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, 2000
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) 937-6100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
--- ---
As of June 30, 2000 the Corporation had 1,549,930,306 common shares without
par value outstanding.
PART I. FINANCIAL INFORMATION
Abbott Laboratories and Subsidiaries
Condensed Consolidated Financial Statements
(Unaudited)
Abbott Laboratories and Subsidiaries
Condensed Consolidated Statement of Earnings
(Unaudited)
(dollars and shares in thousands except per share data)
Three Months Ended Six Months Ended
June 30 June 30
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Net Sales .................................................. $3,370,153 $3,259,211 $6,723,331 $6,572,531
---------- ---------- ---------- ----------
Cost of products sold ...................................... 1,530,254 1,415,188 3,026,701 2,868,204
Research and development ................................... 361,592 317,903 682,959 587,400
Selling, general and administrative ........................ 728,943 693,664 1,459,247 1,379,144
Gain on sale of business ................................... (92,203) -- (138,507) --
---------- ---------- ---------- ----------
Total Operating Cost and Expenses ..................... 2,528,586 2,426,755 5,030,400 4,834,748
---------- ---------- ---------- ----------
Operating Earnings ......................................... 841,567 832,456 1,692,931 1,737,783
Net interest expense ....................................... 11,090 21,716 23,124 47,568
Income from TAP Pharmaceutical Products Inc. joint venture . (117,571) (96,336) (236,485) (167,905)
Net foreign exchange (gain) loss ........................... 1,439 (2,078) 2,280 18,481
Other (income) expense, net ................................ 7,976 13,355 16,123 15,086
---------- ---------- ---------- ----------
Earnings Before Taxes ................................. 938,633 895,799 1,887,889 1,824,553
Taxes on earnings .......................................... 253,431 250,824 509,730 510,875
---------- ---------- ---------- ----------
Net Earnings ............................................... $ 685,202 $ 644,975 $1,378,159 $1,313,678
========== ========== ========== ==========
Basic Earnings Per Common Share ............................ $ 0.44 $ 0.42 $ 0.89 $ 0.86
========== ========== ========== ==========
Diluted Earnings Per Common Share .......................... $ 0.44 $ 0.41 $ 0.88 $ 0.84
========== ========== ========== ==========
Cash Dividends Declared Per Common Share ................... $ 0.19 $ 0.17 $ 0.38 $ 0.34
========== ========== ========== ==========
Average Number of Common Shares Outstanding
Used for Basic Earnings Per Common Share ................. 1,549,864 1,535,397 1,548,941 1,533,808
Dilutive Common Stock Options .............................. 16,509 23,304 13,999 24,205
---------- ---------- ---------- ----------
Average Number of Common Shares Outstanding
Plus Dilutive Common Stock Options ....................... 1,566,373 1,558,701 1,562,940 1,558,013
========== ========== ========== ==========
Outstanding Common Stock Options Having No Dilutive Effect . 19,575 2,808 19,575 2,808
========== ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part
of this statement.
2
Abbott Laboratories and Subsidiaries
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(dollars in thousands)
Six Months Ended
June 30
------------------------
2000 1999
---------- ----------
Cash Flow From (Used in) Operating Activities:
Net earnings .................................................... $1,378,159 $1,313,678
Adjustments to reconcile net earnings to
net cash from operating activities -
Depreciation and amortization .............................. 435,773 417,517
Trade receivables .......................................... (49,696) (33,373)
Inventories ................................................ (252,334) (67,557)
Gain on sale of business ................................... (138,507) --
Other, net ................................................. 274,159 (17,205)
---------- ----------
Net Cash From Operating Activities ......................... 1,647,554 1,613,060
---------- ----------
Cash Flow From (Used in) Investing Activities:
Proceeds from sale of business .................................. 116,000 --
Acquisitions of property, equipment and businesses .............. (530,845) (465,109)
Investment securities transactions .............................. 32,450 79,033
Other ........................................................... 36,034 6,558
---------- ----------
Net Cash Used in Investing Activities ...................... (346,361) (379,518)
---------- ----------
Cash Flow From (Used in) Financing Activities:
Repayments of commercial paper, net ............................. (548,000) (760,000)
Other borrowing transactions, net ............................... (590) (12,862)
Common share transactions ....................................... 49,986 70,267
Dividends paid .................................................. (557,462) (485,939)
---------- ----------
Net Cash Used in Financing Activities ...................... (1,056,066) (1,188,534)
---------- ----------
Effect of exchange rate changes on cash and cash equivalents ......... (13,075) (12,674)
---------- ----------
Net Increase in Cash and Cash Equivalents ............................ 232,052 32,334
Cash and Cash Equivalents, Beginning of Year ......................... 608,097 315,238
---------- ----------
Cash and Cash Equivalents, End of Period ............................. $ 840,149 $ 347,572
========== ==========
The accompanying notes to consolidated financial statements are an integral part
of this statement.
