<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------- -------------------
Commission File No. 1-2189
ABBOTT LABORATORIES
An Illinois Corporation I.R.S. Employer Identification
No. 36-0698440
100 Abbott Park Road
Abbott Park, Illinois 60064-6400
Telephone: (847) 937-6l00
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during
the preceding l2 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
--- ---
As of July 31, 1999, the Corporation had 1,521,330,354 common shares without par
value outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
Abbott Laboratories and Subsidiaries
Condensed Consolidated Financial Statements
(Unaudited)
<PAGE>
Abbott Laboratories and Subsidiaries
Condensed Consolidated Statement of Earnings
(Unaudited)
(dollars and shares in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales ......................................... $ 3,243,166 $ 3,066,753 $ 6,542,197 $ 6,111,666
----------- ----------- ----------- -----------
Cost of products sold ............................. 1,410,942 1,297,770 2,859,773 2,577,743
Research and development .......................... 314,944 307,132 582,121 587,008
Selling, general and administrative ............... 687,727 682,162 1,368,000 1,364,337
----------- ----------- ----------- -----------
Total Operating Cost and Expenses ............ 2,413,613 2,287,064 4,809,894 4,529,088
----------- ----------- ----------- -----------
Operating Earnings ................................ 829,553 779,689 1,732,303 1,582,578
----------- ----------- ----------- -----------
Net interest expense .............................. 22,028 26,927 48,267 51,973
Income from TAP Holdings Inc. joint venture ....... (96,336) (70,288) (167,905) (120,636)
Net foreign exchange (gain) loss .................. (2,078) 7,623 18,481 15,024
Other (income) expense, net ....................... 13,355 2,142 15,086 4,053
----------- ----------- ----------- -----------
Earnings Before Taxes .......................... 892,584 813,285 1,818,374 1,632,164
Taxes on earnings ................................. 249,924 227,720 509,145 457,006
----------- ----------- ----------- -----------
Net Earnings ...................................... $ 642,660 $ 585,565 $ 1,309,229 $ 1,175,158
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic Earnings Per Common Share ................... $ 0.42 $ 0.38 $ 0.86 $ 0.77
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted Earnings Per Common Share ................. $ 0.42 $ 0.38 $ 0.85 $ 0.76
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cash Dividends Declared Per Common Share .......... $ 0.17 $ 0.15 $ 0.34 $ 0.30
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Average Number of Common Shares Outstanding
Used for Basic Earnings Per Common Share ....... 1,520,416 1,524,789 1,518,960 1,526,354
Dilutive Common Stock Options ..................... 21,990 21,310 22,809 21,197
----------- ----------- ----------- -----------
Average Number of Common Shares Outstanding
Plus Dilutive Common Stock Options ............. 1,542,406 1,546,099 1,541,769 1,547,551
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Outstanding Common Stock Options Having No Dilutive
Effect ......................................... 2,808 36 1,709 36
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
2
<PAGE>
Abbott Laboratories and Subsidiaries
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash Flow From (Used in) Operating Activities:
Net earnings ............................................................ $ 1,309,229 $ 1,175,158
Adjustments to reconcile net earnings to
net cash from operating activities -
Depreciation and amortization ........................................... 416,140 393,301
Trade receivables ....................................................... (30,245) 21,679
Inventories ............................................................. (65,986) (150,153)
Other, net .............................................................. (16,961) 257,658
----------- -----------
Net Cash From Operating Activities .................................... 1,612,177 1,697,643
----------- -----------
Cash Flow From (Used in) Investing Activities:
Acquisitions of businesses, net of cash acquired ........................ -- (239,777)
Acquisitions of property and equipment .................................. (462,246) (500,616)
Investment securities transactions ...................................... 85,715 (139,928)
Other ................................................................... 6,558 8,206
----------- -----------
Net Cash Used in Investing Activities ................................. (369,973) (872,115)
----------- -----------
Cash Flow From (Used in) Financing Activities:
Repayments of commercial paper, net ..................................... (760,000) (156,000)
Proceeds from issuance of long-term debt ................................ -- 200,000
Other borrowing transactions, net ....................................... (12,898) (42,901)
Common share transactions ............................................... 66,858 (365,743)
Dividends paid .......................................................... (485,939) (435,379)
----------- -----------
Net Cash Used in Financing Activities ................................. (1,191,979) (800,023)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents .............. (12,674) (3,761)
----------- -----------
Net Increase in Cash and Cash Equivalents ................................. 37,551 21,744
