UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-Q

 

(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, 2009

 

 

 

OR

 

 

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from                                 to                      

 

Commission File No. 1-2189

ABBOTT LABORATORIES

 

An Illinois Corporation

 

I.R.S. Employer Identification No.

 

 

36-0698440

 

100 Abbott Park Road

Abbott Park, Illinois 60064-6400

 

Telephone:  (847) 937-6100

 

Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large Accelerated Filer x

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o   No x

 

As of March 31, 2009, Abbott Laboratories had 1,545,458,735 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

 

 

 

2009

 

2008

 

Net Sales

 

$

6,718,368

 

$

6,765,603

 

 

 

 

 

 

 

Cost of products sold

 

2,935,921

 

2,961,072

 

Research and development

 

650,743

 

619,957

 

Acquired in-process research and development

 

 

18,700

 

Selling, general and administrative

 

2,070,945

 

2,018,033

 

Total Operating Cost and Expenses

 

5,657,609

 

5,617,762

 

 

 

 

 

 

 

Operating Earnings

 

1,060,759

 

1,147,841

 

 

 

 

 

 

 

Interest expense

 

124,190

 

142,534

 

Interest (income)

 

(36,044

)

(49,356

)

(Income) from TAP Pharmaceutical Products Inc. joint venture

 

 

(101,942

)

Net foreign exchange loss (gain)

 

14,434

 

6,221

 

Other (income) expense, net

 

(974,300

)

(10,342

)

Earnings Before Taxes

 

1,932,479

 

1,160,726

 

Taxes on Earnings

 

493,842

 

222,859

 

Net Earnings

 

$

1,438,637

 

$

937,867

 

 

 

 

 

 

 

Basic Earnings Per Common Share

 

$

0.93

 

$

0.61

 

Diluted Earnings Per Common Share

 

$

0.92

 

$

0.60

 

 

 

 

 

 

 

Cash Dividends Declared Per Common Share

 

$

0.40

 

$

0.36

 

 

 

 

 

 

 

Average Number of Common Shares Outstanding Used for Basic Earnings Per Common Share

 

1,545,767

 

1,544,022

 

Dilutive Common Stock Options and Awards

 

10,618

 

16,545

 

Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options and Awards

 

1,556,385

 

1,560,567

 

 

 

 

 

 

 

Outstanding Common Stock Options Having No Dilutive Effect

 

67,391

 

6,399

 

 

The accompanying notes to condensed 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

 

 

 

2009

 

2008

 

Cash Flow From (Used in) Operating Activities:

 

 

 

 

 

Net earnings

 

$

1,438,637

 

$

937,867

 

Adjustments to reconcile earnings to net cash from operating activities -

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

270,072

 

265,808

 

Amortization of intangibles

 

193,973

 

186,046

 

Share-based compensation

 

186,947

 

151,922

 

Derecognition of a contingent liability associated with the conclusion of the TAP Pharmaceutical Products Inc. joint venture

 

(797,130

)

 

Acquired in-process research and development

 

 

18,700

 

Trade receivables

 

375,665

 

43,998

 

Inventories

 

(198,704

)

(36,749

)

Other, net

 

(770,742

)

(262,441

)

Net Cash From Operating Activities

 

698,718

 

1,305,151

 

 

 

 

 

 

 

Cash Flow From (Used in) Investing Activities:

 

 

 

 

 

Acquisitions of property and equipment

 

(252,151

)

(332,983

)

Acquisitions of businesses, net of cash acquired

 

(1,492,059

)

 

Sales of Boston Scientific common stock

 

 

318,645

 

Proceeds from sales of (purchases of) other investment securities, net

 

138,962

 

(860,623

)

Other

 

(510

)

(18,204

)

Net Cash (Used in) Investing Activities

 

(1,605,758

)

(893,165

)

 

 

 

 

 

 

Cash Flow From (Used in) Financing Activities:

 

 

 

 

 

Proceeds from issuance of short-term debt and other

 

1,770,418

 

989,946

 

Proceeds from issuance of long-term debt

 

3,000,000

 

 

Payment of long-term debt

 

(1,983,176

)

(200,000

)

Purchases of common shares

 

(822,953

)

(819,150

)

Proceeds from stock options exercised, including income tax benefit

 

279,394

 

307,488

 

Dividends paid

 

(559,081

)

(504,550

)

Net Cash From (Used in) Financing Activities

 

1,684,602

 

(226,266

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(14,789

)

67,847

 

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

 

762,773

 

253,567

 

Cash and Cash Equivalents, Beginning of Year

 

4,112,022

 

2,456,384

 

Cash and Cash Equivalents, End of Period

 

$

4,874,795

 

$

2,709,951

 

 

The accompanying notes to condensed consolidated financial statements are an integral part of this statement.

 

3



 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Balance Sheet

 

(Unaudited)

 

(dollars in thousands)

 

 

 

March  31
2009

 

December 31
2008

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

4,874,795

 

$

4,112,022

 

Investments, primarily time deposits and certificates of deposit

 

828,982

 

967,603

 

Trade receivables, less allowances of $309,456 in 2009 and $263,632 in 2008

 

5,227,102

 

5,465,660

 

Inventories:

 

 

 

 

 

Finished products

 

1,869,353

 

1,545,950

 

Work in process

 

686,224

 

698,140

 

Materials

 

603,516

 

531,759

 

Total inventories

 

3,159,093

 

2,775,849

 

Prepaid expenses, deferred income taxes, and other receivables

 

3,917,922

 

3,721,425

 

Total Current Assets

 

18,007,894

 

17,042,559

 

Investments

 

1,053,854

 

1,073,736

 

Property and Equipment, at Cost

 

15,330,092

 

15,188,673

 

Less: accumulated depreciation and amortization

 

8,019,659

 

7,969,507

 

Net Property and Equipment

 

7,310,433

 

7,219,166

 

Intangible Assets, net of amortization

 

6,065,213

 

5,151,106

 

Goodwill

 

11,648,675

 

9,987,361

 

Deferred Income Taxes and Other Assets

 

1,351,528

 

1,945,276

 

 

 

$

45,437,597

 

$

42,419,204

 

Liabilities and Shareholders’ Investment

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Short-term borrowings

 

$

3,500,404

 

$

1,691,069

 

Trade accounts payable

 

1,184,761

 

1,351,436

 

Salaries, dividends payable, and other accruals

 

5,501,863

 

5,787,118

 

Income taxes payable

 

926,513

 

805,397

 

Obligation in connection with conclusion of TAP Pharmaceutical Products, Inc. joint venture

 

118,852

 

915,982

 

Current portion of long-term debt

 

537,878

 

1,040,906

 

Total Current Liabilities

 

11,770,271

 

11,591,908

 

 

 

 

 

 

 

Long-term Debt

 

11,675,953

 

8,713,327

 

Post-employment Obligations and Other Long-term Liabilities

 

4,008,233

 

4,595,278

 

Commitments and Contingencies

 

 

 

 

 

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: 2009: 1,607,596,389; 2008: 1,601,580,899

 

7,853,114

 

7,444,411

 

Common shares held in treasury, at cost -
Shares: 2009: 62,137,654; 2008: 49,147,968

 

(3,344,028

)

(2,626,404

)

Earnings employed in the business

 

14,629,154

 

13,825,383

 

Accumulated other comprehensive income (loss)

 

(1,194,941

)

(1,163,839

)

Total Abbott Shareholders’ Investment

 

17,943,299

 

17,479,551

 

Noncontrolling Interests in Subsidiaries

 

39,841

 

39,140

 

Total Equity

 

17,983,140

 

17,518,691

 

 

 

$

45,437,597

 

$

42,419,204

 

 

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

 

March 31, 2009

 

(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, 2008.

 

On January 1, 2009, Abbott adopted SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” and accordingly, noncontrolling interests in subsidiaries are presented as a component of total equity as of March 31, 2009 and December 31, 2008.

 

Note 2 — Supplemental Financial Information

 

Other (income) expense, net, for the first quarter of 2009 includes the derecognition of a contingent liability of $797 million and ongoing contractual payments from Takeda associated with the conclusion of the TAP joint venture as discussed in Note 9 and income from the recording of certain investments at fair value in connection with business acquisitions.

 

Supplemental Cash Flow Information — Other, net in Net cash from operating activities for 2009 and 2008 includes the effects of contributions to the main domestic defined benefit plan of $700 million and $200 million, respectively, and to the post-employment medical and dental plans of $13 million and $65 million, respectively.

 

The components of long-term investments as of March 31, 2009 and December 31, 2008 are as follows:

 

 

 

March 31

 

December 31

 

(dollars in millions)

 

2009

 

2008

 

Equity securities

 

$

121

 

$

147

 

Note receivable from Boston Scientific, 4% interest, due in 2011

 

868

 

865

 

Other

 

65

 

62

 

Total

 

$

1,054

 

$

1,074

 

 

Note 3 — Taxes on Earnings

 

Taxes on earnings reflect the estimated annual effective rates and include charges for interest and penalties.  The effective tax rates are less than the statutory U.S. federal income tax rate principally due to the benefit of lower statutory tax rates and tax exemptions in several foreign taxing jurisdictions.

