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, 1998
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 60064-3500
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 July 31, 1998, the Corporation has 1,539,854,873 common shares without
par value outstanding.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As reported in the Company's 10-K for the fiscal year ended December 31,
1997, the Company is involved in numerous antitrust suits and two
investigations regarding the Company's pricing of pharmaceutical products.
As of June 30, 1998, 120 cases are pending in the United States District
court for the Northern District of Illinois as "In re: Brand Name
Prescription Drug Antitrust Litigation, MDL 997." A portion of the MDL 997
litigation has been certified as a class action on behalf of certain retail
pharmacies. As of July 14, 1998, the Company entered into an agreement to
settle the class action portion of the MDL litigation for $57 million. The
agreement does not become final until it is approved by the United States
District Court for the Northern District of Illinois. A final approval
hearing is scheduled for September 9, 1998.
As of June 30, 1998, there were 25 pharmaceutical pricing cases pending
in various state courts and one case pending in a District of Columbia court.
The Company has entered into settlement agreements to settle 12 consumer
lawsuits pending in the following 11 jurisdictions: Arizona, Florida, Kansas,
Maine, Michigan, Minnesota (2), New York, North Carolina, Tennessee,
Washington, D.C., and Wisconsin. Under these settlement agreements, the
Company agreed to pay a total of $1.65 million. The court in each
jurisdiction must approve the agreement before it becomes final.
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 disposition should not have a material adverse effect on
the Company's financial position, cash flows, or results of operations.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
4.1 Resolution of the Company's Board of Directors relating to
the 6.0% Note filed as Exhibit 4.12 to the 1996 Abbott
Laboratories Annual Report on Form 10-K*.
4.2 Form of $200,000,000 6.0% Note issued pursuant to
Indenture - attached hereto.
4.3 Actions of Authorized Officers with respect to the
Company's 6.0% Note - attached hereto.
4.4 Officers' Certificate and Company Order with respect to
the Company's 6.0% Note - attached hereto.
10.1 Abbott Laboratories Supplemental Pension Plan** -
attached hereto.
12. Statement re: computation of ratio of earnings to fixed
charges - attached hereto.
27. Financial Data Schedule - attached hereto.
* Incorporated herein by reference
** Denotes management contract or compensatory plan or
arrangement required to be filed as an exhibit hereto.
b) Reports on Form 8-K
None
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/ Theodore A. Olson
---------------------------------------
Date: August 13, 1998 Theodore A. Olson, Vice President
and Controller (Principal Accounting Officer)
PART 1 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
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net Sales............................. $3,066,753 $2,900,408 $6,111,666 $5,900,222
---------- ---------- ---------- ----------
Cost of products sold................. 1,297,770 1,217,043 2,577,743 2,544,374
Research and development.............. 307,132 320,148 587,008 600,222
Selling, general and administrative... 682,162 651,005 1,364,337 1,307,601
---------- ---------- ---------- ----------
Total Operating Cost and Expenses... 2,287,064 2,188,196 4,529,088 4,452,197
---------- ---------- ---------- ----------
Operating Earnings.................... 779,689 712,212 1,582,578 1,448,025
---------- ---------- ---------- ----------
Interest expense...................... 40,401 31,388 78,361 64,142
Interest income....................... (13,474) (11,668) (26,388) (23,391)
Other (income) expense, net........... (60,523) (47,266) (101,559) (91,102)
---------- ---------- ---------- ----------
Earnings Before Taxes................. 813,285 739,758 1,632,164 1,498,376
Taxes on Earnings..................... 227,720 218,229 457,006 442,021
---------- ---------- ---------- ----------
Net Earnings.......................... $ 585,565 $ 521,529 $1,175,158 $1,056,355
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic Earnings Per Common Share....... $.38 $.34 $.77 $.68
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted Earnings Per Common Share..... $.38 $.33 $.76 $.67
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Cash Dividends Declared
Per Common Share.................... $.15 $.135 $.30 $.27
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Average Number of Common Shares
Outstanding Used for Basic Earnings
Per Common Share.................. 1,524,789 1,544,458 1,526,354 1,546,210
Dilutive Common Stock Options......... 21,310 23,205 21,197 22,242
---------- ---------- ---------- ----------
Average Number of Common Shares
Outstanding Plus Dilutive Common
Stock Options..................... 1,546,099 1,567,663 1,547,551 1,568,452
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Outstanding Employee Common Stock
Options Having No Dilutive Effect... 36 223 36 223
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The accompanying notes to condensed consolidated financial statements are an
integral part of this statement.