Cash and Cash Equivalents, Beginning of Year .............................. 308,230 230,024
----------- -----------
Cash and Cash Equivalents, End of Period .................................. $ 345,781 $ 251,768
----------- -----------
----------- -----------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
3
<PAGE>
Abbott Laboratories and Subsidiaries
Condensed Consolidated Balance Sheet
(dollars in thousands)
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ....................................................... $ 345,781 $ 308,230
Investment securities ........................................................... 55,969 75,087
Trade receivables, less allowances of $190,148 in 1999 and $190,952 in 1998 ..... 1,909,378 1,950,058
Inventories:
Finished products ............................................................... 746,292 697,494
Work in process ................................................................. 314,411 345,776
Materials ....................................................................... 362,055 367,339
----------- ------------
Total inventories ............................................................ 1,422,758 1,410,609
Prepaid expenses, income taxes, and other receivables ............................. 1,813,300 1,809,152
----------- ------------
Total Current Assets ......................................................... 5,547,186 5,553,136
----------- ------------
Investment Securities Maturing after One Year ..................................... 717,243 783,842
----------- ------------
Property and Equipment, at Cost ................................................... 9,499,590 9,396,236
Less: accumulated depreciation and amortization ................................. 4,799,702 4,657,393
----------- ------------
Net Property and Equipment ...................................................... 4,699,888 4,738,843
Deferred Charges, Intangible and Other Assets ..................................... 2,180,781 2,140,392
----------- ------------
$ 13,145,098 $ 13,216,213
----------- ------------
----------- ------------
Liabilities and Shareholders' Investment
Current Liabilities:
Short-term borrowings and current portion of long-term debt ..................... $ 982,861 $ 1,759,076
Trade accounts payable .......................................................... 830,748 1,056,641
Salaries, income taxes, dividends payable, and other accruals ................... 2,356,809 2,146,409
----------- ------------
Total Current Liabilities ................................................... 4,170,418 4,962,126
----------- ------------
Long-Term Debt .................................................................... 1,337,566 1,339,694
----------- ------------
Other Liabilities and Deferrals ................................................... 1,197,843 1,200,732
----------- ------------
Shareholders' Investment:
Preferred shares, one dollar par value
Authorized - 1,000,000 shares, none issued .................................... -- --
Common shares, without par value
Authorized - 2,400,000,000 shares
Issued at stated capital amount -
Shares: 1999: 1,538,743,060; 1998: 1,533,774,332 .............................. 1,468,693 1,231,079
Earnings employed in the business ................................................. 5,408,876 4,782,349
Accumulated other comprehensive income ............................................ (366,059) (227,701)
Common shares held in treasury, at cost -
Shares: 1999: 17,591,970; 1998: 17,710,838 ..................................... (46,421) (46,735)
Unearned compensation - restricted stock awards ................................... (25,818) (25,331)
----------- ------------
Total Shareholders' Investment .............................................. 6,439,271 5,713,661
----------- ------------
$13,145,098 $ 13,216,213
----------- ------------
----------- ------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
4
<PAGE>
Abbott Laboratories and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 30, 1999
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited, condensed consolidated financial statements have
been prepared pursuant to rules and regulations of the Securities and Exchange
Commission and, therefore, do not include all information and footnote
disclosures normally included in audited financial statements. However, in the
opinion of management, all adjustments (which include only normal adjustments)
necessary to present fairly the results of operations, financial position and
cash flows have been made. It is suggested that these statements be read in
conjunction with the financial statements included in Abbott's Annual Report on
Form 10-K for the year ended December 31, 1998.
Note 2 - Supplemental Financial Information
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net interest expense:
Interest expense .................... $ 36,492 $ 40,401 $ 76,840 $ 78,361
Interest income ..................... (14,464) (13,474) (28,573) (26,388)
-------- -------- -------- --------
Total .................................. $ 22,028 $ 26,927 $ 48,267 $ 51,973
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Note 3 - Taxes on Earnings
Taxes on earnings reflect the estimated annual effective tax rates. The
effective tax rates are less than the statutory U.S. Federal income tax rate
principally due to tax incentive grants related to subsidiaries operating in
Puerto Rico, the Dominican Republic, Ireland, the Netherlands, and Italy.