 

Note 4 — Litigation and Environmental Matters

 

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 company-owned locations.  Abbott has recorded an estimated cleanup cost for each site for which management believes Abbott has a probable loss exposure.  No individual site cleanup exposure is expected to exceed $3 million, and the aggregate cleanup exposure is not expected to exceed $15 million.

 

There are a number of patent disputes with third parties who claim Abbott’s products infringe their patents.  In one of those disputes, filed in April 2007, Abbott is unable to estimate a range of possible loss, if any, and no reserve has been recorded.  Abbott’s acquisition of Kos Pharmaceuticals Inc. resulted in the assumption of various cases and investigations and Abbott has recorded reserves related to several of those cases and investigations.

 

5



 

Notes to Condensed Consolidated Financial Statements

March 31, 2009

(Unaudited), continued

 

There are several civil actions pending brought by individuals or entities that allege generally that Abbott and numerous pharmaceutical companies reported false or misleading pricing information relating to the average wholesale price of certain pharmaceutical products in connection with federal, state and private reimbursement.  Civil actions have also been brought against Abbott, and in some cases other members of the pharmaceutical industry, by state attorneys general seeking to recover alleged damages on behalf of state Medicaid programs.  In May 2006, Abbott was notified that the U.S. Department of Justice intervened in a civil whistle-blower lawsuit alleging that Abbott inflated prices for Medicaid and Medicare reimbursable drugs.  Abbott has settled a few of the cases and recorded reserves for its estimated losses in a few other cases, however, Abbott is unable to estimate the range or amount of possible loss for the remaining cases, and no loss reserves have been recorded for them.  Many of the products involved in these cases are Hospira products.  Hospira, Abbott’s former hospital products business, was spun off to Abbott’s shareholders in 2004.  Abbott retained liability for losses that result from these cases and investigations to the extent any such losses both relate to the sale of Hospira’s products prior to the spin-off of Hospira and relate to allegations that were made in such pending and future cases and investigations that were the same as allegations existing at the date of the spin-off.

 

There are several civil actions pending brought by state attorneys general and private entities alleging antitrust and unfair competition claims in connection with the sales of TriCor. Abbott licenses TriCor from a third party and the licensor has also been named as a defendant.  Settlements have been reached in all of these cases except the state attorneys general, however, Abbott is unable to estimate a reserve and no loss reserve has been recorded for the remaining TriCor cases. There are several civil actions pending brought by private payers and others alleging antitrust claims in connection with the pricing of Norvir.

 

Within the next year, legal proceedings may occur that may result in a change in the estimated reserves recorded by Abbott.  For its legal proceedings and environmental exposures, except as noted above, Abbott estimates the range of possible loss to be from approximately $185 million to $405 million.  The recorded reserve balance at March 31, 2009 for these proceedings and exposures was approximately $255 million.  These reserves represent management’s best estimate of probable loss, as defined by Statement of Financial Accounting Standards No. 5 “Accounting for Contingencies.”

 

While it is not feasible to predict the outcome of all such proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on Abbott’s financial position, cash flows, or results of operations, except for the cases and investigations discussed in the third paragraph and the patent case discussed in the second paragraph of this footnote, the resolution of which could be material to cash flows or results of operations for a quarter.

 

Note 5 — Post-Employment Benefits

 

Retirement plans consist of defined benefit, defined contribution, and medical and dental plans.  Net cost for the three months ended March 31 for Abbott’s major defined benefit plans and post-employment medical and dental benefit plans is as follows:

 

 

 

Defined Benefit Plans

 

Medical and Dental Plans

 

(dollars in millions)

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Service cost — benefits earned during the period

 

$

60

 

$

60

 

$

12

 

$

12

 

Interest cost on projected benefit obligations

 

94

 

86

 

26

 

26

 

Expected return on plans’ assets

 

(127

)

(119

)

(6

)

(8

)

Net amortization

 

18

 

13

 

4

 

5

 

 

 

 

 

 

 

 

 

 

 

Net cost

 

$

45

 

$

40

 

$

36

 

$

35

 

 

Abbott funds its domestic defined benefit plans according to IRS funding limitations.  In the first quarters of 2009 and 2008, $700 million and $200 million, respectively, was contributed to the main domestic defined benefit plan and $13 million and $65 million, respectively, was contributed to the post-employment medical and dental benefit plans.

 

 

6



 

Notes to Condensed Consolidated Financial Statements

March 31, 2009

(Unaudited), continued

 

Note 6 — Comprehensive Income, net of tax

 

 

 

Three Months Ended
March 31

 

(dollars in millions)

 

2009

 

2008

 

 

 

 

 

 

 

Foreign currency translation (loss) gain adjustments

 

$

(59

)

$

191

 

Unrealized gains (losses) on marketable equity securities

 

3

 

(25

)

Amortization of net actuarial losses and prior service cost and credits

 

16

 

12

 

Net adjustments for derivative instruments designated as cash flow hedges

 

9

 

(6

)

Other comprehensive income (loss), net of tax

 

(31

)

172

 

Net Earnings

 

1,439

 

938

 

Comprehensive Income

 

$

1,408

 

$

1,110

 

 

 

 

March 31
2009

 

December 31
2008

 

 

 

 

 

 

 

Supplemental Comprehensive Income Information, net of tax:

 

 

 

 

 

 

 

 

 

 

 

Cumulative foreign currency translation (gain) adjustments

 

$

(681

)

$

(740

)

Net actuarial losses and prior service cost and credits

 

1,885

 

1,901

 

Cumulative unrealized (gains) on marketable equity securities

 

(20

)

(17

)

Cumulative losses on derivative instruments designated as cash flow hedges

 

11

 

20

 

 

Note 7 — Segment Information

 

Abbott’s principal business is the discovery, development, manufacture and sale of a broad line of health care products.  Abbott’s products are generally sold directly to retailers, wholesalers, hospitals, health care facilities, laboratories, physicians’ offices and government agencies throughout the world.  Abbott’s reportable segments are as follows:

 

Pharmaceutical Products — Worldwide sales of a broad line of pharmaceuticals.  For segment reporting purposes, two pharmaceutical divisions are aggregated and reported as the Pharmaceutical Products segment.

 

Nutritional Products — Worldwide sales of a broad line of adult and pediatric nutritional products.

 

Diagnostic Products — Worldwide sales of diagnostic systems and tests for blood banks, hospitals, commercial laboratories and alternate-care testing sites.  For segment reporting purposes, three diagnostic divisions are aggregated and reported as the Diagnostic Products segment.

 

Vascular Products — Worldwide sales of coronary, endovascular and vessel closure products.

 

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 charged to segments at predetermined rates that approximate cost.  Remaining costs, if any, are not allocated to segments.  For acquisitions prior to 2006, substantially all intangible assets and related amortization are not allocated to segments.  The following segment information has been prepared in accordance with the internal accounting policies of Abbott, as described above, and are not presented in accordance with generally accepted accounting principles applied to the consolidated financial statements.

 

7



 

Notes to Condensed Consolidated Financial Statements

March 31, 2009

(Unaudited), continued

 

 

 

Three Months Ended March 31

 

 

 

Net Sales to
External Customers

 

Operating
Earnings (Loss)

 

(dollars in millions)

 

2009

 

2008

 

2009

 

2008

 

Pharmaceutical Products

 

$

3,636

 

$

3,854

 

$

1,305

 

$

1,345

 

Nutritional Products

 

1,181

 

1,110

 

180

 

184

 

Diagnostic Products

 

816

 

832

 

88

 

52

 

Vascular Products

 

645

 

452

 

160

 

(31

)

Total Reportable Segments

 

6,278

 

6,248

 

1,733

 

1,550

 

Other

 

440

 

518

 

 

 

 

 

Net Sales

 

$

6,718

 

$

6,766

 

 

 

 

 

Corporate functions and benefit plans costs

 

 

 

 

 

(94

)

(113

)

Non-reportable segments

 

 

 

 

 

61

 

72

 

Net interest expense

 

 

 

 

 

(88

)

(93

)

Income from TAP Pharmaceutical Products Inc. joint venture

 

 

 

 

 

 

102

 

Share-based compensation (a)

 

 

 

 

 

(174

)

(152

)

Other, net (b)

 

 

 

 

 

494

 

(205

)

Consolidated Earnings Before Taxes

 

 

 

 

 

$

1,932

 

$

1,161

 

 


(a)          Approximately 40 to 45 percent of the annual net cost of share-based awards will typically be recognized in the first quarter due to the timing of the granting of share-based awards.

 

(b)         Other, net, for the three months ended March 31, 2009, includes the derecognition of a contingent liability of $797 established in connection with the conclusion of the TAP joint venture.