2
ABBOTT LABORATORIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
JUNE 30 DECEMBER 31
1998 1997
----------- -----------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 251,768 $ 230,024
Investment securities . . . . . . . . . . . . . . . . . . . . . . 71,241 28,986
Trade Receivables, less allowances of $197,141 in 1998
and $167,406 in 1997. . . . . . . . . . . . . . . . . . . . . . 1,759,497 1,782,326
Inventories:
Finished products . . . . . . . . . . . . . . . . . . . . . . . 730,474 667,355
Work in process . . . . . . . . . . . . . . . . . . . . . . . . 329,978 287,653
Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . 368,668 324,892
----------- -----------
Total Inventories . . . . . . . . . . . . . . . . . . . . . . 1,429,120 1,279,900
Prepaid expenses, income taxes, and other receivables . . . . . . 1,663,572 1,716,972
----------- -----------
Total Current Assets. . . . . . . . . . . . . . . . . . . . . 5,175,198 5,038,208
----------- -----------
Investment Securities Maturing after One Year . . . . . . . . . . 728,521 630,967
----------- -----------
Property and Equipment, at Cost. . . . . . . . . . . . . . . . . . . . 9,119,481 8,790,157
Less: accumulated depreciation and amortization . . . . . . . . . 4,452,846 4,220,466
----------- -----------
Net Property and Equipment. . . . . . . . . . . . . . . . . . 4,666,635 4,569,691
Deferred Charges, Intangible and Other Assets. . . . . . . . . . . . . 2,114,186 1,822,202
----------- -----------
$12,684,540 $12,061,068
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Short-term borrowings and current portion of long-term debt . . . $ 1,575,454 $ 1,781,352
Trade accounts payable. . . . . . . . . . . . . . . . . . . . . . 932,490 1,001,058
Salaries, income taxes, dividends payable, and other accruals . . 2,492,176 2,252,058
----------- -----------
Total Current Liabilities . . . . . . . . . . . . . . . . . . 5,000,120 5,034,468
----------- -----------
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,141,258 937,983
----------- -----------
Other Liabilities and Deferrals. . . . . . . . . . . . . . . . . . . . 1,233,193 1,089,940
----------- -----------
Shareholders' Investment:
Preferred shares, $1 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: 1998: 1,540,307,096; 1997: 1,546,468,504. . . . . . . 1,053,943 907,106
Earnings employed in the business. . . . . . . . . . . . . . . . . . . 4,614,804 4,395,582
Accumulated other comprehensive income . . . . . . . . . . . . . . . . (275,232) (230,241)
----------- -----------
5,393,515 5,072,447
Less:
Common shares held in treasury, at cost -
Shares: 1998: 17,728,098; 1997: 18,280,398 . . . . . . . . . . . 46,781 48,238
Unearned compensation - restricted stock awards. . . . . . . . . . . . 36,765 25,532
----------- -----------
Total Shareholders' Investment. . . . . . . . . . . . . . . . 5,309,969 4,998,677
----------- -----------
$12,684,540 $12,061,068
----------- -----------
----------- -----------
The accompanying notes to condensed consolidated financial statements are an
integral part of this statement.