Note 4 - Litigation and Environmental Matters
Abbott is involved in various claims and legal proceedings including numerous
antitrust suits and investigations in connection with the pricing of
prescription pharmaceuticals. These suits and investigations allege that various
pharmaceutical manufacturers have conspired to fix prices for prescription
pharmaceuticals and/or to discriminate in pricing to retail pharmacies by
providing discounts to mail-order pharmacies, institutional pharmacies and HMOs
in violation of state and federal antitrust laws. The suits have been brought on
behalf of individuals and retail pharmacies and name both Abbott and certain
other pharmaceutical manufacturers and pharmaceutical wholesalers and at least
one mail-order pharmacy company as defendants. The cases seek treble damages,
civil penalties, injunctive and other relief. During 1998, settlements were
reached in the federal class action lawsuit, whereby Abbott paid $57 million,
and thirteen other separate actions. Abbott has filed or intends to file a
response to each of the remaining complaints denying all substantive
allegations.
In addition, Abbott has been identified as a potentially responsible party
for investigation and cleanup costs at a number of locations in the United
States and Puerto Rico under federal and state remediation laws and is
investigating potential contamination at a number of Abbott-owned locations.
The matters above are discussed more fully in Note 14 to the financial
statements included in Abbott's Annual Report on Form 10-K, which is available
upon request, and in Part II, Item 1, Legal Proceedings, in this Form.
5
<PAGE>
Notes to Condensed Consolidated Financial Statements
June 30, 1999
(Unaudited), continued
Note 4 - Litigation and Environmental Matters, continued
Abbott expects that within the next year, legal proceedings will occur
which may result in a change in the estimated reserves recorded by Abbott. While
it is not feasible to predict the outcome of such pending claims, proceedings,
investigations and remediation activities with certainty, management is of the
opinion that their ultimate disposition should not have a material adverse
effect on Abbott's financial position, cash flows, or results of operations.
Note 5 - Comprehensive Income
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Earnings ................................................. $ 642,660 $ 585,565 $ 1,309,229 $ 1,175,158
----------- ----------- ----------- -----------
Other comprehensive income (loss):
Foreign currency translation adjustments .................. (42,637) 9,841 (122,174) (35,754)
Tax (expense) benefit related to foreign
currency translation adjustments ...................... (81) -- 45 --
Unrealized gains (losses) on marketable equity securities.. 912 (15,052) (27,048) (15,395)
Tax (expense) benefit related to unrealized losses
on marketable equity securities ....................... (365) 6,021 10,819 6,158
----------- ----------- ----------- -----------
Other comprehensive income (loss), net of tax ................ (42,171) 810 (138,358) (44,991)
----------- ----------- ----------- -----------
Comprehensive Income ......................................... $ 600,489 $ 586,375 $ 1,170,871 $ 1,130,167
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
As of June 30, 1999, the cumulative net of tax balances for foreign currency
translation loss adjustments and the unrealized (gains) on marketable equity
securities were $382,840, and ($16,781), respectively.
Note 6 - Segment Information
(dollars in millions)
REVENUE SEGMENTS - Abbott's principal business is the discovery, development,
manufacture and sale of a broad line of health care products and services.
Abbott's products are generally sold directly to retailers, wholesalers,
hospitals, health care facilities, laboratories, physicians' offices and
government agencies throughout the world. Segments are identified as those
revenue divisions which report directly to the chief operating officer of
Abbott. Abbott's products are sold through six revenue segments as follows:
PHARMACEUTICAL PRODUCTS - U.S. sales of a broad line of pharmaceuticals.
DIAGNOSTIC PRODUCTS - Worldwide sales of diagnostic systems for blood
banks, hospitals, consumers, commercial laboratories and alternate-care sites.
HOSPITAL PRODUCTS - U.S. sales of intravenous and irrigation fluids and
related administration equipment, drugs and drug delivery systems, anesthetics,
critical care products and other medical specialty products for hospitals and
alternate-care sites.
ROSS PRODUCTS - U.S. sales of a broad line of adult and pediatric
nutritional products, pediatric pharmaceuticals and consumer products.
INTERNATIONAL - Non-U.S. sales of all Abbott's pharmaceutical, hospital
and nutritional products. Products sold by International are manufactured by
domestic segments and by international manufacturing locations.
6
<PAGE>
Notes to Condensed Consolidated Financial Statements
June 30, 1999
(Unaudited), continued
Note 6 - Segment Information
(dollars in millions), continued
CHEMICAL & AGRICULTURAL PRODUCTS - Worldwide sales of chemicals and agricultural
products for crop protection, forestry and animal health and a supplier of bulk
drugs for the Pharmaceutical Products, Hospital Products, and International
segments.