 

Note 8 — Incentive Stock Program

 

In the first quarter of 2009, Abbott granted 1,712,400 stock options, 733,003 replacement stock options, 1,224,400 restricted stock awards and 5,116,457 restricted stock units under this program.  In addition, 2,899,411 options were issued in connection with the conversion of Advanced Medical Optics, Inc. options to Abbott options.   At March 31, 2009, approximately 46 million shares were reserved for future grants.  Information regarding the number of options outstanding and exercisable at March 31, 2009 is as follows:

 

 

 

Outstanding

 

Exercisable

 

 

 

 

 

 

 

Number of shares

 

125,987,522

 

102,819,892

 

Weighted average remaining life (years)

 

6.3

 

5.8

 

Weighted average exercise price

 

$

49.71

 

$

48.68

 

Aggregate intrinsic value (in millions)

 

$

271

 

$

268

 

 

The total unrecognized share-based compensation cost at March 31, 2009 amounted to approximately $390 million which is expected to be recognized over the next three years.

 

8



 

Notes to Condensed Consolidated Financial Statements

March 31, 2009

(Unaudited), continued

 

Note 9 — Conclusion of TAP Pharmaceutical Products Inc. Joint Venture

 

On April 30, 2008, Abbott and Takeda concluded their TAP Pharmaceutical Products Inc. (TAP) joint venture, evenly splitting the value and assets of the joint venture.  Abbott exchanged its 50 percent equity interest in TAP for the assets, liabilities and employees related to TAP’s Lupron business.   Beginning on May 1, 2008, Abbott began recording U.S. Lupron net sales and costs in its operating results and no longer records income from the TAP joint venture.  Abbott receives payments based on specified development, approval and commercial events being achieved with respect to products retained by Takeda and payments from Takeda based on sales of products retained by Takeda, which are recorded by Abbott as Other (income) expense, net as earned.  Abbott also agreed to remit cash to Takeda if certain research and development events are not achieved on the development assets retained by Takeda.  These amounts were recorded as a liability at closing in the amount of approximately $1.1 billion.  Of the $1.1 billion, Abbott made a tax-deductible payment of $200 million in 2008 and Abbott will make a tax-deductible payment of approximately $120 million in 2009.  In the first quarter of 2009, events occurred resulting in the remaining payments not being required and the remaining liability in the amount of $797 million was derecognized and recorded as income in Other (income) expense, net.

 

The 50 percent-owned joint venture was accounted for under the equity method of accounting.  Summarized financial information for TAP for the three months ended March 31, 2008 are as follows below.  (dollars in millions)

 

Net sales

 

$

711

 

Cost of sales

 

183

 

Income before taxes

 

321

 

Net income

 

204

 

 

Note 10 — Business Acquisitions

 

In February 2009, Abbott acquired the outstanding shares of Advanced Medical Optics, Inc. (AMO), a marketer of ophthalmic surgical technology and devices, as well as eye care solutions for approximately $1.4 billion in cash, net of cash held by AMO.  Prior to the acquisition, Abbott held a small investment in AMO.  Abbott acquired AMO to take advantage of increasing demand for vision care technologies due to population growth and demographic shifts and AMO’s premier position in its field.  Abbott acquired control of this business on February 25, 2009 and the financial results of the acquired operations are included in these financial statements beginning on that date in accordance with Statement of Financial Standards No. 141(R).  The acquisition was financed with long-term debt.  The preliminary allocation of the fair value of the acquisition is shown in the table below (in billions of dollars).  These allocations will be finalized when appraisals are completed.

 

Goodwill, non-deductible

 

$

1.6

 

Acquired intangible assets, non-deductible

 

0.9

 

Acquired in-process research and development

 

0.2

 

Acquired net tangible assets

 

0.5

 

Acquired debt

 

(1.5

)

Deferred income taxes recorded at acquisition

 

(0.3

)

Total preliminary allocation of fair value

 

$

1.4

 

 

Acquired intangible assets consist of established customer relationships, developed technology and trade names and will be amortized over 2 to 30 years (average of 10 years).  Acquired in-process research and development will be accounted for as an indefinite lived intangible asset until regulatory approval or discontinuation.  The net tangible assets acquired consist primarily of trade accounts receivable, inventory, property and equipment and other assets, net of assumed liabilities, primarily trade accounts payable, accrued compensation and other liabilities.

 

Abbott incurred approximately $55 million of acquisition related expenses which are classified as Selling, general and administrative expense.  In addition, subsequent to the acquisition, Abbott repaid substantially all of the acquired debt of AMO.

 

9



 

Notes to Condensed Consolidated Financial Statements

March 31, 2009

(Unaudited), continued

 

In January 2009, Abbott acquired Ibis Biosciences, Inc. (Ibis) for $175 million, in cash, to expand Abbott’s position in molecular diagnostics for infectious disease.  Including a $40 million investment in Ibis in 2008, Abbott has acquired 100 percent of the outstanding shares of Ibis.  A substantial portion of the fair value of the acquisition has been allocated to goodwill and amortizable intangible assets, and acquired in-process research and development which will be accounted for as an indefinite lived intangible asset until regulatory approval or discontinuation.  The investment in Ibis in 2008 resulted in a charge to acquired in-process research and development.  In connection with the acquisition, the carrying amount of this investment was revalued to fair value in the first quarter of 2009 resulting in recording $33 million of income, which is reported as Other (income) expense, net.

 

Had the above acquisitions taken place on January 1 of the previous year, consolidated net sales and income would not have been significantly different from reported amounts.

 

Note 11 — Financial Instruments, Derivatives and Fair Value Measures

 

Certain Abbott foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar.  These contracts, totaling $517 million and $129 million at March 31, 2009 and December 31, 2008, respectively, are designated as cash flow hedges of the variability of the cash flows due to changes in foreign exchange rates.  Accumulated gains and losses as of March 31, 2009 will be included in Cost of products sold at the time the products are sold, generally through the next twelve months.

 

Abbott enters into foreign currency forward exchange contracts to manage currency exposures for foreign currency denominated third-party trade payables and receivables, and for intercompany loans and trade accounts payable where the receivable or payable is denominated in a currency other than the functional currency of the entity.  For intercompany loans, the contracts require Abbott to sell or buy foreign currencies, primarily European currencies and Japanese yen, in exchange for primarily U.S. dollars and other European currencies.  For intercompany and trade payables and receivables, the currency exposures are primarily the U.S. dollar, European currencies and Japanese yen.  At March 31, 2009 and December 31, 2008, Abbott held $6.0 billion and $8.3 billion, respectively, of such foreign currency forward exchange contracts.

 

Abbott has designated foreign denominated short-term debt as a hedge of the net investment in certain foreign subsidiaries of approximately $547 million and approximately $585 million as of March 31, 2009 and December 31, 2008, respectively.  Accordingly, changes in the fair value of this debt due to changes in exchange rates are recorded in Accumulated other comprehensive income (loss), net of tax.

 

Abbott is a party to interest rate swap contracts totaling $5.5 billion and $2.5 billion at March 31, 2009 and December 31, 2008, respectively, to manage its exposure to changes in the fair value of $5.5 billion and $2.5 billion, respectively, of fixed-rate debt due 2011 through 2019.  These contracts are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates.  The effect of the hedge is to change a fixed-rate interest obligation to a variable rate for that portion of the debt.  Abbott records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount.  No hedge ineffectiveness was recorded in income in 2009 or 2008 for these hedges.

 

10



 

Notes to Condensed Consolidated Financial Statements

March 31, 2009

(Unaudited), continued

 

The following table summarizes the amounts and location of certain derivative financial instruments as of March 31, 2009 and December 31, 2008:

 

 

 

Fair Value - Assets

 

Fair Value - Liabilities

 

(dollars in millions)

 

March 31
2009

 

December 31
2008

 

Balance Sheet Caption

 

March 31
2009

 

December 31
2008

 

Balance Sheet Caption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps designated as fair value hedges

 

$

156

 

$

170

 

Deferred income taxes and other assets

 

$

9

 

$

 

Post-employment obligations and other long-term liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts —

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging instruments

 

8

 

 

Prepaid expenses,

 

2

 

7

 

Salaries, dividends

 

Others not designated as hedges

 

104

 

148

 

deferred income taxes, and other receivables

 

89

 

93

 

payable and other accruals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets and liabilities relating to TAP employees’ stock options

 

11

 

16

 

Deferred income taxes and other assets

 

16

 

24

 

Post-employment obligations and other long-term liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt designated as a hedge of net investment in certain foreign subsidiaries

 

 

 

 

 

547

 

585

 

Short-term borrowings

 

 

 

$

279

 

$

334

 

 

 

$

663

 

$

709

 

 

 

 

The following table summarizes the activity for foreign currency forward exchange contracts designated as cash flow hedges, debt designated as a hedge of net investment in certain foreign subsidiaries and the amounts and location of income (expense) and gain (loss) reclassified into income in the first three months of 2009 and 2008 and for certain other derivative financial instruments.  The amount of hedge ineffectiveness was not significant in 2009 and 2008 for these hedges.

