsequently
fail to qualify under Section 355 as a result of any event wholly
or partially within the control of the Company and its
subsidiaries (the "Company Group") involving either the stock or
assets (or any combination thereof) of any member of the Company
Group within three years of the date of the Exchange Offer, then
the Company is obligated to indemnify and hold Lilly harmless
from any tax liability imposed on Lilly in connection with the
Exchange Offer, which liability would be material.
Financial Information Relating to Classes of Products
Financial information relating to classes of products, set
forth in the Company's 1996 Annual Report to Shareholders under
"Management's Discussion and Analysis of Results of Operations
and Financial Condition," at page 13, 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 1996 Annual Report to
Shareholders at page 28 under "Notes to Consolidated Financial
Statements--Geographic Information," is incorporated herein by
reference.
Local restrictions on the transfer of funds from branches
and subsidiaries located abroad (including the availability of
dollar exchange) have not to date been a significant deterrent in
the Company's overall operations abroad. The Company cannot
predict what effect these restrictions or the other risks
inherent in foreign operations, including possible
nationalization, might have on its future operations or what
other restrictions may be imposed in the future.
Item 2. PROPERTIES
As of December 31, 1996, the Company owned or leased the following
facilities:
Approximate Leased or
Location Type of Facility Square Feet Owned
- -------- ---------------- ----------- ---------
Basingstoke, UK Administration, VI 24,000 Leased
manufacturing and
product development
Brussels, Belgium Administration 17,000 Leased
Dorado, PR CRM manufacturing, research 54,000 Owned
and administration
Indianapolis, IN Administration 18,000 Leased
Menlo Park, CA MIS manufacturing, research 63,000 Leased
and development, admini-
stration, sales and marketing
and warehouse
Santa Clara, CA VI manufacturing, research 370,000 Owned
and development, admini-
stration, and sales and
marketing
St. Paul, MN CRM manufacturing, research 315,000 Owned
and development, admini-
stration and sales and
marketing
St. Paul, MN CRM lead development and 100,000 Leased
administration
St. Paul, MN CRM packaging, shipping 25,000 Leased
and warehouse
Temecula, CA VI manufacturing; CRM 500,000 Owned
manufacturing, research
and development and
administration
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
On May 31, 1994, SciMed Life Systems, Inc. ("SciMed") filed
suit against ACS in the Northern District of California, San
Francisco Division, alleging that the ACS RX FLOWTRACK 40 and ACS
RX ELIPSE catheters infringed certain SciMed patents. In
addition, on November 17, 1995, SciMed filed suit against ACS in
the Northern District of California, San Francisco Division,
alleging that the ACS RX LIFESTREAM catheter infringed certain
SciMed patents. Both cases seek injunctive relief and
unspecified monetary damages. ACS exercised its rights under a
settlement agreement between ACS and SciMed (the "Settlement
Agreement") and initiated arbitration proceedings claiming that
these catheters are licensed products under the Settlement
Agreement. The Court granted ACS' request that the two lawsuits
be stayed pending the outcome of the arbitration. In March 1997,
the Arbitration Panel ruled that the ACS RX FLOWTRACK 40 and
ACS RX LIFESTREAM were licensed products under the Settlement
Agreement. However, the Arbitration Panel ruled that the ACS RX
ELIPSE was not a licensed product. As a result, the lawsuit
regarding the ACS RX ELIPSE will proceed.
On May 15, 1995, Intermedics, Inc., a division of
Sulzermedica USA, Inc. ("Intermedics"), filed suit against CPI in
the United States District Court for the Southern District of
Texas, Galveston Division. The lawsuit was subsequently
transferred to the United States District Court for Minnesota.
The complaint alleges infringement of certain Intermedics patents
by CPI products, including unspecified defibrillator models
bearing the VENTAK and/or PRx trademark(s); unspecified pacemaker
models bearing the VIGOR trademark; and unspecified pacemaker
models bearing the EXCEL trademark (which models are not
currently manufactured or sold by CPI). Intermedics is seeking
injunctive and monetary relief of an unspecified amount.
On August 28, 1995, the Company received a letter from
Pacesetter, Inc. ("Pacesetter") advising the Company that
Pacesetter believes that certain Pacesetter patents are being
used by the Company in connection with the Company's VIGOR
pacemaker/programmer combination. The Pacesetter letter and a
subsequent letter also advise that it appears to Pacesetter that
the Company may be using certain patents licensed to Pacesetter
in connection with the Company's VENTAK MINI family of
defibrillators. On May 3, 1996, Pacesetter filed suit against
CPI in the United States District Court for the District of
Delaware. The lawsuit was subsequently transferred to the United
States District Court for Minnesota. The complaint, as
subsequently amended, alleges infringement of certain of the
patents referred to in the previous letters and seeks injunctive
relief, unspecified monetary damages, and an award of attorneys'
fees.