SEGMENT ACCOUNTING POLICIES - Abbott's underlying accounting records are
maintained on a legal entity basis for government and public reporting
requirements. Segment disclosures are on a performance basis consistent with
internal management reporting. Intersegment transfers of inventory are recorded
at standard cost and are not a measure of segment operating earnings. The cost
of some corporate functions and the cost of certain employee benefits are sold
to segments at predetermined rates which approximate cost. Remaining costs, if
any, are not allocated to revenue segments. The following segment information
has been prepared in accordance with the internal accounting policies of Abbott,
as described above, and may not be presented in accordance with generally
accepted accounting principles.
<TABLE>
<CAPTION>
Net Sales to Operating
External Customers Earnings
-------------------------------------------- -------------------------------------------
Three Months Ended Six Months Ended Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
------------------ ------------------- --------------- ---------------
1999 1998 1999 1998 1999 1998 1999 1998
------ ----- ------ ------ ---- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pharmaceutical ................ $ 543 $ 592 $1,213 $1,289 $277 $306 $ 654 $ 715
Diagnostics ................... 760 702 1,475 1,327 141 107 251 201
Hospital ...................... 544 459 1,061 916 145 104 265 202
Ross .......................... 470 460 971 912 158 147 343 280
International ................. 781 750 1,613 1,483 169 162 382 342
Chemical & Agricultural ....... 110 104 174 184 34 40 48 63
------ ----- ------ ------ ---- ---- ------ ------
Total Segments ................ 3,208 3,067 6,507 6,111 924 866 1,943 1,803
Other ......................... 35 -- 35 1
------ ----- ------ ------
Net Sales ..................... $3,243 $3,067 $6,542 $6,112
------ ----- ------ ------
------ ----- ------ ------
Corporate and service functions ..................................................... 36 39 64 73
Benefit plans costs ................................................................. 31 24 58 52
Net interest expense ................................................................ 22 27 48 52
Income from TAP Holdings Inc. ....................................................... (96) (70) (168) (121)
Net foreign exchange (gain) loss .................................................... (3) 8 18 15
Other expenses, net ................................................................. 42 25 105 100
---- ---- ------ ------
Consolidated Earnings Before Taxes .................................................. $892 $813 $ 1,818 $1,632
---- ---- ------ ------
---- ---- ------ ------
</TABLE>
7
<PAGE>
Notes to Condensed Consolidated Financial Statements
June 30, 1999
(Unaudited), continued
Note 7 - Pending Acquisitions
On June 21, 1999, Abbott and ALZA Corporation announced that the companies
entered into a definitive agreement for Abbott to acquire ALZA, a research-based
pharmaceutical company with a growing portfolio of urology and oncology products
and leading drug delivery technologies. The transaction is expected to be
completed by year end.
On July 8, 1999, Abbott and Perclose, Inc. announced that the companies
entered into a definitive agreement for Abbott to acquire Perclose, the leading
arterial closure device manufacturer. The transaction is expected to be
completed by year end.
Abbott expects to account for each transaction as a pooling of interests.
8
<PAGE>
FINANCIAL REVIEW
RESULTS OF OPERATIONS - SECOND QUARTER AND FIRST SIX MONTHS 1999 COMPARED WITH
SAME PERIODS IN 1998
The following table details sales by segment for the second quarter and first
six months 1999:
(dollars in millions)
<TABLE>
<CAPTION>
Net Sales to Percentage Net Sales to Percentage
External Customers Change* External Customers Change*
------------------- ---------- -------------------- ----------
Three Months Ended June 30 Six Months Ended June 30
------------------------------------- --------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Pharmaceutical ..................... $ 543 $ 592 (8.1) $1,213 $1,289 (5.9)
Diagnostics ........................ 760 702 8.2 1,475 1,327 11.1
Hospital ........................... 544 459 18.8 1,061 916 15.9
Ross ............................... 470 460 2.1 971 912 6.5
International ...................... 781 750 4.2 1,613 1,483 8.8
Chemical & Agricultural ............ 110 104 4.4 174 184 (5.8)
------ ------ ------ ------
Total Segments ..................... 3,208 3,067 4.6 6,507 6,111 6.5
Other .............................. 35 -- 35 1
------ ------ ------ ------
Net Sales .......................... $3,243 $3,067 5.8 $6,542 $6,112 7.0
------ ------ ------ ------
------ ------ ------ ------
Total U.S. ......................... $1,990 $1,857 7.2 $4,031 $3,773 6.8
------ ------ ------ ------
------ ------ ------ ------
Total International ................ $1,253 $1,210 3.6 $2,511 $2,338 7.4
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
* Percentage changes are based on unrounded numbers.