 

 

 

Gain (loss) Recognized in
Other Comprehensive
Income (loss)

 

Income (expense) and
Gain (loss) Reclassified
into Income

 

 

 

(dollars in millions)

 

2009

 

2008

 

2009

 

2008

 

Income Statement Caption

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts designated as cash flow hedges

 

$

(3

)

$

(3

)

$

(2

)

$

(3

)

Cost of products sold

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt designated as a hedge of net investment in certain foreign subsidiaries

 

40

 

(150

)

 

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps designated as fair value hedges

 

n/a

 

n/a

 

23

 

(49

)

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts not designated as a hedge

 

n/a

 

n/a

 

50

 

(17

)

Net foreign exchange loss (gain)

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets and liabilities relating to TAP employees’ stock options —

 

 

 

 

 

 

 

 

 

 

 

Assets

 

n/a

 

n/a

 

(5

)

 

Other (income) expense,

 

Liabilities

 

n/a

 

n/a

 

8

 

 

net

 

 

The interest rate swaps are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates.  The hedged debt is marked to market resulting in expense in 2009 of $23 million and income of $49 million in 2008, offsetting the effect of marking the interest rate swap to market.

 

11



 

Notes to Condensed Consolidated Financial Statements

March 31, 2009

(Unaudited), continued

 

The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the balance sheet:

 

 

 

 

 

Basis of Fair Value Measurement

 

(dollars in millions)

 

Outstanding
Balances

 

Quoted
Prices in
Active
Markets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable Inputs

 

March 31, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity and other securities

 

$

117

 

$

79

 

$

7

 

$

31

 

Interest rate swap derivative financial instruments

 

156

 

 

156

 

 

Foreign currency forward exchange contracts

 

112

 

 

112

 

 

Financial assets relating to TAP employees’ stock options

 

11

 

 

 

11

 

Total Assets

 

$

396

 

$

79

 

$

275

 

$

42

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

5,647

 

$

 

$

5,647

 

$

 

Interest rate swap derivative financial instruments

 

9

 

 

9

 

 

Foreign currency forward exchange contracts

 

91

 

 

91

 

 

Financial liabilities relating to TAP employees’ stock options

 

16

 

 

 

16

 

Total Liabilities

 

$

5,763

 

$

 

$

5,747

 

$

16

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008:

 

 

 

 

 

 

 

 

 

Equity and other securities

 

$

144

 

$

105

 

$

10

 

$

29

 

Interest rate swap derivative financial instruments

 

170

 

 

170

 

 

Foreign currency forward exchange contracts

 

148

 

 

148

 

 

Financial assets relating to TAP employees’ stock options

 

16

 

 

 

16

 

Total Assets

 

$

478

 

$

105

 

$

328

 

$

45

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

2,670

 

$

 

$

2,670

 

$

 

Foreign currency forward exchange contracts

 

100

 

 

100

 

 

Financial liabilities relating to TAP employees’ stock options

 

24

 

 

 

24

 

Total Liabilities

 

$

2,794

 

$

 

$

2,770

 

$

24

 

 

The value of the financial assets and liabilities relating to TAP employees’ stock options are calculated using the Black-Scholes option-pricing model.  Changes in the recorded amounts are recorded in Other income (expense), net each period.  The recorded value of investments that are valued using significant unobservable inputs did not change significantly.  Changes in these values are recorded in Accumulated other comprehensive income.

 

Note 12 — Goodwill and Intangible Assets

 

Abbott recorded goodwill of approximately $1.7 billion in 2009 related to the acquisitions of Advanced Medical Optics, Inc. and Ibis Biosciences, Inc.  Goodwill related to the Ibis acquisition was allocated to the Diagnostic Products segment.  Foreign currency translation adjustments and other adjustments increased goodwill in the first quarter 2008 by approximately $165 million.  The amount of goodwill related to reportable segments at March 31, 2009 was $6.0 billion for the Pharmaceutical Products segment, $206 million for the Nutritional Products segment, $385 million for the Diagnostic Products segment and $2.2 billion for the Vascular Products segment.  There were no reductions of goodwill relating to impairments or disposal of all or a portion of a business.

 

The gross amount of amortizable intangible assets, primarily product rights and technology, was $10.5 billion as of March 31, 2009 and $9.4 billion as of December 31, 2008, and accumulated amortization was $4.4 billion as of March 31, 2009 and $4.2 billion as of December 31, 2008.  The estimated annual amortization expense for intangible assets is approximately $856 million in 2009, $864 million in 2010, $851 million in 2011, $844 million in 2012 and $691 million in 2013. Amortizable intangible assets are amortized over 4 to 25 years (average 11 years).

 

12



 

Notes to Condensed Consolidated Financial Statements

March 31, 2009

(Unaudited), continued

 

Note 13 — Restructuring Plans

 

In 2008, Abbott management approved a plan to streamline global manufacturing operations, reduce overall costs, and improve efficiencies in Abbott’s core diagnostic business.  Additional charges of approximately $9 million were recorded in the first quarter of 2009 relating to this restructuring, primarily for accelerated depreciation and product transfer costs.  Additional charges will occur through 2011 as a result of product re-registration timelines required under manufacturing regulations in a number of countries and product transition timelines.  The following summarizes the activity for this restructuring:  (dollars in millions)

 

 

 

2009

 

 

 

Accrued balance at January 1

 

$

110

 

 

 

Restructuring charges

 

1

 

 

 

Payments and other adjustments

 

(1

)

 

 

Accrued balance at March 31

 

$

110

 

 

 

 

In 2009 and prior years, Abbott management approved plans to realign its worldwide pharmaceutical and vascular manufacturing operations and selected domestic and international commercial and research and development operations in order to reduce costs.  Additional charges of $9 million and $22 million were subsequently recorded in the first quarter of 2009 and 2008, respectively, relating to these restructurings, primarily for accelerated depreciation and product transfer costs.  The following summarizes the activity for these restructurings: (dollars in millions)

 

 

 

2009

 

2008

 

Accrued balance at January 1

 

$

105

 

$

194

 

Restructuring charges

 

26

 

11

 

Payments and other adjustments

 

(24

)

(48

)

Accrued balance at March 31

 

$

107

 

$

157

 

 

13



 

FINANCIAL REVIEW

 

Results of Operations

 

The following table details sales by reportable segment for the three months ended March 31.  Percent changes are versus the prior year and are based on unrounded numbers.

 

 

 

Net Sales to External Customers

 

(dollars in millions)

 

2009

 

Percent
Change

 

2008

 

Percent
Change

 

 

 

 

 

 

 

 

 

 

 

Pharmaceutical Products

 

$

3,636

 

(5.7

)

$

3,854

 

14.3

 

Nutritional Products

 

1,181

 

6.4

 

1,110

 

10.8

 

Diagnostic Products

 

816

 

(1.8

)

832

 

17.1

 

Vascular Products

 

645

 

42.7

 

452

 

7.6

 

Total Reportable Segments

 

6,278

 

0.5

 

6,248

 

13.5

 

Other

 

440

 

(15.0

)

518

 

17.3

 

Net Sales

 

$

6,718

 

(0.7

)

$

6,766

 

13.8

 

 

 

 

 

 

 

 

 

 

 

Total U.S.

 

$

3,001

 

(1.3

)

$

3,043

 

3.7

 

 

 

 

 

 

 

 

 

 

 

Total International

 

$

3,717

 

(0.2

)

$

3,723

 

23.6

 

 

Net sales in 2009 reflect the negative effect of a relatively stronger U.S. dollar.  Excluding 6.1 percent of unfavorable exchange, net sales increased 5.4 percent in 2009, which reflects primarily unit growth.  The sales growth in 2008 reflects unit growth and the positive effect of the relatively weaker U.S. dollar.  The relatively stronger U.S. dollar decreased first quarter 2009 Total International sales 11.1 percent, decreased Pharmaceutical Products segment sales by 6.6 percent, decreased Nutritional Product segment sales by 4.2 percent, decreased Diagnostic Products segment sales by 7.8 percent and decreased Vascular Products segment sales by 4.5 percent over the first quarter of 2008.  The relatively weaker U.S. dollar increased first quarter 2008 consolidated net sales 5.5 percent, increased Total International sales 10.9 percent, increased Pharmaceutical Products segment sales by 5.9 percent, increased Nutritional Product segment sales by 3.0 percent, increased Diagnostic Products segment sales by 8.1 percent and increased Vascular Products segment sales by 4.9 percent over the first quarter of 2007.   The sales growth in 2009 for the Vascular Products segment was impacted by the U.S. launch of the Xience V drug eluting stent in the third quarter of 2008.  The sales growth in 2009 for the Pharmaceutical Products segment and Total U.S. sales in 2009 were impacted by decreased sales of Depakote due to expected generic competition.