3
Abbott Laboratories and Subsidiaries
Condensed Consolidated Balance Sheet
(dollars in thousands)
June 30 December 31
2000 1999
----------- -----------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents ........................................................... $ 840,149 $ 608,097
Investment securities ............................................................... 144,102 115,199
Trade receivables, less allowances of $193,056 in 2000 and $238,956 in 1999 ......... 2,040,877 2,055,839
Inventories:
Finished products .............................................................. 885,225 772,478
Work in process ................................................................ 372,621 338,818
Materials ...................................................................... 426,461 384,148
----------- -----------
Total inventories ......................................................... 1,684,307 1,495,444
----------- -----------
Prepaid expenses, income taxes, and other receivables .................................... 2,188,601 2,145,175
----------- -----------
Total Current Assets ...................................................... 6,898,036 6,419,754
----------- -----------
Investment Securities Maturing after One Year ............................................ 879,707 954,778
----------- -----------
Property and Equipment, at Cost .......................................................... 9,938,898 9,797,567
Less: accumulated depreciation and amortization ..................................... 5,168,128 5,027,508
----------- -----------
Net Property and Equipment .......................................................... 4,770,770 4,770,059
Deferred Charges, Intangible and Other Assets ............................................ 2,415,568 2,326,453
----------- -----------
$14,964,081 $14,471,044
=========== ===========
Liabilities and Shareholders' Investment
Current Liabilities:
Short-term borrowings and current portion of long-term debt ......................... $ 355,594 $ 896,271
Trade accounts payable .............................................................. 1,480,079 1,226,854
Salaries, income taxes, dividends payable, and other accruals ....................... 2,352,593 2,393,586
----------- -----------
Total Current Liabilities ................................................. 4,188,266 4,516,711
----------- -----------
Long-Term Debt ........................................................................... 1,326,416 1,336,789
----------- -----------
Other Liabilities and Deferrals .......................................................... 1,265,005 1,189,949
----------- -----------
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: 2000: 1,567,539,540; 1999: 1,564,670,440 .................................. 2,074,238 1,939,673
Common shares held in treasury, at cost -
Shares: 2000: 17,609,234; 1999: 17,650,834 ........................................ (257,147) (257,756)
Unearned compensation - restricted stock awards......................................... (19,857) (23,028)
Earnings employed in the business ...................................................... 6,879,490 6,174,007
Accumulated other comprehensive loss ................................................... (492,330) (405,301)
----------- -----------
Total Shareholders' Investment ............................................ 8,184,394 7,427,595
----------- -----------
$14,964,081 $14,471,044
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of this statement.
4
Abbott Laboratories and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(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, 1999.
Note 2 - Supplemental Financial Information
(dollars in thousands)
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net interest expense:
Interest expense .................. $ 33,018 $ 36,492 $ 65,233 $ 76,840
Interest income ................... (21,928) (14,776) (42,109) (29,272)
-------- -------- -------- --------
Total .................................. $ 11,090 $ 21,716 $ 23,124 $ 47,568
======== ======== ======== ========
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 the domestic dividend exclusion applicable to earnings of
TAP Pharmaceutical Products Inc. and 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, and injunctive and other relief. Abbott has filed or intends to
file a response to each of the remaining complaints denying all substantive
allegations.
In addition, there are several lawsuits and one investigation pending in
connection with the sales of HYTRIN. These suits and the investigation allege
that Abbott violated state or federal antitrust laws and, in some cases, unfair
competition laws by signing settlement agreements with Geneva Pharmaceuticals,
Inc. and Zenith Laboratories, Inc. Those agreements related to pending patent
infringement lawsuits between Abbott and the two companies. Some of the suits
also allege that Abbott violated various state or federal laws by filing
frivolous patent infringement lawsuits to protect HYTRIN from generic
competition. The cases seek treble damages, civil penalties and other relief.
Abbott has filed or intends to file a response to each of the complaints denying
all substantive allegations.