Worldwide sales for the second quarter and first six months reflect primarily
unit growth. Excluding the negative effect of the relatively stronger U.S.
dollar, sales increased 6.8 percent and 7.5 percent, respectively, over the
comparable 1998 periods. Pharmaceutical segment sales decreased primarily due to
volume shortfalls for Abbokinase, as the result of production issues more fully
described below. Diluted earnings per common share increased 10.5 percent and
11.8 percent in the second quarter and first six months 1999, respectively, over
the same periods in 1998. Net earnings increased 9.8 percent and 11.4 percent in
the second quarter and first six months 1999, respectively, over the comparable
1998 periods.
Gross profit margin (sales less cost of products sold, including freight
and distribution expenses) was 56.5 percent for the 1999 second quarter,
compared to 57.7 percent for the 1998 second quarter. First six months 1999
gross profit margin was 56.3 percent, compared to 57.8 percent a year earlier.
Unfavorable product mix, primarily lower sales of pharmaceuticals, had a
negative effect on both periods in 1999.
Research and development expenses were $314.9 million for the second
quarter 1999 and $582.1 million for the first six months 1999. Research and
development expenses represented 9.7 percent and 8.9 percent of net sales in the
second quarter and first six months 1999, respectively, compared to 10.0 percent
and 9.6 percent in the comparable 1998 periods. The majority of research and
development expenditures continues to be concentrated on pharmaceutical and
diagnostic products.
Selling, general and administrative expenses for the second quarter and
first six months 1999 were comparable to the respective prior year periods.
Abbott holds patents on Hytrin in the United States and several major
markets throughout the world. Abbott is facing a number of patent challenges
from generic manufacturers in the United States, and the ultimate outcome of
litigation cannot be predicted with certainty. Abbott has been informed that
Geneva Pharmaceuticals, Inc. intends to begin shipments of generic Hytrin in
the United States in August 1999. Abbott believes that the resulting generic
competition will adversely impact Abbott's Hytrin sales. For the first six
months of 1999, Abbott recorded U.S. sales of Hytrin of $292 million and U.S.
sales of Hytrin in 1998 amounted to $542 million.
9
<PAGE>
FINANCIAL REVIEW
(continued)
In late 1998, the U.S. Food and Drug Administration (FDA) suspended its
approval of the release of production lots of Abbott's pharmaceutical product
Abbokinase due to Current Good Manufacturing Practice concerns raised by the
FDA following inspections of Abbott and its raw material supplier. In January
1999, after Abbott revised the product's labeling to add additional warnings
and the FDA issued a health care provider information sheet, the FDA released
certain lots that were under its review. Since January, the FDA has
established new criteria for the release of additional lots. In a letter
dated July 14, 1999, the FDA raised additional concerns regarding these
criteria and identified several additional criteria which Abbott must
address as part of its corrective actions. Abbott continues to work with the
FDA to resolve the remaining issues. No additional lots have been released.
Abbott cannot predict whether it will be able to resolve the FDA's concerns
or the effect of this matter on future sales of Abbokinase. During 1998,
Abbott sold approximately $277 million of Abbokinase, primarily in the United
States.
LIQUIDITY AND CAPITAL RESOURCES AT JUNE 30, 1999 COMPARED WITH DECEMBER 31, 1998
Net cash from operating activities for the first six months 1999 totaled $1.612
billion. Abbott expects annual cash flow from operating activities to continue
to approximate or exceed Abbott's capital expenditures and cash dividends.
Abbott has maintained its favorable bond ratings (AAA by Standard & Poor's
Corporation and Aa1 by Moody's Investors Service) and continues to have readily
available financial resources, including unused domestic lines of credit of
$2.505 billion at June 30, 1999. These lines of credit support domestic
commercial paper borrowing arrangements.
Abbott may issue up to $1.350 billion of senior debt securities in the
future under a registration statement filed with the Securities and Exchange
Commission on July 23, 1999. Of the $1.350 billion total, Abbott may issue up to
$600 million either in the form of debt securities or additional common shares
without par value. The remaining $750 million may only be issued in the form of
debt securities.
In December 1998, Abbott suspended purchases of its common shares and
in June 1999, the Board of Directors revoked its resolutions authorizing
future purchases of common shares. Abbott's short-term borrowings have
decreased by approximately $776 million since December 31, 1998, due, in
part, to the cessation of the common stock purchases.