 

14



 

FINANCIAL REVIEW

(continued)

 

A comparison of significant product group sales for the three months ended March 31 is as follows.  Percent changes are versus the prior year and are based on unrounded numbers.

 

 

 

Three Months Ended March 31

 

(dollars in millions)

 

2009

 

Percent
Change

 

2008

 

Percent
Change

 

Pharmaceutical Products —

 

 

 

 

 

 

 

 

 

U.S. Specialty

 

$

910

 

(12.0

)

$

1,034

 

19.9

 

U.S. Primary Care

 

622

 

(9.0

)

683

 

(12.2

)

International Pharmaceuticals

 

1,927

 

0.9

 

1,909

 

26.0

 

 

 

 

 

 

 

 

 

 

 

Nutritional Products —

 

 

 

 

 

 

 

 

 

U.S. Pediatric Nutritionals

 

295

 

(3.2

)

305

 

4.5

 

International Pediatric Nutritionals

 

336

 

14.7

 

293

 

24.5

 

U.S. Adult Nutritionals

 

288

 

6.2

 

271

 

3.9

 

International Adult Nutritionals

 

238

 

1.8

 

234

 

16.4

 

 

 

 

 

 

 

 

 

 

 

Diagnostics —

 

 

 

 

 

 

 

 

 

Immunochemistry

 

642

 

(2.6

)

660

 

17.8

 

 

Decreased sales of Depakote due to expected generic competition impacted U.S. Specialty product sales in 2009.  This was partially offset by the addition of Lupron sales from the conclusion of the TAP joint venture in April 2008.  U.S. sales of Depakote for the first three months of 2009 and 2008 were $110 million and $341 million, respectively.  Increased sales of HUMIRA and Depakote accounted for the majority of the sales increases for U.S. Specialty products in 2008.  U.S. Primary Care sales in both 2009 and 2008 were impacted by decreased sales of Omnicef due to generic competition, partially offset by increased sales of Niaspan and the TriCor/Trilipix franchise.  Increased sales of HUMIRA favorably impacted International Pharmaceutical sales in both 2009 and 2008.  International sales of HUMIRA for the first three months of 2009 and 2008 were $614 million and $476 million, respectively.  Abbott forecasts worldwide HUMIRA sales growth of 15 to 20 percent. Excluding the impact of exchange, Abbott forecasts HUMIRA sales growth of 25 to 30 percent.  The relatively stronger U.S. dollar decreased International Pharmaceutical sales in 2009 by 12.1 percent and the relatively weaker U.S. dollar increased International Pharmaceutical sales in 2008 by 12.3 percent.  U.S. Pediatric sales were affected by the impact of a modest decline in the U.S. infant nutritional market, partially offset by higher market share.  International Pediatric Nutritionals sales increases in 2009 and 2008 were due primarily to volume growth in developing countries.  The relatively stronger U.S. dollar decreased Immunochemistry sales in 2009 by 8.4 percent and the relatively weaker U.S. dollar increased Immunochemistry sales in 2008 by 9.0 percent.

 

The gross profit margin was 56.3 percent for the first quarter 2009, compared to 56.2 percent for the first quarter 2008.  The gross profit margin in 2009 was impacted by charges relating to a delayed product launch and the discontinuation of a product.  These charges had the effect of reducing the gross profit margin by 1.2 percentage points.  The increase in the gross profit margin in 2009, excluding these charges, was due, in part, to improved margins in the diagnostics and vascular businesses and the favorable effect of exchange on the gross profit margin; partially offset by the negative impact from lower sales of Depakote.

 

Research and development expenses increased 5.0 percent in the first quarter 2009 over the first quarter 2008.  This increase reflects continued pipeline spending, including programs in vascular devices, biologics, neuroscience, oncology and Hepatitis C.  The majority of research and development expenditures are concentrated on pharmaceutical products.

 

15



 

FINANCIAL REVIEW

(continued)

 

Selling, general and administrative expenses for the first quarter 2009 increased 2.6 percent over the first quarter 2008.  This increase reflects the settlement of litigation, and acquisition expenses relating to the acquisition of Advanced Medical Optics, Inc., partially offset by the favorable effect of exchange.  Excluding the effect of the charges and exchange, selling, general and administrative expenses increased 2.3 percent.

 

Business Acquisitions

 

In February 2009, Abbott acquired the outstanding shares of Advanced Medical Optics, Inc. (AMO), a marketer of ophthalmic surgical technology and devices, as well as eye care solutions for approximately $1.4 billion in cash, net of cash held by AMO.  Prior to the acquisition, Abbott held a small investment in AMO.  Abbott acquired AMO to take advantage of increasing demand for vision care technologies due to population growth and demographic shifts and AMO’s premier position in its field.  Abbott acquired control of this business on February 25, 2009 and the financial results of the acquired operations are included in these financial statements beginning on that date in accordance with Statement of Financial Standards No. 141(R).  The acquisition was financed with long-term debt.  The preliminary allocation of the fair value of the acquisition is shown in the table below (in billions of dollars).  These allocations will be finalized when appraisals are completed.

 

Goodwill, non-deductible

 

$

1.6

 

 

 

Acquired intangible assets, non-deductible

 

0.9

 

 

 

Acquired in-process research and development

 

0.2

 

 

 

Acquired net tangible assets

 

0.5

 

 

 

Acquired debt

 

(1.5

)

 

 

Deferred income taxes recorded at acquisition

 

(0.3

)

 

 

Total preliminary allocation of fair value

 

$

1.4

 

 

 

 

Acquired intangible assets consist of established customer relationships, developed technology and trade names and will be amortized over 2 to 30 years (average of 10 years).  Acquired in-process research and development will be accounted for as an indefinite lived intangible asset until regulatory approval or discontinuation.  The net tangible assets acquired consist primarily of trade accounts receivable, inventory, property and equipment and other assets, net of assumed liabilities, primarily trade accounts payable, accrued compensation and other liabilities.

 

Abbott incurred approximately $55 million of acquisition related expenses which are classified as Selling, general and administrative expense.  In addition, subsequent to the acquisition, Abbott repaid substantially all of the acquired debt of AMO.

 

In January 2009, Abbott acquired Ibis Biosciences, Inc. (Ibis) for $175 million, in cash, to expand Abbott’s position in molecular diagnostics for infectious disease.  Including a $40 million investment in Ibis in 2008, Abbott has acquired 100 percent of the outstanding shares of Ibis.  A substantial portion of the fair value of the acquisition has been allocated to goodwill and amortizable intangible assets, and acquired in-process research and development which will be accounted for as an indefinite lived intangible asset until regulatory approval or discontinuation.  The investment in Ibis in 2008 resulted in a charge to acquired in-process research and development.  In connection with the acquisition, the carrying amount of this investment was revalued to fair value in the first quarter of 2009 resulting in recording $33 million of income, which is reported as Other (income) expense, net.

 

Had the above acquisitions taken place on January 1 of the previous year, consolidated net sales and income would not have been significantly different from reported amounts.

 

16



 

FINANCIAL REVIEW

(continued)

 

Restructurings

 

In 2008, Abbott management approved a plan to streamline global manufacturing operations, reduce overall costs, and improve efficiencies in Abbott’s core diagnostic business.  Additional charges of approximately $9 million were recorded in the first quarter of 2009 relating to this restructuring, primarily for accelerated depreciation and product transfer costs.  Additional charges will occur through 2011 as a result of product re-registration timelines required under manufacturing regulations in a number of countries and product transition timelines.  The following summarizes the activity for this restructuring:  (dollars in millions)

 

 

 

2009

 

 

 

Accrued balance at January 1

 

$

110

 

 

 

Restructuring charges

 

1

 

 

 

Payments and other adjustments

 

(1

)

 

 

Accrued balance at March 31

 

$

110

 

 

 

 

In 2009 and prior years, Abbott management approved plans to realign its worldwide pharmaceutical and vascular manufacturing operations and selected domestic and international commercial and research and development operations in order to reduce costs.  Additional charges of $9 million and $22 million were subsequently recorded in the first quarter of 2009 and 2008, respectively, relating to these restructurings, primarily for accelerated depreciation and product transfer costs.  The following summarizes the activity for these restructurings: (dollars in millions)

 

 

 

2009

 

2008

 

Accrued balance at January 1

 

$

105

 

$

194

 

Restructuring charges

 

26

 

11

 

Payments and other adjustments

 

(24

)

(48

)

Accrued balance at March 31

 

$

107

 

$

157

 

 

Interest (Income)

 

Interest expense and interest income decreased in the first quarter 2009 compared to 2008 primarily as a result of lower interest rates.

