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 March 31, 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 60064-3500
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 April 30, 1999, the Corporation had 1,520,401,928 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 March 31
---------------------------
1999 1998
---------- ----------
Net Sales. . . . . . . . . . . . . . . . . . . . . . . . . . $3,299,031 $3,044,913
---------- ----------
Cost of products sold. . . . . . . . . . . . . . . . . . . . 1,448,831 1,279,973
Research and development . . . . . . . . . . . . . . . . . . 267,177 279,876
Selling, general and administrative. . . . . . . . . . . . . 680,273 682,175
---------- -----------
Total Operating Cost and Expenses . . . . . . . . . . . 2,396,281 2,242,024
---------- -----------
Operating Earnings . . . . . . . . . . . . . . . . . . . . . 902,750 802,889
---------- -----------
Net interest expense . . . . . . . . . . . . . . . . . . . . 26,239 25,046
Income from TAP Holdings Inc. joint venture. . . . . . . . . (71,569) (50,348)
Net foreign exchange (gain) loss . . . . . . . . . . . . . . 20,559 7,401
Other (income) expense, net. . . . . . . . . . . . . . . . . 1,731 1,911
---------- -----------
Earnings Before Taxes . . . . . . . . . . . . . . . . . . 925,790 818,879
Taxes on earnings. . . . . . . . . . . . . . . . . . . . . . 259,221 229,286
---------- -----------
Net Earnings . . . . . . . . . . . . . . . . . . . . . . . . $ 666,569 $ 589,593
---------- -----------
---------- -----------
Basic Earnings Per Common Share. . . . . . . . . . . . . . . $0.44 $0.39
----- -----
----- -----
Diluted Earnings Per Common Share. . . . . . . . . . . . . . $0.43 $0.38
----- -----
----- -----
Average Number of Common Shares Outstanding
Used for Basic Earnings Per Common Share. . . . . . . . . 1,517,598 1,528,009
Dilutive Common Stock Options. . . . . . . . . . . . . . . . 23,628 21,082
---------- -----------
Average Number of Common Shares Outstanding
Plus Dilutive Common Stock Options. . . . . . . . . . . . 1,541,226 1,549,091
---------- ----------
---------- ----------
Outstanding Common Stock Options Having No Dilutive
Effect . . . . . . . . . . . . . . . . . . . . . . . . . . 1,709 13,468
----- ------
----- ------
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)
Three Months Ended March 31
-----------------------------
1999 1998
--------- --------
Cash Flow From (Used in) Operating Activities:
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . $666,569 $ 589,593
Adjustments to reconcile net earnings to
net cash from operating activities -
Depreciation and amortization . . . . . . . . . . . . . . . . 211,599 190,585
Trade receivables . . . . . . . . . . . . . . . . . . . . . . (84,822) 50,467
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . (493) (86,212)
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . 52,535 136,950
--------- --------
Net Cash From Operating Activities. . . . . . . . . . . . . 845,388 881,383
--------- --------
Cash Flow From (Used in) Investing Activities:
Acquisitions of property and equipment. . . . . . . . . . . . (209,939) (238,447)
Investment securities transactions. . . . . . . . . . . . . . 69,045 16,778
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,439 4,388
--------- --------
Net Cash Used in Investing Activities . . . . . . . . . . . (133,455) (217,281)
--------- --------
Cash Flow From (Used in) Financing Activities:
Proceeds from (repayments of) commercial paper, net . . . . . (491,000) (489,000)
Proceeds from issuance of long-term debt. . . . . . . . . . . --- 200,000
Other borrowing transactions, net . . . . . . . . . . . . . . 23,218 2,237
Common share transactions . . . . . . . . . . . . . . . . . . 34,004 (171,709)
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . (227,519) (206,343)
--------- --------
Net Cash Used in Financing Activities . . . . . . . . . . . (661,297) (664,815)
--------- --------
Effect of exchange rate changes on cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . (7,104) (3,767)
--------- --------
Net Increase (Decrease) in Cash and Cash Equivalents. . . . . . 43,532 (4,480)
Cash and Cash Equivalents, Beginning of Year. . . . . . . . . . 308,230 230,024
--------- ---------
Cash and Cash Equivalents, End of Period. . . . . . . . . . . . $ 351,762 $ 225,544
--------- ---------
--------- ---------
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)
March 31 December 31
1999 1998
------------ ------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . $ 351,762 $ 308,230
Investment securities. . . . . . . . . . . . . . . . . . . . . . . 45,051 75,087
Trade receivables, less allowances of $188,907 in 1999 and