3
ABBOTT LABORATORIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
SIX MONTHS ENDED JUNE 30
-------------------------
1998 1997
---------- ----------
Cash Flow From (Used in) Operating Activities:
Net earnings....................................... $1,175,158 $1,056,355
Adjustments to reconcile net earnings to
net cash from operating activities -
Depreciation and amortization...................... 393,301 348,436
Trade receivables.................................. 21,679 (95,310)
Inventories........................................ (150,153) (43,568)
Other, net......................................... 257,658 97,993
---------- ----------
Net Cash From Operating Activities............ 1,697,643 1,363,906
---------- ----------
Cash Flow From (Used in) Investing Activities:
Acquisitions of businesses, net of cash acquired... (239,777) (200,394)
Acquisitions of property and equipment............. (500,616) (436,325)
Investment securities transactions................. (139,928) 19,380
Other.............................................. 8,206 11,363
---------- ----------
Net Cash (Used in) Investing Activities....... (872,115) (605,976)
---------- ----------
Cash Flow From (Used in) Financing Activities:
Proceeds from (repayment of) commercial paper, net. (156,000) 36,000
Proceeds from issuance of long-term debt........... 200,000 ...
Other borrowing transactions, net.................. (42,901) 48,886
Common share transactions.......................... (365,743) (421,409)
Dividends paid..................................... (435,379) (394,671)
---------- ----------
Net Cash (Used in) Financing Activities....... (800,023) (731,194)
---------- ----------
Effect of exchange rate changes on cash and
cash equivalents................................... (3,761) (10,424)
---------- ----------
Net Increase in Cash and Cash Equivalents.............. 21,744 16,312
Cash and Cash Equivalents, Beginning of Year........... 230,024 110,209
---------- ----------
Cash and Cash Equivalents, End of Period............... $ 251,768 $ 126,521
---------- ----------
---------- ----------
The accompanying notes to condensed consolidated financial statements are an
integral part of this statement.
4
ABBOTT LABORATORIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
NOTE 1 - BASIS OF PREPARATION:
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 financial position, cash
flows, and results of operations have been made. It is suggested that these
statements be read in conjunction with the financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
NOTE 2 - 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, Italy, Ireland, and the Netherlands.
NOTE 3 - LITIGATION AND ENVIRONMENTAL MATTERS:
The Company is involved in various claims and legal proceedings including
numerous antitrust suits and investigations in connection with the pricing of
prescription pharmaceuticals. On July 14, 1998, subject to final court
approval, the Company entered into an agreement to settle the independent
retail pharmacy federal class action lawsuit for $57 million.
In addition, the Company 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 Company-owned locations.
The matters above are discussed more fully in Note 10 to the financial
statements included in the Company's Annual Report on Form 10-K, which is
available upon request, and in Part II, Item 1, Legal Proceedings, in this
Form.
The Company expects that within the next year, progress in the legal
proceedings described above may cause a change in the estimated reserves
recorded by the Company. 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 disposition should not have
a material adverse effect on the Company's financial position, cash flows, or
results of operations.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(Unaudited), Continued
NOTE 4 - ACQUISITIONS:
On April 17, 1998, the Company acquired the common stock of International
Murex Technologies Corporation for approximately $234 million in cash. A
substantial portion of the purchase price was allocated to intangible assets,
including goodwill, which is being amortized over up to 40 years. Had this
acquisition taken place on January 1, 1997, consolidated sales and net income
would not have been significantly different from reported amounts.
NOTE 5 - COMPREHENSIVE INCOME:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- -------------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
Net Earnings $585,565 $521,529 $1,175,158 $1,056,355
-------- -------- ---------- -----------
Other comprehensive income:
Foreign currency translation
adjustments 9,841 (8,517) (35,754) (108,096)
Unrealized (losses) gains on
marketable equity securities (15,052) 9,401 (15,395) 4,697
Tax benefit (expense) related to
items of other comprehensive
income 6,021 (3,760) 6,158 (1,878)
-------- -------- ---------- -----------
Other comprehensive income, net of tax 810 (2,876) (44,991) (105,277)
-------- -------- ---------- -----------
Comprehensive income $586,375 $518,653 $1,130,167 $ 951,078
-------- -------- ---------- -----------
-------- -------- ---------- -----------
As of June 30, 1998, the cumulative net of tax balances for foreign currency
translation loss adjustments and the unrealized (gains) on marketable equity
securities were $298 million, and ($23) million, respectively.
NOTE 6 - STOCK SPLIT:
On February 13, 1998, the Company announced a two-for-one stock split.