The U.S. Department of Justice is investigating the marketing and sales
practices of TAP Pharmaceutical Products Inc. ("TAP") for LUPRON. In
addition, various state and federal agencies are investigating the pricing
practices of TAP with respect to LUPRON and/or of Abbott with respect to
certain other Medicare and Medicaid reimbursable products.
Abbott has also 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 Company-owned locations.
Abbott expects that within the next year, legal proceedings will occur that 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.
5
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(Unaudited), continued
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.
Note 5 - U.S. Food and Drug Administration Consent Decree
In November 1999, Abbott reached agreement with the U.S. Food and Drug
Administration to have a consent decree entered to settle issues involving
Abbott's diagnostics manufacturing operations in Lake County, Ill. The decree
requires Abbott to ensure its diagnostics manufacturing processes in Lake
County, Ill., conform with the FDA's current Quality System Regulation. The
decree allows for the continued manufacture and distribution of medically
necessary diagnostic products made in Lake County, Ill. However, Abbott is
prohibited from manufacturing or distributing certain diagnostic products until
Abbott ensures the processes in its Lake County, Ill., diagnostics manufacturing
operations conform with the current Quality System Regulation. Under the terms
of the consent decree, among other actions, Abbott has submitted to the FDA a
proposed master compliance and validation plan to ensure its processes conform
with the current Quality System Regulation. The decree requires Abbott to ensure
its facilities are in conformance with the current Quality System Regulation
within one year from the date of the consent decree. The consent decree allows
Abbott to export diagnostic products and components for sale and distribution
outside the United States if they meet the export requirements of the Federal
Food, Drug and Cosmetic Act.
Note 6 - Comprehensive Income
(dollars in thousands)
Three Months Ended Six Months Ended
June 30 June 30
-------------------- ------------------------
2000 1999 2000 1999
-------- -------- ---------- ----------
Foreign currency translation losses .................................. $(55,158) $(42,637) $ (86,220) $ (122,174)
Tax (expense) benefit related to foreign
currency translation losses ........................................ 157 (81) (261) 45
Unrealized gains (losses) on marketable equity securities ............ 1,189 859 20,172 (27,140)
Tax (expense) benefit related to unrealized gains (losses)
on marketable equity securities .................................... (476) (365) (8,069) 10,819
Reclassification adjustment for gains included in net income ......... (22,981) -- (12,651) --
-------- -------- ---------- ----------
Other comprehensive loss, net of tax ................................. (77,269) (42,224) (87,029) (138,450)
Net Earnings ......................................................... 685,202 644,975 1,378,159 1,313,678
-------- -------- ---------- ----------
Comprehensive Income ................................................. $607,933 $602,751 $1,291,130 $1,175,228
======== ======== ========== ==========
Supplemental Comprehensive Income Information:
June 30
--------------------
2000 1999
-------- --------
Cumulative foreign currency translation loss adjustments,
net of tax ......................................................... $518,423 $382,840
Cumulative unrealized (gains) on marketable equity securities,
net of tax ......................................................... (26,093) (16,697)
6
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(Unaudited), continued
Note 7 - 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 that report directly to the chief operating officer of Abbott.
Abbott's reportable segments are 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 testing 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 of Abbott's pharmaceutical, hospital and
nutritional products. Products sold by International are manufactured by
domestic segments and by international manufacturing locations.
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.
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
----------------- ----------------- ----------------- -----------------
2000 1999 2000 1999 2000 1999 2000 1999
------ ------ ------ ------ ------ ------ ------ ------
Pharmaceutical (a) ........... $ 563 $ 544 $1,170 $1,168 $ 164 $ 292 $ 398 $ 640
Diagnostics .................. 761 759 1,468 1,475 101 141 160 251
Hospital (a) ................. 659 561 1,229 1,137 166 133 292 284
Ross ......................... 497 469 1,047 971 171 158 394 343
International ................ 807 782 1,659 1,613 202 169 430 382
------ ------ ------ ------ ------ ------ ------ ------
Total Reportable Segments .... 3,287 3,115 6,573 6,364 804 893 1,674 1,900
Other ........................ 83 144 150 209
------ ------ ------ ------
Net Sales .................... $3,370 $3,259 $6,723 $6,573
====== ====== ====== ======
Corporate functions ...................................................... 37 30 78 57
Benefit plans costs ...................................................... 18 31 37 58
Non-reportable segments .................................................. (19) (28) (26) (41)
Gain on sale of business ................................................. (92) -- (139) --
Net interest expense ..................................................... 11 22 23 48
Income from TAP Pharmaceutical Products Inc. ............................. (118) (96) (236) (168)
Net foreign exchange loss ................................................ 1 (2) 2 18
Other expense (income), net .............................................. 27 40 47 103
------ ------ ------ ------
Consolidated Earnings Before Taxes ....................................... $ 939 $ 896 $1,888 $1,825
====== ====== ====== ======
(a) In 2000, management of the cardiovascular medicine franchise was
transferred from the Pharmaceutical segment to the Hospital segment. Net sales
and operating earnings for 1999 have been restated to reflect this
transfer.