$190,952 in 1998 . . . . . . . . . . . . . . . . . . . . . . . . 1,983,431 1,950,058
Inventories:
Finished products. . . . . . . . . . . . . . . . . . . . . . . . 693,700 697,494
Work in process. . . . . . . . . . . . . . . . . . . . . . . . . 332,762 345,776
Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . 349,109 367,339
----------- -----------
Total inventories. . . . . . . . . . . . . . . . . . . . . . . 1,375,571 1,410,609
Prepaid expenses, income taxes, and other receivables. . . . . . . . 2,015,484 1,809,152
----------- -----------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . 5,771,299 5,553,136
----------- -----------
Investment Securities Maturing after One Year. . . . . . . . . . . . 744,832 783,842
----------- -----------
Property and Equipment, at Cost. . . . . . . . . . . . . . . . . . . 9,398,387 9,396,236
Less: accumulated depreciation and amortization. . . . . . . . . . 4,714,464 4,657,393
----------- -----------
Net Property and Equipment . . . . . . . . . . . . . . . . . . . . 4,683,923 4,738,843
Deferred Charges, Intangible and Other Assets. . . . . . . . . . . . 2,116,903 2,140,392
----------- -----------
$13,316,957 $13,216,213
----------- -----------
----------- -----------
Liabilities and Shareholders' Investment
Current Liabilities:
Short-term borrowings and current portion of long-term debt. . . . $ 1,286,394 $ 1,759,076
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . 1,058,172 1,056,641
Salaries, income taxes, dividends payable, and other accruals. . . 2,364,629 2,146,409
------------ ------------
Total Current Liabilities. . . . . . . . . . . . . . . . . . . 4,709,195 4,962,126
------------ ------------
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,339,524 1,339,694
------------ ------------
Other Liabilities and Deferrals. . . . . . . . . . . . . . . . . . . 1,206,000 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: 1,536,988,092; 1998: 1,533,774,332 . . . . . . . . 1,364,070 1,231,079
Earnings employed in the business. . . . . . . . . . . . . . . . . . 5,094,196 4,782,349
Accumulated other comprehensive income. . . . . . . . . . . . . . . . (323,888) (227,701)
Common shares held in treasury, at cost -
Shares: 1999: 17,654,838; 1998: 17,710,838 . . . . . . . . . . . . (46,587) (46,735)
Unearned compensation - restricted stock awards . . . . . . . . . . . (25,553) (25,331)
------------ ------------
Total Shareholders' Investment . . . . . . . . . . . . . . . . . . 6,062,238 5,713,661
------------ ------------
$13,316,957 $13,216,213
------------ ------------
------------ ------------
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
March 31, 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)
Three Months Ended March 31
----------------------------
1999 1998
---- ----
Net interest expense:
Interest expense . . . . . . . . . $ 40,348 $ 37,960
Interest income. . . . . . . . . . (14,109) (12,914)
-------- --------
Total . . . . . . . . . . . . . . . . $ 26,239 $ 25,046
-------- --------
-------- --------
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
Notes to Condensed Consolidated Financial Statements
March 31, 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)
Three Months Ended March 31
---------------------------
1999 1998
---- ----
Net Earnings . . . . . . . . . . . . . . . . . . $666,569 $589,593
-------- ---------
Other comprehensive loss:
Foreign currency translation adjustments. . . (79,537) (45,595)
Tax benefit related to foreign currency 126 ---
translation adjustments . . . . . . . . . .
Unrealized losses on marketable equity
securities. . . . . . . . . . . . . . . . . (27,960) (343)
Tax benefit related to unrealized losses on
marketable equity securities. . . . . . . . 11,184 137
-------- --------
Other comprehensive loss, net of tax . . . . . . (96,187) (45,801)
-------- --------
Comprehensive Income . . . . . . . . . . . . . . $570,382 $543,792
-------- --------
-------- --------
As of March 31, 1999, the cumulative net of tax balances for foreign currency
translation loss adjustments and the unrealized (gains) on marketable equity
securities were $340,122, and ($16,234), respectively.
Note 6 - Common Stock Split
On February 13, 1998, the Board of Directors approved a two-for-one stock split.
Shareholders of record on May 1, 1998, were issued an additional share of
Abbott'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.
Note 7 - Segment Information
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.
6
Notes to Condensed Consolidated Financial Statements
March 31, 1999
(Unaudited), continued
Note 7 - Segment Information
(dollars in millions), continued
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.
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.