Shareholders of record on May 1, 1998 were issued an additional share of the
Company's common stock on May 29, 1998 for each share owned on the record
date. All shares and per share data in the condensed consolidated financial
statements and notes have been adjusted to reflect the stock split.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(Unaudited), Continued
NOTE 7 - RECENTLY ISSUED ACCOUNTING STANDARD:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires the recognition
of derivatives as either assets or liabilities in the statement of financial
position at fair value. The statement is effective for fiscal years beginning
after June 15, 1999. The Company is assessing the impact that this statement
will have on its financial statements.
7
FINANCIAL REVIEW
RESULTS OF OPERATIONS - SECOND QUARTER AND FIRST SIX MONTHS 1998 COMPARED
WITH SAME PERIODS IN 1997
Worldwide sales for the second quarter and first six months increased 5.7
percent and 3.6 percent, respectively, over the comparable 1997 periods.
Excluding the negative effect of the relatively stronger U.S. dollar, sales
increased 8.7 percent and 6.9 percent, respectively, over the comparable 1997
periods. Net earnings increased 12.3 percent and 11.2 percent,
respectively, in the second quarter and first six months 1998. Basic
earnings per common share increased 11.8 percent and 13.2 percent,
respectively, over the prior year periods. Diluted earnings per common share
increased 15.2 percent and 13.4 percent, respectively, over the prior year
periods.
Gross profit margin (sales less cost of products sold, including freight and
distribution expenses) was 57.7 percent for the 1998 second quarter, compared
to 58.0 percent for the 1997 second quarter. First six months gross profit
margin was 57.8 percent, compared to 56.9 percent a year earlier, and was
negatively affected by unfavorable sales mix. The relatively stronger U.S.
dollar had a negative effect on gross profit margins for both periods.
Research and development expenses were $307.2 million for the second quarter
1998 and $587.0 million for the first six months 1998. Research and
development represented 10.0 percent and 9.6 percent of net sales in the
second quarter and first six months 1998, compared to 11.0 percent and 10.2
percent in 1997. 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 1998 increased 4.8 percent and 4.3 percent, respectively, over the
comparable prior year periods, net of the favorable effect of the relatively
stronger U.S. dollar of 3.1 percent and 3.5 percent, respectively. The net
increases reflect inflation, additional selling and marketing support for new
and existing products, primarily for pharmaceutical products, and litigation
charges.
Other (income) expense, net, includes net foreign exchange losses of $7.6
million for the second quarter and $15.0 million for the first six months
1998, compared to a net foreign exchange loss of $4.0 million and a net
foreign exchange gain of $6.8 million, respectively, for the corresponding
prior year periods. Other (income) expense, net, also includes the Company's
share of the net income from joint ventures, primarily TAP Holdings, Inc., of
$70.3 million for the second quarter and $120.6 million for the first six
months 1998, compared to $53.7 million and $90.8 million for the respective
prior year periods.
On July 27, 1998, the Company announced that it was experiencing
manufacturing difficulties with the capsule formulation of its protease
inhibitor Norvir. The manufacturing difficulties with Norvir will result in
shortages and interruption of the supply of capsules. The Company plans to
supply Norvir liquid formulation to provide continued Norvir therapy for
patients. During the first six months of 1998, the Company recorded sales of
Norvir of $125.5 million. The Company is unable to quantify the effect that
the production problems will have on sales in future periods.
8
FINANCIAL REVIEW
(Continued)
INDUSTRY SEGMENTS
Industry segment sales for the second quarter and first six months 1998 and
the related change from the comparable 1997 periods are shown in the table
below. The Pharmaceutical and Nutritional Products segment includes a broad
line of adult and pediatric pharmaceuticals and nutritionals, which are sold
primarily on the prescription or recommendation of physicians or other health
care professionals; consumer products; agricultural and chemical products;
and bulk pharmaceuticals. The Hospital and Laboratory Products segment
includes diagnostic systems for consumers, blood banks, hospitals, commercial
laboratories and alternate-care testing sites; 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.
