ABBOTT LABORATORIES - ABT Quarterly Report (10-Q) Notes to Condensed Consolidated Financial Statements

The following is an excerpt from a 10-Q SEC Filing, filed by ABBOTT LABORATORIES on 8/3/2000.

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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.

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.

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.

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.

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

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.

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.