Net Sales to Operating
External Customers Earnings
Three Months Ended March 31 Three Months Ended March 31
--------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
Pharmaceutical. . . . . . . . . . . . $ 670 $ 697 $ 377 $ 409
Diagnostics . . . . . . . . . . . . . 715 625 110 94
Hospital. . . . . . . . . . . . . . . 517 457 120 98
Ross. . . . . . . . . . . . . . . . . 501 452 185 133
International . . . . . . . . . . . . 832 733 213 180
Chemical & Agricultural . . . . . . . 64 80 14 23
------ ------ ------ ------
Total Segments. . . . . . . . . . . . 3,299 3,044 1,019 937
Other . . . . . . . . . . . . . . . . --- 1
------ ------
Net Sales . . . . . . . . . . . . . . $3,299 $3,045
------ ------
------ ------
Corporate and service functions. . . . . . . . . . . . . . . . . . . . . . . . . 28 34
Benefit plans costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 28
Net interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 25
Income from TAP Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . . . . (72) (50)
Net foreign exchange (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . 21 7
Other expenses, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 74
------ -------
Consolidated Earnings Before Taxes . . . . . . . . . . . . . . . . . . . . . . . $ 926 $ 819
------ -------
------ -------
7
FINANCIAL REVIEW
RESULTS OF OPERATIONS - FIRST QUARTER 1999 COMPARED WITH FIRST QUARTER 1998
The following table details sales by segment for the first quarter 1999:
(dollars in millions)
Net Sales to Percentage
External Customers Change*
-------------------------- ----------
Three Months Ended March 31
---------------------------
1999 1998
---- ----
Pharmaceutical . . . . . . . . . . . . $ 670 $ 697 (4.0)
Diagnostics. . . . . . . . . . . . . . 715 625 14.5
Hospital . . . . . . . . . . . . . . . 517 457 13.0
Ross . . . . . . . . . . . . . . . . . 501 452 10.9
International. . . . . . . . . . . . . 832 733 13.5
Chemical & Agricultural. . . . . . . . 64 80 (19.2)
------ ------
Total Segments . . . . . . . . . . . . 3,299 3,044 8.4
Other. . . . . . . . . . . . . . . . . --- 1
------ ------
Net Sales. . . . . . . . . . . . . . . $3,299 $3,045 8.3
------ ------
------ ------
Total U.S. . . . . . . . . . . . . . . $2,041 $1,917 6.5
------ ------
------ ------
Total International. . . . . . . . . . $1,258 $1,128 11.5
------ ------
------ ------
* Percentage changes are based on unrounded numbers.
Domestic and international sales for the first quarter reflect primarily unit
growth. Total sales were favorably affected 0.1 percent and international sales
were favorably affected 0.2 percent by the relatively weaker U.S. dollar in the
first quarter 1999. Pharmaceutical segment sales decreased primarily due to
volume shortfalls for Abbokinase and Norvir, as the result of production issues
more fully described below. Diluted earnings per share for the quarter rose to
43 cents, up 13.2 percent from 38 cents a year ago. Net earnings increased 13.1
percent to $667 million, from $590 million in the first quarter of 1998.
Gross profit margin (sales less cost of products sold, including freight
and distribution expenses) was 56.1 percent for the 1999 first quarter, compared
to 58.0 percent for the 1998 first quarter. This decrease was primarily due to
unfavorable product mix, primarily lower sales of pharmaceuticals, higher
manufacturing costs, and inflation.
Research and development expenses were $267 million for the first quarter
1999, representing 8.1 percent of net sales, compared to 9.2 percent in 1998.
The majority of research and development expenditures continues to be
concentrated on pharmaceutical and diagnostic products.
Selling, general and administrative expenses for the first quarter 1999
were comparable to the prior year.
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
this litigation cannot be predicted with certainty. However, Abbott does not
expect a generic form of Hytrin to become available before the end of the third
quarter of 1999. Abbott believes generic competition would adversely impact
sales of Hytrin. For the year ended December 31, 1998, Abbott recorded U.S.
sales of Hytrin of $542 million.
On July 27, 1998, Abbott announced that it was experiencing manufacturing
difficulties with the capsule formulation of its protease inhibitor Norvir. The
manufacturing difficulties with Norvir have resulted in shortages and
interruption of the supply of capsules. Abbott is supplying Norvir liquid
formulation to provide continued Norvir therapy for patients. For the year
ended December 31, 1998, Abbott recorded sales of Norvir of $250 million.
Abbott is unable to quantify the effect that the production problems will have
on sales in future periods.
8
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. Abbott is
instituting changes to its procedures in response to the FDA. 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. The FDA subsequently established
new criteria for the release of additional lots. No additional lots have
been released. Abbott cannot predict the effect of this matter on future
sales of Abbokinase. For the year ended December 31, 1998, Abbott sold
approximately $277 million of Abbokinase, primarily in the U.S.