LEGISLATIVE ISSUES
Abbott's primary markets are highly competitive and subject to substantial
government regulation. Abbott expects debate to continue at both the federal and
the state levels over the availability, method of delivery, and payment for
health care products and services. Abbott believes that if legislation is
enacted, it could have the effect of reducing prices, or reducing the rate of
price increases for medical products and services. International operations are
also subject to a significant degree of government regulation. It is not
possible to predict the extent to which Abbott or the health care industry in
general might be adversely affected by these factors in the future. A more
complete discussion of these factors is contained in Item 1, Business, in the
Annual Report on Form 10-K, which is available upon request.
YEAR 2000
The Year 2000 ("Y2K") issue results from the inability of some computer programs
to identify the Year 2000 properly, potentially leading to errors or system
failure.
Abbott has organized its efforts to resolve the Y2K issue as follows:
internal information systems; landlord and embedded systems; electronic products
currently marketed or in the field; and suppliers providing products and
services to Abbott. Progress goals have been established in each area.
Internal information systems were inventoried and assessed, and
remediation started in 1992. All remediation and testing has been completed. A
suite of seven new systems at one European site, as well as three other systems,
all of which are Y2K compliant and tested, are yet to be put into production
but will be in the third quarter.
Landlord and embedded systems were inventoried and Y2K assessment
completed by May 1998. Abbott's goal is to resolve all critical systems by July
1999. Current progress is according to plan.
10
<PAGE>
FINANCIAL REVIEW
(continued)
Abbott has assessed the ability of its medical electronic and software
products to cope with the Y2K issue. Customers may access Abbott's assessment on
Abbott's Web site. For i-STAT products and the recently acquired Murex product
line, a referral source for customers to contact the manufacturer is provided on
the Web site. Most of Abbott's products are not affected by the Y2K issue. For
those products requiring remediation, all products except one have solutions
available. The remaining solution is expected by the end of August.
Beginning in March 1998, key suppliers were requested to certify that they
were Y2K compliant or, if not, to provide their plans to become compliant.
Ninety-five percent of suppliers responded; 70 percent of those responding
certified compliance currently and 30 percent have stated they have action
plans for compliance in place. Follow-up with all key suppliers is being
conducted according to plan.
Each of the above areas began developing business continuity plans
during 1998. Abbott's goal is to complete all business continuity plans by
September 30, 1999. Current progress is according to plan.
Abbott is in the process of quantifying the amount of sales which might
occur in 1999 due to Y2K that would otherwise occur in 2000.
The most likely worst-case Y2K scenarios are subject to a wide range of
speculation. However, the business continuity plans assume Y2K failures are
primarily third party, are intermittent, are of relatively short duration, or
are localized at one site or region, primarily outside the United States.
Abbott's policy is to expense Y2K remediation costs as incurred. Y2K
remediation costs from inception through the end of 1999 are expected to
approximate $100 million, of which approximately one-third is expected to be
spent in 1999.
EURO CONVERSION
On January 1, 1999, the European Economic and Monetary Union took effect and
introduced the euro as the official single currency of the eleven participating
member countries. On that date the currency exchange rates of the participating
countries were fixed against the euro. There is a three-year transition to the
euro, and at the end of 2001, the legacy currencies will be eliminated. In 1997,
Abbott organized an internal cross-functional task force to address the euro
issues and expects to be ready for the full conversion to the euro. Costs
required to prepare for the euro are not material to Abbott's financial
position, results of operations or cash flows. The impact, if any, of the euro
on Abbott's competitive position is unknown.
PENDING ACQUISITIONS
On June 21, 1999, Abbott and ALZA Corporation announced that the companies
entered into a definitive agreement for Abbott to acquire ALZA, a research-based
pharmaceutical company with a growing portfolio of urology and oncology products
and leading drug delivery technologies. The transaction is expected to be
completed by year end.
On July 8, 1999, Abbott and Perclose, Inc. announced that the companies
entered into a definitive agreement for Abbott to acquire Perclose, the leading
arterial closure device manufacturer. The transaction is expected to be
completed by year end.
Abbott expects to account for each transaction as a pooling of interests.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As reported in Abbott's 10-K for the fiscal year ended December
31, 1998, Abbott is involved in numerous antitrust suits and two investigations
regarding Abbott's pricing of pharmaceutical products. As of July 7, 1999, 116
antitrust suits are pending in federal court and 15 are pending in state courts.