7
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(Unaudited), continued
Note 8 -- Sale of Agricultural Products Business
On January 20, 2000, Abbott sold its agricultural products business to
Sumitomo Chemical Co., Ltd., resulting in a $46 million gain recorded in the
first quarter 2000. In the second quarter, upon Sumitomo achieving a sales
milestone, Abbott recorded an additional $92 million gain. Under the
transaction, Sumitomo acquired research and development, sales, marketing,
and support operations for Abbott's entire line of naturally occurring
biopesticides, plant growth regulators and other products for agriculture,
public health and forestry. Bulk active ingredient manufacturing rights were
retained by Abbott. For the full year 1999, Abbott recorded approximately
$102 million in sales from this business.
8
FINANCIAL REVIEW
RESULTS OF OPERATIONS - SECOND QUARTER AND FIRST SIX MONTHS 2000 COMPARED WITH
SAME PERIODS IN 1999
The following table details sales by segment for the second quarter and first
six months 2000:
(dollars in millions)
Net Sales to Percentage Net Sales to Percentage
External Customers Change (a) External Customers Change (a)
------------------ --------- ------------------ ---------
Three Months Ended June 30 Six Months Ended June 30
------------------------------ ------------------------------
2000 1999 2000 1999
------ ------ ------ ------
Pharmaceutical (b) ................ $ 563 $ 544 3.5 $1,170 $1,168 0.2
Diagnostics ....................... 761 759 0.2 1,468 1,475 (0.4)
Hospital (b) ...................... 659 561 17.4 1,229 1,137 8.1
Ross .............................. 497 469 6.0 1,047 971 7.9
International ..................... 807 782 3.2 1,659 1,613 2.8
------ ------ ------ ------
Total Reportable Segments ......... 3,287 3,115 5.5 6,573 6,364 3.3
Other ............................. 83 144 150 209
------ ------ ------ ------
Net Sales ......................... $3,370 $3,259 3.4 $6,723 $6,573 2.3
====== ====== ====== ======
Total U.S. ........................ $2,076 $2,006 3.5 $4,137 $4,062 1.9
====== ====== ====== ======
Total International ............... $1,294 $1,253 3.3 $2,586 $2,511 3.0
====== ====== ====== ======
(a) Percentage changes are based on unrounded numbers.
(b) In 2000, management of the cardiovascular medicine franchise was
transferred from the Pharmaceutical segment to the Hospital segment. Net sales
for 1999 have been restated to reflect this transfer.
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 4.8 percent for the second quarter and 3.8 percent for
the first six months, respectively, over the comparable 1999 periods.
Diagnostics segment sales decreased for the first six months primarily due to
the effect of the consent decree as discussed in Note 5 and due to the negative
effect of the relatively stronger U.S. Dollar. Excluding exchange, Diagnostics
segment sales increased 2.3 percent for the first six months. Diluted earnings
per common share increased 7.3 percent and 4.8 percent in the second quarter and
first six months, respectively, over the same periods in 1999. Net earnings
increased 6.2 percent and 4.9 percent in the second quarter and first six months
2000, respectively, over the comparable 1999 periods.
In August 1999, Geneva Pharmaceuticals, Inc. began shipments of generic HYTRIN
in the United States, which has adversely impacted Abbott's HYTRIN sales. Full
year U.S. sales of HYTRIN amounted to $466 million in 1999. For the first six
months 2000, U.S. sales of HYTRIN were $69 million.
As a result of the consent decree entered into with the U.S. Food and Drug
Administration in 1999, as discussed in Note 5, Abbott is prohibited from
manufacturing or distributing certain diagnostic products until Abbott
ensures the processes in its Lake County, Ill., diagnostics manufacturing
operations conform with the current Quality System Regulation. The consent
decree resulted in a one-time charge of $168 million in the third quarter of
1999. In addition, Abbott estimates that 2000 sales may be negatively
impacted up to $250 million and earnings per share may be negatively impacted
up to 10 cents per share.