On December 15, 1995, Boston Scientific Corporation and its
subsidiary, SciMed (collectively, "BSC"), filed suit against ACS
in the United States District Court of Massachusetts alleging
violation of federal and state antitrust laws, as well as state
unfair competition and abuse of process laws. The lawsuit seeks
injunctive relief, unspecified monetary damages and a declaration
that certain patents are unenforceable. BSC alleges that the
violations are based on the misuse of the United States patent
laws as a result of agreements concerning certain rapid exchange
catheter patents.
On May 15, 1996, The Johns Hopkins University ("Johns
Hopkins") filed suit against the Company and CPI in the District
of Maryland, Northern Division. The Complaint alleges that
certain of the Company's defibrillators infringe a patent owned
by Johns Hopkins, that the Company has breached an agreement
originally entered into by Johns Hopkins and Medrad, Inc., and
that the Company has been unjustly enriched. Johns Hopkins is
seeking injunctive relief, specific performance, unspecified
monetary damages, and an award of attorneys' fees.
On June 4, 1996, General Surgical Innovations, Inc. ("GSI")
filed suit against the Company's subsidiary, Origin Medsystems,
Inc. ("Origin") in the Northern District of California alleging
that Origin's making, using, offering to sell and selling certain
Origin Preperitoneal Distention Balloon Systems infringed and is
continuing to infringe a patent owned by GSI. GSI is seeking
injunctive relief, unspecified monetary damages and an award of
costs and attorneys' fees.
The Company is a party to certain other legal actions
arising in the ordinary course of its business. While it is not
possible to predict or determine the outcome of the legal actions
brought against the Company, the Company believes that 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 in any one accounting period.
On August 23, 1996, following the filing with the French
Ministry of Labor and Social Affairs of a small number of
reported incidents concerning the use in France of the ACS RX
MULTI-LINK Coronary Stent System, the Company in cooperation with
the French Ministry voluntarily suspended sales of this product
and recalled units in France.
Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, no matters were submitted
to a vote of security holders.
Part II
Item 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock
Exchange ("NYSE") and the Pacific Stock Exchange ("PSE").
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 1996 Annual Report to Shareholders under "Notes to
Consolidated Financial Statements--Selected Quarterly Information
(Unaudited)," at page 30 is incorporated herein by reference.
During each quarter of 1996 and the third and fourth
quarters of 1995, the Company paid a quarterly cash dividend of
$0.025 per share of the Company's common stock. The declaration
and payment of future dividends to holders of the Company's
common stock will be at the discretion of the Board and will
depend upon many factors, including the Company's competitive
position, financial condition, earnings and capital requirements.
Accordingly, there is no requirement or assurance that dividends
will be declared or paid.
As of March 3, 1997, the number of record holders of the
Company's common stock was 3,271.
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 1996 Annual
Report to Shareholders under "Selected Consolidated Financial
Data," at page 12, 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
1996 Annual Report to Shareholders under "Operating Results"
(pages 13-16), "Liquidity and Financial Condition" (pages 16-17),
and "Regulatory and Other Matters" (page 17), 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
1996 Annual Report to Shareholders at pages 18-21 (Consolidated
Statements of Income, Consolidated Balance Sheets, Consolidated
Statements of Shareholders' Equity and Consolidated Statements of
Cash Flows), and pages 22-30 (Notes to Consolidated Financial
Statements) and the Report of Independent Auditors set forth in
the Company's 1996 Annual Report to Shareholders at page 31, are
incorporated herein by reference.
Information on quarterly results of operations, set forth in
the Company's 1996 Annual Report to Shareholders under "Notes to
Consolidated Financial Statements--Selected Quarterly Information
(Unaudited)," at page 30, is incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS 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 19, 1997, 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 18-20 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 19, 1997, 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 19, 1997, 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 1996
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,
1996, 1995 and 1994 (page 18)
Consolidated Balance Sheets--December 31, 1996 and 1995
(page 19)
Consolidated Statements of Shareholders' Equity--Years Ended
December 31, 1996, 1995 and 1994 (page 20)
Consolidated Statements of Cash Flows--Years Ended December
31, 1996, 1995 and 1994 (page 21)
Notes to Consolidated Financial Statements (pages 22-30)
(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.