The prescription pharmaceutical pricing antitrust suits allege that various
pharmaceutical manufacturers and pharmaceutical wholesalers have conspired to
fix prices for prescription pharmaceuticals and/or to discriminate in pricing to
retail pharmacies by providing discounts to mail-order pharmacies, institutional
pharmacies, and HMOs in violation of state and federal antitrust laws. The suits
have been brought on behalf of individual consumers and retail pharmacies and
name both Abbott and certain other pharmaceutical manufacturers and
pharmaceutical wholesalers and at least one mail-order pharmacy company as
defendants. The cases seek treble damages, civil penalties and injunctive and
other relief. Abbott has filed or intends to file a response to each of the
complaints denying all substantive allegations. The federal cases are pending in
the United States District Court for the Northern District of Illinois under the
Multidistrict Litigation Rules as In re: Brand Name Prescription Drug Antitrust
Litigation, MDL 997. The state cases are pending in the following state courts:
Tuscaloosa County and Clarke County, Alabama; Monterey County, California; San
Francisco County, California (five cases); San Joaquin County, California;
Prentiss County, Mississippi; San Miguel County, New Mexico; Burleigh County,
North Dakota; Hughes County, South Dakota; Cocke County, Tennessee; and Marshall
County, West Virginia. As previously reported, a settlement agreement for the
four consumer cases pending in Alameda County, California and San Francisco
County, California was approved by the court on April 21, 1999. The amount to be
paid in settlement is $6.2 million. An appeal has been filed challenging this
settlement agreement.
As previously reported, five cases involving Abbott's patents
for terazosin hydrochloride, a drug that Abbott sells under the trademark
Hytrin-Registered Trademark-,are pending in the United States District Court
for the Northern District of Illinois. The other parties to these cases are
Geneva Pharmaceuticals, Inc. ("Geneva") Novopharm Limited ("Novopharm"),
Invamed, Inc. ("Invamed"), Mylan Pharmaceuticals, Inc., and Warner Chilcott,
Inc. Abbott sued each of these five other corporations alleging patent
infringement after learning that they had applied to the Federal Food and
Drug Administration for approval for a generic version of terazosin
hydrochloride. Each of these corporations contends that Abbott's patent which
covers their version of terazosin hydrochloride is invalid and unenforceable.
The Geneva, Invamed, and Novopharm cases were all pending before the same
judge, who, on September 1, 1998, entered a judgment in each of those cases
ruling that the Abbott patent at issue in those cases is invalid. Abbott
appealed this ruling and on July 1, 1999, the appellate court affirmed the
lower court's decision. Abbott filed a petition for rehearing which was
denied on August 5, 1999. Abbott has the right to seek certiorari from the
United States Supreme Court.
In April 1996, Zenith Laboratories, Inc. ("Zenith") sued Abbott
in the United States District Court for the District of New Jersey alleging that
Abbott had engaged in unfair competition, abuse of process, tortious
interference with prospective economic advantage, and
<PAGE>
fraud in attempting to protect Hytrin from generic competition. Zenith sought
money damages and a declaration that certain of Abbott's patents covering
terazosin hydrochloride are invalid. Abbott filed counterclaims alleging
patent infringement. On March 31, 1998, Abbott and Zenith reached an
agreement that resolved the litigation between the parties. In the
settlement, Zenith acknowledged the validity of Abbott's terazosin
hydrochloride patents and agreed to refrain from selling a generic version of
terazosin hydrochloride until the expiration of one of Abbott's patents for
terazosin hydrochloride (U.S. Patent No. 4,251,532). On April 1, 1998, Abbott
and Geneva reached an agreement under which Geneva would not market its Food
and Drug Administration approved generic terazosin hydrochloride products
until resolution of the pending litigation between the parties. Abbott agreed
to make quarterly payments to Zenith and monthly payments to Geneva until the
date on which they may enter the market for terazosin hydrochloride under
their agreements. Under the agreements, both Zenith and Geneva would be free
to enter the market for terazosin hydrochloride in the United States if
certain of Abbott's patents for terazosin hydrochloride were determined to be
invalid and if another company legally enters the generic market in the
United States. On August 12, 1999, Abbott and Geneva terminated their April 1
agreement, and Geneva returned to Abbott a portion of the payments held in
escrow under the agreement. As previously reported, Abbott has received a
subpoena and a civil investigative demand from the Federal Trade Commission
regarding these agreements with Geneva and Zenith. In addition, Louisiana
Wholesale Drug Co. sued Abbott, Geneva, and Zenith in the United States
District Court for the Southern District of Florida alleging that Abbott's
agreements with Geneva and Zenith regarding terazosin hydrochloride violate
the federal antitrust laws. The case purports to be a class action and seeks
actual damages, treble damages civil penalties and other relief. On July 12,
1999, Walgreen Co., Eckerd Corp., The Kroger Co., Albertson's Inc., The Stop
& Shop Supermarket Co., and Hy-Vee, Inc. also sued Abbott, Geneva, and Zenith
in the United States District Court for the Southern District of Florida
alleging that Abbott's agreements with Geneva and Zenith regarding terazosin
hydrochloride violate the federal antitrust laws. Abbott intends to file a
response to the complaint denying all substantive allegations.