In 1998, the U.S. Food and Drug Administration suspended its approval of the
release of production lots of Abbott's pharmaceutical product ABBOKINASE due
to Current Good Manufacturing Practice concerns. It is anticipated that sales
of ABBOKINASE will resume after 2000. In 1999, sales of ABBOKINASE were
approximately $47 million, all of which were recorded in the first quarter.
Gross profit margin (sales less cost of products sold, including freight and
distribution expenses) was 54.6 percent for the second quarter 2000, compared to
56.6 percent for the second quarter 1999. First six months 2000 gross profit
margin was 55.0 percent, compared to 56.4 percent for the first six months 1999.
These decreases were primarily due to unfavorable product mix.
9
FINANCIAL REVIEW
(continued)
Research and development expenses for the second quarter 2000 and first six
months 2000 increased 13.7 percent and 16.3 percent, respectively, over the
comparable 1999 periods, and include charges relating to several research and
development collaboration agreements entered into in the first six months 2000.
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 2000 and
first six months 2000 increased 5.1 percent and 5.8 percent, respectively, over
the comparable 1999 periods, due primarily to increased selling and marketing
support for new and existing products.
SALE OF AGRICULTURAL PRODUCTS BUSINESS
On January 20, 2000, Abbott sold its agricultural products business to
Sumitomo Chemical Co., Ltd., resulting in a $46 million gain recorded in the
first quarter 2000. In the second quarter, upon Sumitomo achieving a sales
milestone, Abbott recorded an additional $92 million gain. Under the
transaction, Sumitomo acquired research and development, sales, marketing,
and support operations for Abbott's entire line of naturally occurring
biopesticides, plant growth regulators and other products for agriculture,
public health and forestry. Bulk active ingredient manufacturing rights were
retained by Abbott. For the full year 1999, Abbott recorded approximately
$102 million in sales from this business.
INTEREST (INCOME) EXPENSE, NET
Net interest expense decreased in both the second quarter and first six months
2000, due primarily to a lower level of borrowings.
TAXES ON EARNINGS
The effective income tax rate was 27.0 percent in 2000 and 28.0 percent in
1999. The tax rate for 2000 was reduced primarily due to the domestic
dividend exclusion applicable to the increased earnings of TAP Pharmaceutical
Products Inc.
LIQUIDITY AND CAPITAL RESOURCES AT JUNE 30, 2000 COMPARED WITH DECEMBER 31, 1999
Net cash from operating activities for the first six months 2000 totaled
$1.648 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
$1.505 billion at June 30, 2000. These lines of credit support domestic
commercial paper borrowing arrangements.
Abbott may issue up to $518 million of securities in the future under a
registration statement filed with the Securities and Exchange Commission in
1999. Of the $518 million, Abbott may issue up to $268 million either in the
form of debt securities or common shares without par value. The remaining $250
million may only be issued in the form of debt securities.
In June 2000, Abbott's Board of Directors authorized the purchase of up to 25
million of Abbott's common shares. Abbott purchased and retired 1,352,000 shares
during this period at a cost of $56.8 million. As of June 30, 2000, an
additional 23,648,000 shares may be purchased in future periods.
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.
10
FINANCIAL REVIEW
(continued)
RECENTLY ISSUED ACCOUNTING STANDARD
The Securities and Exchange Commission (the "SEC") has issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements, as amended on June 26, 2000. SAB No. 101 provides the SEC staff's
views in applying generally accepted accounting principles to selected
revenue recognition issues, and is effective beginning in the fourth quarter
of 2000. Abbott is evaluating the effects of implementation, if any, on its
financial statements.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 -- A CAUTION CONCERNING
FORWARD-LOOKING STATEMENTS20
Under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995, Abbott cautions investors that any forward-looking statements or
projections made by Abbott, including those made in this document, are subject
to risks and uncertainties that may cause actual results to differ materially
from those projected. Economic, competitive, governmental, technological and
other factors that may affect Abbott's operations are discussed in Exhibit 99.1
to the Annual Report on Form 10-K.
11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Abbott is involved in various claims and legal proceedings, including
those described below.