 

Conclusion of TAP Pharmaceutical Products Inc. Joint Venture

 

On April 30, 2008, Abbott and Takeda concluded their TAP Pharmaceutical Products Inc. (TAP) joint venture, evenly splitting the value and assets of the joint venture.  Abbott exchanged its 50 percent equity interest in TAP for the assets, liabilities and employees related to TAP’s Lupron business.   Beginning on May 1, 2008, Abbott began recording U.S. Lupron net sales and costs in its operating results and no longer records income from the TAP joint venture.  Abbott receives payments based on specified development, approval and commercial events being achieved with respect to products retained by Takeda and payments from Takeda based on sales of products retained by Takeda, which are recorded by Abbott as Other (income) expense, net as earned.  Abbott also agreed to remit cash to Takeda if certain research and development events are not achieved on the development assets retained by Takeda.  These amounts were recorded as a liability at closing in the amount of approximately $1.1 billion.  Of the $1.1 billion, Abbott made a tax-deductible payment of $200 million in 2008 and Abbott will make a tax-deductible payment of approximately $120 million in 2009.  In the first quarter of 2009, events occurred resulting in the remaining payments not being required and the remaining liability in the amount of $797 million was derecognized and recorded as income in Other (income) expense, net.

 

17



 

FINANCIAL REVIEW

(continued)

 

The 50 percent-owned joint venture was accounted for under the equity method of accounting.  Summarized financial information for TAP for the three months ended March 31, 2008 are as follows below.  (dollars in millions)

 

Net sales

 

$

711

 

Cost of sales

 

183

 

Income before taxes

 

321

 

Net income

 

204

 

 

Other (Income) Expense, net

 

Other (income) expense, net, for the first quarter of 2009 includes the derecognition of a contingent liability of $797 million and ongoing contractual payments from Takeda associated with the conclusion of the TAP joint venture as discussed above and income from the recording of certain investments at fair value in connection with business acquisitions.

 

Taxes on Earnings

 

Taxes on earnings reflect the estimated annual effective rates.  The effective tax rates are less than the statutory U.S. federal income tax rate principally due to the benefit of lower statutory tax rates and tax exemptions in several foreign taxing jurisdictions.

 

Liquidity and Capital Resources at March 31, 2009 Compared with December 31, 2008

 

Net cash from operating activities for the first three months 2009 totaled approximately $700 million.  Other, net in Net cash from operating activities for 2009 and 2008 includes the effects of contributions to the main domestic defined benefit plan of $700 million in 2009 and $200 million in 2008 and to the post-employment medical and dental plans of $13 million and $65 million, respectively.  Abbott expects annual cash flow from operating activities to continue to exceed Abbott’s capital expenditures and cash dividends.

 

Working capital was $6.2 billion at March 31, 2009 and $5.5 billion at December 31, 2008.

 

At March 31, 2009, Abbott’s long-term debt rating was AA by Standard & Poor’s Corporation and A1 by Moody’s Investors Service.  Abbott has readily available financial resources, including unused lines of credit of $5.3 billion that support commercial paper borrowing arrangements of which a $2.3 billion facility expires in December 2009 and a $3.0 billion facility expires in 2012.  Abbott’s access to short-term financing has not been affected by recent credit market conditions.

 

Under a registration statement filed with the Securities and Exchange Commission in February 2009, Abbott issued $3.0 billion of long-term debt in the first quarter of 2009 that matures in 2019 and 2039 with interest rates of 5.125 percent and 6.0 percent, respectively.  Proceeds from this debt were used to fund the acquisition of Advanced Medical Optics, Inc. and to repay debt of Advanced Medical Optics, Inc.  In addition, Abbott repaid $500 million of long-term notes that were due in February 2009 using short-term borrowings.

 

In October 2008, the board of directors authorized the purchase of up to $5 billion of Abbott’s common shares from time to time and 14.5 million shares were purchased under this authorization in the first three months of 2009 at a cost of approximately $800 million.  In the first three months of 2008, Abbott purchased approximately 14.1 million of its common shares at a cost of approximately $800 million under a prior authorization.

 

18



 

FINANCIAL REVIEW

(continued)

 

Recently Issued Accounting Standards

 

In 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 “Recognition and Presentation of Other-Than-Temporary Impairments” which provides additional guidance for the accounting for and presentation of impairment losses on securities.  Abbott will adopt this FSP in the second quarter of 2009 and does not expect adoption to have a material effect on Abbott.

 

Legislative Issues

 

Abbott’s primary markets are highly competitive and subject to substantial government regulation throughout the world.  Abbott expects debate to continue over the availability, method of delivery, and payment for health care products and services.  Abbott believes that if legislation is enacted, it could change access to health care products and services, or reduce prices or the rate of price increases for health care products and services.  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, and Item 1A, Risk Factors, in the 2008 Annual Report on Form 10-K.

 

Private Securities Litigation Reform Act of 1995 — A Caution Concerning Forward-Looking Statements

 

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 Item 1A, Risk Factors, in the 2008 Annual Report on Form 10-K.

 

19



 

PART I.  FINANCIAL INFORMATION

 

Item 4.     Controls and Procedures

 

(a)   Evaluation of disclosure controls and procedures.  The Chief Executive Officer, Miles D. White, and Chief Financial Officer, Thomas C. Freyman, evaluated the effectiveness of Abbott Laboratories’ disclosure controls and procedures as of the end of the period covered by this report, and concluded that Abbott Laboratories’ disclosure controls and procedures were effective to ensure that information Abbott is required to disclose in the reports that it files or submits with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and to ensure that information required to be disclosed by Abbott in the reports that it files or submits under the Exchange Act is accumulated and communicated to Abbott’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b)   Changes in internal control over financial reporting.  On February 25, 2009, Abbott acquired control of Advanced Medical Optics, Inc.  During the quarter ended March 31, 2009, there were no other changes in Abbott’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, Abbott’s internal control over financial reporting.

 

PART II.    OTHER INFORMATION

 

Item 1.     Legal Proceedings

 

Abbott is involved in various claims, legal proceedings, and investigations, including (as of March 31, 2009) those described below.  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 resolution should not have a material adverse effect on Abbott’s financial position, cash flows, or results of operations, except for the case filed in April 2007 referred to in the second paragraph of Note 4 to Abbott’s financial statements above and the cases described in the third paragraph of such note.

 

In its 2008 Form 10-K, Abbott reported that litigation is pending in the United States District Court for the District of Delaware against Abbott, Fournier Industrie et Sante, and Laboratoires Fournier, S.A. (Fournier), regarding the sale and marketing of fenofibrate products.  In April 2009, Abbott and Fournier reached settlements on the claims brought by all indirect purchasers of fenofibrate products.  The case brought by twenty-six State Attorneys General, State of Florida, et al. (filed in March 2008), is the only remaining litigation regarding the sale and marketing of fenofibrate products.

 

In its 2008 Form 10-K, Abbott reported that it is seeking to enforce its patent rights relating to fenofibrate tablets (a drug Abbott sells under the trademark Tricor®).  In a case filed

 

20



 

in the United States District Court for the District of New Jersey in March 2009, Abbott and the patents’ owner, Laboratories Fournier, S.A., allege that Lupin Pharmaceuticals and Lupin Limited’s proposed generic products infringe the asserted patents and seek declaratory and injunctive relief.

 

In its 2008 Form 10-K, Abbott reported that Bayer HealthCare LLC (Bayer) filed a patent infringement suit against Abbott in the United States District Court for the Eastern District of Texas.  In February 2009, the case was transferred to the United States District Court for the District of Massachusetts, where Abbott has filed a declaratory judgment action against Bayer seeking a declaration that adalimumab (a drug Abbott sells under the trademark Humira®) does not infringe Bayer’s patent and that Bayer’s patent is invalid and unenforceable.

 

Abbott is seeking to enforce its patents rights relating to ritonavir/lopinavir tablets (a drug Abbott sells under the trademark Kaletra®).  In cases filed in the United States District Courts for the Northern District of Illinois and for the District of Delaware in March 2009, Abbott alleges that Matrix Laboratories, Inc., Matrix Laboratories, Ltd., and Mylan, Inc.’s proposed generic products infringe Abbott’s patents and seeks declaratory and injunctive relief.

 

Abbott is seeking to enforce its patent rights relating to niacin extended release tablets (a drug Abbott sells under the trademark Niaspan®).  In cases filed in the United States District Courts for the District of Delaware and for the District of Maryland in March 2009, Abbott alleges that Lupin Pharmaceuticals and Lupin Limited’s proposed generic products infringe Abbott’s patents and seeks declaratory and injunctive relief.