(a)3. Exhibits
3.1 Amended and Restated Articles of Incorporation of the
Registrant. (1)
3.2 By-Laws of the Registrant. (1)
4.1 Specimen of Certificate for Common Stock. (1)
10.1 Rights Agreement dated as of October 17, 1994 between the
Company and Bank One, Indianapolis, N.A. (1)
10.2 Form of International Services Agreement between
international subsidiary of Eli Lilly and Company and
international subsidiary of the Company. (1)
10.3 United States Services Agreement dated as of October 31,
1994 between Eli Lilly and Company and the Company. (1)
10.4 Transfer Agreement dated as of November 30, 1994 between
Eli Lilly and Company and the Company. (1)
10.5 Tax Sharing Agreement dated as of November 30, 1994
between Eli Lilly and Company and the Company. (1)
10.6 Form of International Asset Purchase Agreement between
international subsidiary of Eli Lilly and Company and
international subsidiary of the Company. (1)
10.7 Sublicense Agreement dated as of October 18, 1994 between
Eli Lilly and Company and Cardiac Pacemakers, Inc. (1)
10.8 Purchase and Sale Agreement and Escrow Instructions dated
as of October 18, 1994 between Eli Lilly and Company and
Advanced Cardiovascular Systems, Inc. (1)
10.9 Assignment of Leases dated as of October 25, 1985 between
Seaport Centre Venture Phase II and Metropolitan Life
Insurance Company. (1)
10.10 Settlement Agreement dated as of December 1, 1991 among
Advanced Cardiovascular Systems, Inc., Eli Lilly and
Company and SciMed Life Systems, Inc. (1)
10.11 Distribution Agreement dated as of December 31, 1992 among
Advanced Cardiovascular Systems, Inc., Peripheral Systems
Group and Mallinckrodt Medical, Inc. (1)
10.12 Settlement Agreement dated as of January 13, 1992 between
Advanced Cardiovascular Systems, Inc. and C. R. Bard, Inc. (1)
10.13 Settlement and License Agreement dated as of December 17,
1991 among Schneider (Europe) A.G., Schneider (USA) Inc.
and Advanced Cardiovascular Systems, Inc. (1)
10.14 Amendment to Settlement and License Agreement dated as of
April 9, 1992 among Schneider (Europe) A.G., Schneider
(USA) Inc. and Advanced Cardiovascular Systems, Inc. (1)
10.15 Amended License Agreement dated as of September 26, 1988
between Paul Yock, M.D. and Advanced Cardiovascular
Systems, Inc. (1)
10.16 First Amendment to Amended License Agreement dated as of
January 1, 1992 between Paul Yock, M.D. and Advanced
Cardiovascular Systems, Inc. (1)
10.17 Second Amendment to Amended License Agreement dated as of
January 13, 1992 between Paul Yock, M.D. and Advanced
Cardiovascular Systems, Inc. (1)
10.18 Agreement dated as of January 31, 1994 between E. I.
DuPont de Nemours and Company, Cardiac Pacemakers, Inc.
and Eli Lilly and Company. (1)
10.19 Agreement dated as of July 1, 1994 between E. I. DuPont de
Nemours and Company, Minco Products, Inc., Cardiac
Pacemakers, Inc. and Eli Lilly and Company. (1)
10.20 Override Agreement between Motorola, Inc., Cardiac
Pacemakers, Inc. and Eli Lilly and Company. (1)
10.21 Material Supply Agreement dated as of January 1, 1995 between
Dow Corning Corporation and Cardiac Pacemakers, Inc. (2)
10.22 Purchase Contract dated as of January 1, 1991 between
Wilson Greatbatch Ltd. and Cardiac Pacemakers, Inc. (1)
10.23 Purchase Contract Extension between Wilson Greatbatch Ltd. and
Cardiac Pacemakers, Inc., effective as of January 1, 1996. (2)
10.24 Exclusive License Agreement dated as of January 30, 1973
between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.25 Amendment to Exclusive License Agreement dated as of January
10, 1975 between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.26 First Addendum to the Exclusive License Agreement dated as of
June 17, 1974 between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.27 Second Addendum to the Exclusive License Agreement dated as of
April 11, 1975 between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.28 Third Addendum to the Exclusive License Agreement dated as of
December 22, 1976 between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.29 Fourth Addendum to the Exclusive License Agreement dated as of
January 1, 1979 between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.30 Fifth Addendum to the Exclusive License Agreement dated as of
June 24, 1981 between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.31 Sixth Addendum to the Exclusive License Agreement dated as of
September 16, 1983 between Medrad, Inc., Mieczyslaw Mirowski,
Medrad/Intec., Inc. and Intec Systems, Inc. (1)
10.32 Guidant Corporation 1994 Stock Plan, as amended. * #
10.33 Guidant Corporation Economic Value Added (EVA) Bonus Plan dated
January 1, 1995. (2) #
10.34 Stock Purchase Agreement dated as of October 31, 1994 between Eli
Lilly and Company and Advanced Cardiovascular Systems, Inc. (1)
10.35 Standard Form Office Lease dated December 27, 1994 between
Zell/Merrill Lynch Real Estate Opportunity Partners Limited
Partnership II and the Company. (3)
10.36 Guidant Corporation Change in Control Plan for Select Employees. (4)
10.37 Credit Agreement dated as of January 8, 1996 among the Company,
certain banks and Morgan Guaranty Trust Company of New York,
as agent. (5)
11.1 Computation of Earnings Per Share. *
13.1 Annual Report to Shareholders for the year ended December 31, 1996
(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 ended December 31, 1994.