LIQUIDITY AND CAPITAL RESOURCES AT MARCH 31, 1999 COMPARED WITH DECEMBER 31,
1998
Net cash from operating activities for the first quarter 1999 totaled
$845 million. 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 $2.5
billion at March 31, 1999. These lines of credit support domestic commercial
paper borrowing arrangements.
Abbott may issue up to $750 million of senior debt securities in the future
under a registration statement filed with the Securities and Exchange Commission
in 1998.
In December 1998, Abbott suspended purchases of its common shares and
currently has no plans to resume purchases in 1999.
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 has been completed. Eighty-nine percent of
testing has been completed, and all testing is scheduled to be completed by
mid-1999. Current progress is slightly better than plan.
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.
Abbott has assessed the ability of its medical electronic and software
products to cope with the Y2K issue. Except for certain products for which
Abbott is the distributor, 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, Abbott's goal is to provide solutions by June
1999. Current progress is according to plan.
9
FINANCIAL REVIEW
(continued)
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-one percent of suppliers responded; 57 percent of those responding
certified compliance currently and 43 percent forwarded action plans. 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 will be 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.
10
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 April 30, 1999,
116 antitrust suits are pending in federal court and 13 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; and Cocke County, Tennessee. Abbott has
previously reported that it has entered settlement agreements in the consumer
lawsuits pending in Johnson County, Kansas; Mecklenburg County, North
Carolina; and Davidson County, Tennessee and that the court in each
jurisdiction must approve the agreement before it becomes final. The courts
have now approved the settlement agreement in each of those jurisdictions.
In addition, 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 (in cash and product).
As reported in Abbott's 10-K for the fiscal year ended December 31,
1998, 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. ("Mylan"), 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 has appealed this ruling.
On March 4, 1999, the judge hearing the Mylan case granted Mylan's motion for
summary judgment, applying the ruling issued September 1 in the Geneva,
Novopharm and Invamed cases in Mylan's case as well. Abbott has also
appealed this ruling.
Additionally, 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 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 will 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. 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 April 19, 1999, Abbott received a subpoena and a civil
investigation demand from the Federal Trade Commission regarding these
agreements with Geneva and Zenith.
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 Abbotts financial position, cash flows, or results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Abbott held its Annual Meeting of Shareholders on April 23, 1999. The
following is a summary of the matters voted on at that meeting.
(a) The shareholders elected Abbott's entire Board of Directors. The
persons elected to Abbott's Board of Directors and the number of shares cast
for and the number of shares withheld, with respect to each of these persons,
were as follows:
NAME VOTES FOR VOTES WITHHELD
H. Laurance Fuller 1,238,343,957 5,521,927
David A. Jones 1,235,310,332 8,555,552
Jeffrey M. Leiden, M.D., Ph.D. 1,238,392,486 5,473,398
The Lord Owen CH 1,238,584,310 5,281,574
Robert L. Parkinson Jr. 1,239,172,503 4,693,381
Boone Powell Jr. 1,238,914,382 4,951,502
Addison Barry Rand 1,238,364,655 5,501,229
W. Ann Reynolds, Ph.D. 1,236,279,121 7,586,763
Roy S. Roberts 1,238,126,061 5,739,823
William D. Smithburg 1,237,739,036 6,126,848
John R. Walter 1,236,249,924 7,615,960
William L. Weiss 1,236,168,227 7,697,657
Miles D. White 1,238,887,943 4,977,941
(b) The shareholders ratified the appointment of Arthur Andersen LLP as
auditors of Abbott. The number of shares cast in favor of the ratification
of Arthur Andersen LLP, the number against, and the number abstaining were as
follows:
FOR AGAINST ABSTAIN
1,236,072,381 3,437,644 4,355,859
(c) The shareholders rejected a shareholder proposal that Abbott adopt
the CERES Principles. The number of shares cast in favor of the shareholder
proposal, the number against, the number abstaining, and the number of broker
non-votes were as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTE
62,537,789 920,299,546 77,239,931 183,788,618
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(d) The shareholders rejected a shareholder proposal on the phase-out
production of PVC medical products. The number of shares cast in favor of
the shareholder proposal, the number against, the number abstaining, and the
number of broker non-votes were as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTE
28,510,694 966,086,542 65,485,030 183,783,618
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
3.1 By-Laws of Abbott Laboratories, as amended and effective
April 23, 1999 - 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
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: May 14, 1999 Theodore A. Olson, Vice President
and Controller
(Principal Accounting Officer)
13