 

21



 

Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds

 

(c)   Issuer Purchases of Equity Securities

 

Period

 

(a) Total
Number of
Shares (or
Units)
Purchased

 

(b) Average
Price Paid per
Share (or
Unit)

 

(c) Total Number
of Shares (or
Units) Purchased
as Part of
Publicly

Announced Plans
or Programs

 

(d) Maximum
Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet
Be Purchased Under
the Plans or
Programs

 

January 1, 2009 — January 31, 2009

 

10,401,479

(1)

$

54.664

 

10,000,000

 

$

4,444,954,828

(2)

February 1, 2009 — February 28, 2009

 

5,053,534

(1)

$

55.981

 

4,515,900

 

$

4,192,197,703

(2)

March 1, 2009 — March 31, 2009

 

58,976

(1)

$

47.278

 

0

 

$

4,192,197,703

(2)

Total

 

15,513,989

(1)

$

55.065

 

14,515,900

 

$

4,192,197,703

(2)

 

1.        These shares include:

 

(i)       the shares deemed surrendered to Abbott to pay the exercise price in connection with the exercise of employee stock options 386,979 in January, 523,134 in February, and 44,476 in March; and

 

(ii)      the shares purchased on the open market for the benefit of participants in the Abbott Laboratories, Limited Employee Stock Purchase Plan 14,500 in January, 14,500 in February, and 14,500 in March.

 

These shares do not include the shares surrendered to Abbott to satisfy tax withholding obligations in connection with the vesting of restricted stock or restricted stock units.

 

2.       On October 13, 2008, Abbott announced that its board of directors approved the purchase of up to $5 billion of its common shares, from time to time.

 

Item 6.          Exhibits

 

Incorporated by reference to the Exhibit Index included herewith.

 

22



 

SIGNATURE

 

Pursuant to the requirements of the Securities 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

 

 

 

 

 

 

 

 

 

By:

 

/s/ Thomas C. Freyman

 

 

 

Thomas C. Freyman,

 

 

 

Executive Vice President,

 

 

 

Finance and Chief Financial Officer

 

 

 

 

 

 

 

 

 

Date: May 5, 2009

 

 

 

 

23



 

EXHIBIT INDEX

 

Exhibit No.

 

Exhibit

 

 

 

3.1

 

*By-Laws of Abbott Laboratories, as amended and restated effective as of April 24, 2009, filed as Exhibit 3.1 to the Abbott Laboratories Current Report on Form 8-K dated February 20, 2009.

 

 

 

3.2

 

*By-Laws of Abbott Laboratories, as amended and restated effective as of February 20, 2009, filed as Exhibit 3.2 to the Abbott Laboratories Current Report on Form 8-K dated February 20, 2009.

 

 

 

4.1

 

*Indenture, dated as of June 22, 2004, between AMO and U.S. Bank National Association, as trustee (relating to the 2.50% Notes), filed as Exhibit 4.1 to the Abbott Laboratories Current Report on Form 8-K dated February 25, 2009.

 

 

 

4.2

 

*Supplemental Indenture, dated as of February 26, 2009, between AMO and U.S. Bank National Association, as trustee (relating to the 2.50% Notes), filed as Exhibit 4.2 to the Abbott Laboratories Current Report on Form 8-K dated February 25, 2009.

 

 

 

4.3

 

*Indenture, dated as of July 18, 2005, between AMO and U.S. Bank National Association, as trustee (relating to the 1.375% Notes), filed as Exhibit 4.3 to the Abbott Laboratories Current Report on Form 8-K dated February 25, 2009.

 

 

 

4.4

 

*Supplemental Indenture, dated as of February 26, 2009, between AMO and U.S. Bank National Association, as trustee (relating to the 1.375% Notes), filed as Exhibit 4.4 to the Abbott Laboratories Current Report on Form 8-K dated February 25, 2009.

 

 

 

4.5

 

*Indenture, dated as of June 13, 2006, between AMO and U.S. Bank National Association, as trustee (relating to the 3.25% Notes), filed as Exhibit 4.5 to the Abbott Laboratories Current Report on Form 8-K dated February 25, 2009.

 

 

 

4.6

 

*Supplemental Indenture, dated as of August 15, 2006, between AMO and U.S. Bank National Association, as trustee (relating to the 3.25% Notes), filed as Exhibit 4.6 to the Abbott Laboratories Current Report on Form 8-K dated February 25, 2009.

 

 

 

4.7

 

*Second Supplemental Indenture, dated as of February 26, 2009, between AMO and U.S. Bank National Association, as trustee (relating to the 3.25% Notes), filed as Exhibit 4.7 to the Abbott Laboratories Current Report on Form 8-K dated February 25, 2009.

 

24



 

10.1

 

*Amended and Restated Advanced Medical Optics, Inc. 2002 Incentive Compensation Plan, as amended, filed as Exhibit 4.3 to the Abbott Laboratories Registration Statement on Form S-8 dated March 20, 2009.**

 

 

 

10.2

 

*First Amendment to Amended and Restated Advanced Medical Optics, Inc. 2002 Incentive Compensation Plan, filed as Exhibit 4.4 to the Abbott Laboratories Registration Statement on Form S-8 dated March 20, 2009.**

 

 

 

10.3

 

*2004 Stock Incentive Plan, as amended and restated, filed as Exhibit 4.5 to the Abbott Laboratories Registration Statement on Form S-8 dated March 20, 2009.**

 

 

 

10.4

 

*Advanced Medical Optics, Inc. 2005 Incentive Compensation Plan, filed as Exhibit 4.6 to the Abbott Laboratories Registration Statement on Form S-8 dated March 20, 2009.**

 

 

 

10.5

 

*VISX, Incorporated 2001 Nonstatutory Stock Option Plan, filed as Exhibit 4.7 to the Abbott Laboratories Registration Statement on Form S-8 dated March 20, 2009.**

 

 

 

10.6

 

*VISX, Incorporated 2000 Stock Plan, filed as Exhibit 4.8 to the Abbott Laboratories Registration Statement on Form S-8 dated March 20, 2009.**

 

 

 

10.7

 

*VISX, Incorporated 1995 Director Option and Stock Deferral Plan, as amended and restated, filed as Exhibit 4.9 to the Abbott Laboratories Registration Statement on Form S-8 dated March 20, 2009.**

 

 

 

10.8

 

*VISX, Incorporated 1995 Stock Plan, as amended, filed as Exhibit 4.10 to the Abbott Laboratories Registration Statement on Form S-8 dated March 20, 2009.**

 

 

 

10.9

 

Abbott Laboratories Non-Employee Directors’ Fee Plan, as amended and restated effective as of April 24, 2009.**

 

 

 

10.10

 

Compensation Arrangements.**

 

 

 

10.11

 

The Abbott Laboratories 1996 Incentive Stock Program, as amended and restated through the 6th Amendment February 20, 2009.**

 

 

 

10.12

 

*Form of Performance Restricted Stock Agreement for an award of performance restricted stock under Section 10 of the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 20, 2009, filed as Exhibit 10.1 to the Abbott Laboratories Current Report on Form 8-K dated February 20, 2009.**

 

25



 

10.13

 

*Form of Performance Restricted Stock Agreement for an award of performance restricted stock under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 20, 2009, filed as Exhibit 10.2 to the Abbott Laboratories Current Report on Form 8-K dated February 20, 2009.**

 

 

 

10.14

 

*Form of Non-Qualified Stock Option Agreement for an award of non-qualified stock options under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 20, 2009, filed as Exhibit 10.3 to the Abbott Laboratories Current Report on Form 8-K dated February 20, 2009.**

 

 

 

10.15

 

*Form of Non-Qualified Replacement Stock Option Agreement for an award of non-qualified replacement stock options under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 20, 2009, filed as Exhibit 10.4 to the Abbott Laboratories Current Report on Form 8-K dated February 20, 2009.**

 

 

 

10.16

 

*Form of Restricted Stock Agreement for an award of restricted stock under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 20, 2009 (ratable vesting), filed as Exhibit 10.5 to the Abbott Laboratories Current Report on Form 8-K dated February 20, 2009.**

 

 

 

10.17

 

*Form of Restricted Stock Agreement for an award of restricted stock under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 20, 2009 (cliff vesting), filed as Exhibit 10.6 to the Abbott Laboratories Current Report on Form 8-K dated February 20, 2009.**

 

 

 

10.18

 

*Form of Restricted Stock Unit Agreement for an award of restricted stock units under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 20, 2009, filed as Exhibit 10.7 to the Abbott Laboratories Current Report on Form 8-K dated February 20, 2009.**

 

 

 

10.19

 

*Form of Non-Employee Director Non-Qualified Replacement Stock Option Agreement for an award of non-qualified replacement stock options under the Abbott Laboratories 1996 Incentive Stock Program granted on or after February 20, 2009, filed as Exhibit 10.8 to the Abbott Laboratories Current Report on Form 8-K dated February 20, 2009.**

 

 

 

12

 

Statement re: computation of ratio of earnings to fixed charges.

 

 

 

31.1

 

Certification of Chief Executive Officer Required by Rule 13a-14(a) (17 CFR 240.13a-14(a)).

 

 

 

31.2

 

Certification of Chief Financial Officer Required by Rule 13a-14(a) (17 CFR 240.13a-14(a)).

 

26



 

Exhibits 32.1 and 32.2 are furnished herewith and should not be deemed to be “filed” under the Securities Exchange Act of 1934.