(4) 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.
(5) Incorporated herein by reference to the identical exhibit
filed as part of the Company's Registration Statement on
Form S-3, File No. 333-00014.
* Filed herewith.
# Management compensation plan.
(b) Reports on Form 8-K
The Company filed no Reports on Form 8-K during the fourth
quarter of 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Guidant Corporation
By s/James M. Cornelius
---------------------------
James M. Cornelius,
Chairman of the Board
March 18, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------------------------------------------------------------
s/James M. Cornelius
- ----------------------- Chairman of the Board March 18, 1997
James M. Cornelius and Director (principal
executive officer)
s/Ronald W. Dollens
- ----------------------- President, Chief Executive March 18, 1997
Ronald W. Dollens Officer and Director
(principal executive officer)
s/Keith E. Brauer
- ----------------------- Vice President, Finance and March 18, 1997
Keith E. Brauer and Chief Financial Officer
(principal financial officer)
s/Roger Marchetti
- ----------------------- Corporate Controller and March 18, 1997
Roger Marchetti Chief Accounting Officer
(principal accounting officer)
s/Maurice A. Cox, Jr.
- ----------------------- Director March 18, 1997
Maurice A. Cox, Jr.
s/Enrique C. Falla
- ----------------------- Director March 18, 1997
Enrique C. Falla
s/J.B. King
- ----------------------- Director March 18, 1997
J.B. King
s/Susan B. King
- ----------------------- Director March 18, 1997
Susan B. King
s/J. Kevin Moore
- ----------------------- Director March 18, 1997
J. Kevin Moore
s/Mark Novitch, M.D.
- ----------------------- Director March 18, 1997
Mark Novitch, M.D.
s/Eugene L. Step
- ----------------------- Director March 18, 1997
Eugene L. Step
s/Ruedi E. Wager, Ph.D.
- ----------------------- Director March 18, 1997
Ruedi E. Wager, Ph.D.
Guidant Corporation and Subsidiaries
Schedule II. Valuation and Qualifying Accounts
(in millions)
Col. A Col. B Col. C Col. D Col. E
Balance at Charges Balance at
Beginning and End of
Description of Period Expenses Deductions(1) Period
- ----------- ---------- --------- ---------- ----------
Year Ended December 31, 1994
Allowance for inventory obsolescence $ 7.5 $10.7 $ (9.2) $ 9.0
Allowance for doubtful accounts 4.5 0.9 (0.9) 4.5
------ ----- ------- -----
Totals $12.0 $11.6 $(10.1) $13.5
====== ===== ======= =====
Year Ended December 31, 1995
Allowance for inventory obsolescence $ 9.0 $17.7 $ (20.4) $ 6.3
Allowance for doubtful accounts 4.5 1.7 (0.5) 5.7
----- ----- ------- -----
Totals $13.5 $19.4 $(20.9) $12.0
====== ====== ======= =====
Year Ended December 31, 1996
Allowance for inventory obsolescence $ 6.3 $29.6 $(12.9) $23.0
Allowance for doubtful accounts 5.7 2.2 (0.6) 7.3
----- ----- ------ -----
Totals $12.0 $31.8 $(13.5) $30.3
===== ===== ======= =====
(1) Write-offs of obsolete units.
F-1
Exhibit List
10.32 Guidant Corporation 1994 Stock Plan
11.1 Computation of Earnings Per Share
13.1 Annual Report to Shareholders for the Year Ended
December 31, 1996 (portions incorporated by reference)
21.1 List of Subsidiaries and Affiliates
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
99.1 Factors Possibly Affecting Future Operating Results