Domestic and international sales for the second quarter and first six months
1998 primarily reflect unit growth. Total sales were unfavorably affected 3.0
percent and international sales were unfavorably affected 7.7 percent by the
relatively stronger U.S. dollar in the second quarter. On a year-to-date
basis, total sales were unfavorably affected 3.3 percent and international
sales were unfavorably affected 8.6 percent by the relatively stronger U.S.
dollar.
Second Quarter Six Months
- -------------------------------------------------------------------------------
SEGMENT SALES 1998 Percent 1998 Percent
(in millions of dollars) Sales Change Sales Change
- -------------------------------------------------------------------------------
Pharmaceutical and Nutritional Products:
Domestic $1,124.0 3.2 $2,324.1 1.6
- -------------------------------------------------------------------------------
International 609.5 3.9 1,216.4 0.2
- -------------------------------------------------------------------------------
1,733.5 3.5 3,540.5 1.1
Hospital and Laboratory Products:
Domestic 755.8 11.0 1,492.2 12.0
- -------------------------------------------------------------------------------
International 577.5 6.1 1,079.0 1.2
- -------------------------------------------------------------------------------
1,333.3 8.8 2,571.2 7.2
Total All Segments:
Domestic 1,879.8 6.2 3,816.3 5.4
- -------------------------------------------------------------------------------
International 1,187.0 5.0 2,295.4 0.7
- -------------------------------------------------------------------------------
$3,066.8 5.7 $6,111.7 3.6
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
9
FINANCIAL REVIEW
(Continued)
LIQUIDITY AND CAPITAL RESOURCES AT JUNE 30, 1998
COMPARED WITH DECEMBER 31, 1997
Net cash from operating activities for the first six months 1998 totaled
$1.698 billion. The Company expects annual cash flow from operating
activities to continue to approximate or exceed the Company's capital
expenditures and cash dividends. The Company funded the acquisition of Murex
through commercial paper borrowings.
The Company 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 $1.5 billion at June 30, 1998. These lines of credit support
domestic commercial paper borrowing arrangements.
In the first quarter 1998, the Company issued $200 million of debt securities
under a registration statement filed with the Securities and Exchange
Commission in June 1996. The Company may issue up to an additional $200
million under this registration statement.
During the first six months 1998, the Company continued its program to
purchase its common shares. The Company purchased and retired 11,424,000
shares during this period at a cost of $426 million. As of June 30, 1998, an
additional 15,976,000 shares may be purchased in future periods under
authorization granted by the Board of Directors in December 1997.
LEGISLATIVE ISSUES
The Company's primary markets are highly competitive and subject to
substantial government regulation. The Company 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. The Company
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
the Company 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.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires the recognition
of derivatives as either assets or liabilities in the statement of financial
position at fair value. The statement is effective for fiscal years beginning
after June 15, 1999. The Company is assessing the impact that this statement
will have on its financial statements.
10
FINANCIAL REVIEW
(Continued)
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.
The Company 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 the Company. Progress goals have been established in each
area.
Internal information systems were inventoried and assessed, and remediation
started in 1992. Virtually all remediation is scheduled to be completed by
the end of 1998, and testing completed by mid-1999. Current progress is
slightly better than plan.
Landlord and embedded systems were inventoried and Y2K assessment completed
by May 1998. The Company's goal is to resolve 75 percent of critical systems
by year-end 1998, and 100 percent of critical systems by July 1999. Current
progress is according to plan.
The Company has assessed the ability of its medical electronic and software
products to cope with the Y2K issue. Customers may access the Company's
assessment on the Company's internet web page. Most of the Company's products
are not affected by the Y2K issue. For those products requiring remediation,
the Company's goal is to provide solutions by June 1999. Current progress is
according to plan.
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.
Domestically, 41 percent of suppliers responded; 52 percent of those
responding certified compliance currently and 12 percent forwarded action
plans. International results are not yet known. Follow-up is being conducted.
Each of the above areas will begin developing contingency plans by the end of
1998, and will continue to develop and update those plans throughout 1999.
The Company's policy is to expense Y2K remediation costs as incurred. Future
expenditures to remediate the Company's systems for the Y2K issue are not
material to the Company's cash flow, results of operations or financial
position.
11