While it is not feasible to predict the outcome of such pending
claims, proceedings, and investigations with certainty, management is of the
opinion that their ultimate dispositions should not have a material adverse
effect on Abbott's financial position, cash flows, or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
12. Statement re: computation of ratio of earnings to
fixed charges - attached hereto.
27. Financial Data Schedule - attached hereto.
<PAGE>
b) Reports on Form 8-K
One report on Form 8-K was filed during the quarter ended
June 30, 1999. In a Form 8-K dated June 30, 1999, Abbott
reported that on June 21, 1999, ALZA Corporation, a Delaware
corporation ("ALZA"), entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Abbott and AC Merger
Sub Inc., a Delaware corporation and a wholly-owned
subsidiary of Abbott (the "Merger Sub"). Pursuant to the
terms of the Merger Agreement, and subject to the conditions
set forth therein (including approval of the transaction by
the stockholders of ALZA), Merger Sub will be merged with
and into ALZA (the "Merger"). At the effective time of the
Merger, the separate existence of Merger Sub will cease,
ALZA will become a wholly-owned subsidiary of Abbott, and
each outstanding share of ALZA common stock will be
exchanged for 1.2 shares of Abbott common stock. The Merger
is intended to be a tax-free reorganization pursuant to
Section 368(a) of the Internal Revenue Code of 1986, as
amended, and is intended to be treated as a pooling of
interests for financial reporting purposes. In addition,
Abbott and ALZA entered into two Co-Promotion Agreements
with respect to certain products of ALZA.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ABBOTT LABORATORIES
/s/ Gary L. Flynn
-----------------------------------
Date: August 13, 1999 Gary L. Flynn, Vice President
and Controller (Principal Accounting
Officer)
<PAGE>
Exhibit 12
Abbott Laboratories
Computation of Ratio of Earnings to Fixed Charges
(Unaudited)
(dollars in millions except ratios)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999
-------------
<S> <C>
Net Earnings ........................................................ $1,309
Add (deduct):
Taxes on earnings .............................................. 509
Minority interest .............................................. 3
------
Net Earnings as adjusted ............................................ $1,821
------
Fixed Charges:
Interest on long-term and short-term debt ...................... 77
Capitalized interest cost ...................................... 2
Rental expense representative of an interest factor ............ 19
------
Total Fixed Charges ................................................. 98
------
Total adjusted earnings available for payment of fixed charges ...... $1,919
------
------
Ratio of earnings to fixed charges .................................. 19.6
------
------
</TABLE>
NOTE:
For the purpose of calculating this ratio, (i) earnings have been calculated by
adjusting net earnings for taxes on earnings; interest expense; capitalized
interest cost, net of amortization; minority interest; and the portion of
rentals representative of the interest factor, (ii) Abbott considers one-third
of rental expense to be the amount representing return on capital, and (iii)
fixed charges comprise total interest expense, including capitalized interest
and such portion of rentals.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ABBOTT
LABORATORIES' 1999 SECOND QUARTER FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 345,781
<SECURITIES> 55,969
<RECEIVABLES> 2,099,526
<ALLOWANCES> 190,148
<INVENTORY> 1,422,758
<CURRENT-ASSETS> 5,547,186
<PP&E> 9,499,590
<DEPRECIATION> 4,799,702
<TOTAL-ASSETS> 13,145,098
<CURRENT-LIABILITIES> 4,170,418
<BONDS> 1,337,566
0
0
<COMMON> 1,468,693
<OTHER-SE> 4,970,578
<TOTAL-LIABILITY-AND-EQUITY> 13,145,098
<SALES> 6,542,197
<TOTAL-REVENUES> 6,542,197
<CGS> 2,859,773
<TOTAL-COSTS> 2,859,773
<OTHER-EXPENSES> 582,121<F1>
<LOSS-PROVISION> 13,402
<INTEREST-EXPENSE> 76,840
<INCOME-PRETAX> 1,818,374
<INCOME-TAX> 509,145
<INCOME-CONTINUING> 1,309,229
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,309,229
<EPS-BASIC> 0.86
<EPS-DILUTED> 0.85
<FN>
<F1>OTHER EXPENSES CONSIST OF RESEARCH AND DEVELOPMENT EXPENSES.
</FN>
</TABLE>
