Abbott Laboratories (ABT), (founding name: Abbott Alkaloid Company) is a global pharmaceutical company with around 73,000 employees in 150 countries. Abbott was founded in 1888 by Wallace C. Abbott (1857-1921) and is headquartered in Abbott Park, a northern suburb of Chicago, Illinois.
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) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------- ------------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> 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 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> 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) <TABLE> <CAPTION> JUNE 30 DECEMBER 31 1998 1997 ----------- ----------- (unaudited) <S> <C> <C> 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 ----------- ----------- ----------- ----------- </TABLE> 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) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30 ------------------------- 1998 1997 ---------- ---------- <S> <C> <C> 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 ---------- ---------- ---------- ---------- </TABLE> 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: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 --------------------- ------------------------- 1998 1997 1998 1997 -------- -------- ---------- ---------- <S> <C> <C> <C> <C> 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 -------- -------- ---------- ----------- -------- -------- ---------- ----------- </TABLE> 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. <TABLE> <CAPTION> Second Quarter Six Months - ------------------------------------------------------------------------------- SEGMENT SALES 1998 Percent 1998 Percent (in millions of dollars) Sales Change Sales Change - ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 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 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- </TABLE> 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