In its Form 10-Q for the quarterly period ended March 31, 2000,
Abbott reported five lawsuits were pending involving Abbott's patents for
divalproex sodium, a drug that Abbott sells under the trademark
Depakote-Registered Trademark-, including the patent infringement lawsuits
Abbott filed against Andrx Corporation, Andrx Pharmaceutical, and Andrx
Pharmaceutical, L.L.C. in the United States District Court for the Northern
District of Illinois and in the United States District Court for the Southern
District of Florida and the patent infringement lawsuit Abbott filed against
Andrx L.L.C. in the United States District Court for the Eastern District of
Virginia. During the quarterly period ended June 30, 2000, the lawsuit
pending in the United States District Court for the Northern District of
Illinois was transferred to the United States District Court for the Southern
District of Florida and consolidated with the case pending in that court. The
lawsuit pending in the United States District Court for the Eastern District
of Virginia also will be transferred to the United States District Court for
the Southern District of Florida and consolidated with the case that is
pending in that court.
In its Form 10-Q for the quarterly period ended March 31, 2000,
Abbott reported 17 lawsuits and one antitrust investigation were pending
involving Abbott's patents for terazosin hydrochloride, a drug that Abbott
sells under the trademark Hytrin-Registered Trademark-. During the quarterly
period ended June 30, 2000, three additional lawsuits were filed. All three
of these lawsuits relate to Abbott's agreements with Geneva Pharmaceuticals,
Inc. ("Geneva") and/or Zenith Laboratories, Inc. ("Zenith") which are
described in Abbott's Form 10-K for the fiscal year ended December 31, 1999.
On June 8, 2000, Martin Bernstein filed a lawsuit against Abbott and Geneva
in state court in Oakland County, Michigan alleging that Abbott's agreement
with Geneva violated the Michigan Antitrust Reform Act. On April 27, 2000,
Willie O'Neal filed a lawsuit against Abbott, Geneva, and Zenith in state
court in Jefferson County, Alabama alleging that Abbott's agreement with
Geneva and Zenith violated the Illinois Fraud and Deceptive Trade Practices
Act. On May 26, 2000, Steven Daniels filed a lawsuit against Abbott in state
court in Orange County, California alleging that Abbott's agreements with
Geneva and Zenith violated the California Cartwright Act and/or the Unfair
Trade Practice Act. Each of these cases purports to be a class action and has
been conditionally transferred to the United States District Court for the
Southern District of Florida. Abbott has filed or intends to file a response
to each of the complaints denying all substantive allegations.
In its Form 10-K for the fiscal year ended December 31, 1999,
Abbott reported that 116 antitrust lawsuits were pending in federal court and
14 were pending in state court involving Abbott's pricing of pharmaceutical
products. As of July 21, 2000, as a result of settlements, 114 antitrust
suits were pending in federal court. During the quarterly period ended June
30, 2000, the Alabama Supreme Court dismissed the case that had been pending
in the Alabama state court in Clarke County, Alabama and a new case was
brought in Clarke County on behalf of Alabama consumers by the Alabama
District Attorney. Abbott has filed a response denying all substantive
allegations of the complaint.
12
In its Form 10-Q for the quarterly period ended March 31, 2000,
Abbott reported 19 cases were pending relating to Abbott's alleged
noncompliance with the Federal Food and Drug Administration's Quality System
Regulation at Abbott's Diagnostics Division facilities in Lake County,
Illinois. These include 13 cases consolidated as IN RE ABBOTT LABORATORIES
SECURITIES LITIGATION, 4 cases consolidated as IN RE ABBOTT LABORATORIES
DERIVATIVE SHAREHOLDER, and GALLAGHER V. ABBOTT. Abbott has moved to dismiss
these 18 cases.
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
10.1. Abbott Laboratories 1996 Incentive Stock Program -
attached hereto.
10.2. Abbott Laboratories Non-Employee Directors' Fee Plan -
attached hereto.
12. Statement re: computation of ratio of earnings to fixed
charges - attached hereto.
27. Financial Data Schedule - attached hereto.
b) Reports on Form 8-K
On May 19, 2000, Abbott Laboratories and BankBoston, N.A., as
Rights Agent, executed Amendment No. 2 to the Rights Agreement by
and between Abbott Laboratories and BankBoston, N.A., dated as of
November 11, 1999, as amended as of December 7, 1999.
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 3, 2000 Gary L. Flynn, Vice President
and Controller (Principal Accounting
Officer)