 

 

 

32.1

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 


*             Incorporated herein by reference.  Commission file number 1-2189.

**           Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto.

 

27


Exhibit 10.9

 

Amended and Restated effective April 24, 2009

 

ABBOTT LABORATORIES NON-EMPLOYEE DIRECTORS’ FEE PLAN

 

SECTION 1.
PURPOSE

 

ABBOTT LABORATORIES NON-EMPLOYEE DIRECTORS’ FEE PLAN - referred to below as the “Plan” - has been established by ABBOTT LABORATORIES - - referred to below as the “Company” - to attract and retain as members of its Board of Directors persons who are not full-time employees of the Company or any of its subsidiaries but whose business experience and judgment are a valuable asset to the Company and its subsidiaries.

 

SECTION 2.
DIRECTORS COVERED

 

As used in the Plan, the term “Director” means any person who is elected to the Board of Directors of the Company in April, 1962 or at any time thereafter, and is not a full-time employee of the Company or any of its subsidiaries.

 

SECTION 3.
FEES PAYABLE TO DIRECTORS

 

3.1           Each Director shall be entitled to a deferred monthly fee of Nine Thousand Five Hundred Dollars ($9,500.00) for each calendar month or portion thereof (excluding the month in which he is first elected a Director) that he holds such office with the Company.

 

3.2           A Director who serves as Chairman of the Executive Committee of the Board of Directors shall be entitled to a deferred monthly fee of One Thousand Six Hundred Dollars ($1,600.00) for each calendar month or portion thereof (excluding the month in which he is first elected to such position) that he holds such position.

 

3.3           Audit Committee Fees

 

(a)                                  A Director who serves as Chairman of the Audit Committee of the Board of Directors shall be entitled to a deferred monthly fee of One Thousand Five Hundred Dollars ($1,500.00) for each calendar month or portion thereof (excluding the month in which he is first elected to such position) that he holds such position.

 

(b)                                 Each Director who serves on the Audit Committee of the Board of Directors (other than the Chairman of the Audit Committee) shall be entitled to a deferred monthly fee of Five Hundred Dollars ($500.00) for each calendar month or portion thereof (excluding the month in which he is first elected to such position) that he holds such position.

 



 

3.4           A Director who serves as Chairman of the Compensation Committee of the Board of Directors shall be entitled to a deferred monthly fee of One Thousand Dollars ($1,000.00) for each calendar month or portion thereof (excluding the month in which he is first elected to such position) that he holds such position.

 

3.5           A Director who serves as Chairman of the Nominations Committee of the Board of Directors shall be entitled to a deferred monthly fee of One Thousand Dollars ($1,000.00) for each calendar month or portion thereof (excluding the month in which he is first elected to such position) that he holds such position.

 

3.6           A Director who serves as Chairman of any other Committee created by this Board of Directors shall be entitled to a deferred monthly fee of One Thousand Dollars ($1,000.00) for each calendar month or portion thereof (excluding the month in which he is first elected to such position) that he holds such position.

 

3.7           A Director’s Deferred Fee Account shall be credited with interest annually. During the calendar years 1968 and prior, the rate of interest credited to deferred fees shall be four (4) percent per annum. During the calendar years 1969 through 1992, the rate of interest credited to deferred fees shall be the average of the prime rates being charged by the two largest commercial banks in the City of Chicago as of the end of the month coincident with or last preceding the date upon which said interest is so credited. During the calendar years 1993 through 2007, the rate of interest credited to deferred fees shall be equal to: (a) the average of the prime rates being charged by the two largest commercial banks in the City of Chicago as of the end of the month coincident with or last preceding the date upon which said interest is so credited; plus (b) two hundred twenty-five (225) basis points.  For the calendar year 2008 and subsequent years, the rate of interest credited to deferred fees shall be equal to: (a) the average of the “prime rate” of interest published by The Wall Street Journal (Mid-West Edition) or comparable successor quotation service on the first business day of January and the last business day of each month of the fiscal year; plus (b) two hundred twenty-five (225) basis points.  For purposes of this provision, the term “deferred fees” shall include “deferred monthly fees,” and “deferred meeting fees,” and shall also include any such interest credited thereon.

 

3.8           For purposes of Sections 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6, the automatic deferral of the fees specified therein shall be subject to a Director’s election to receive such fees currently pursuant to Section 4.1 or Section 9.1 of the Plan.

 

SECTION 4.
PAYMENT OF DIRECTORS’ FEES

 

4.1           Any Director may, by written notice filed with the Secretary of the Company no later than December 31 in a calendar year, elect to receive current payment of all or any portion of the monthly and meeting fees earned by him in calendar years subsequent to the calendar year in which he files such notice, in which case such fees shall not be deferred but shall be paid quarterly as earned and no interest shall be credited thereon.  Such election shall be irrevocable as of December 31 of the year prior to the year in which the fees will be earned.  Notwithstanding the timing requirements described above, an individual who is newly elected as a Director may make the election described above by filing it with the Secretary of the Company

 

2



 

within the thirty (30) day period immediately following the date he or she first becomes a Director eligible to participate in the Plan (and all plans that would be aggregated with the Plan pursuant to Treasury Regulation §1.409A-1(c)(2)(i)), provided, that the compensation subject to such election relates solely to services performed after the date of such election and provided further, that such election shall become irrevocable on the thirtieth day following the date he or she first becomes a Director eligible to participate in the Plan.  In no event shall the fees subject to an election under this Section 4.1 be paid later than the last day of the “applicable 2 ½ month period”, as such term is defined in Treasury Regulation § 1.409A-1(b)(4)(i)(A).  Any Director who has previously provided notice pursuant to this Section 4.1 may, by written notice filed with the Secretary of the Company no later than December 31 in a calendar year, elect to defer payment of all or a portion of the monthly and meeting fees earned by him in calendar years subsequent to the year in which he files such notice, in which case such fees shall be paid to him in accordance with Section 4.2 below.

 

4.2           A Director’s deferred fees earned pursuant to the Plan shall commence to be paid on the first day of the calendar month next following the earlier of his death or his attainment of age sixty-five (65) if he is not then serving as a Director, or the termination of his service as a Director if he serves as a Director after the attainment of age sixty-five (65).

 

4.3           A Director’s deferred fees that have commenced to be payable pursuant to Section 4.2 shall be payable in annual installments in the order in which they shall have been deferred (i.e., the deferred fees and earnings thereon for the earliest year of service as a Director will be paid on the date provided for in Section 4.2, the deferred fees for the next earliest year of service as a Director will be paid on the anniversary of the payment of the first installment, etc.).

 

4.4           A Director’s deferred fees shall continue to be paid until all deferred fees which he is entitled to receive under the Plan shall have been paid to him (or, in case of his death, to his beneficiary).

 

4.5           If a Director incurs a termination of service as a Director within two (2) years following the occurrence of a Change in Control (as defined below), the aggregate unpaid balance of such Director’s deferred fees plus all unpaid interest credited thereon, shall be paid to such Director in a lump sum within thirty (30) days following the date of such termination of service; provided, however, that if such Change in Control does not constitute a “change in control event” (as defined in Treasury Regulation § 1.409A-3(i)(5)), then the aggregate unpaid balance of such Director’s deferred fees shall be paid in accordance with Sections 4.2 and 4.3.

 

Notwithstanding any other provision of the Plan, if a Director has made the alternative election set forth in Section 9.1, and if such Director incurs a termination of service as a Director within five (5) years following the occurrence of a Change in Control, the aggregate unpaid balance of such Director’s fees deposited to the Director’s Grantor Trust (as defined below) plus all unpaid interest credited thereon, shall be paid to such Director from the Director’s Grantor Trust in a lump sum within thirty (30) days following the date of such termination of service.

 

4.6           A “Change in Control” shall be deemed to have occurred on the earliest of the following dates:

 

3



 

(i)                                     the date any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 20% or more of the combined voting power of the Company’s then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (a) of paragraph (iii) below; or

 

(ii)                                  the date the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board of Directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board of Directors or nomination for election by the Company’s shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or

 

(iii)                               the date on which there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or other entity, other than (a) a merger or consolidation (I) immediately following which the individuals who comprise the Board of Directors immediately prior thereto constitute at least a majority of the Board of Directors of the Company, the entity surviving such merger or consolidation or, if the Company or the entity surviving such merger or consolidation is then a subsidiary, the ultimate parent thereof and (II) which results in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 50% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (b) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the

 

4



 

Company or its Affiliates) representing 20% or more of the combined voting power of the Company’s then outstanding securities; or

 

(iv)                              the date the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets, other than a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by shareholders of the Company, in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, in substantially the same proportions as their ownership of the Company immediately prior to such sale.

 

Notwithstanding the foregoing, a “Change in Control” shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions.

 

For purposes of this Plan: “Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act; “Beneficial Owner” shall have the meaning set forth in Rule 13d-3 under the Exchange Act; “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time; and “Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company.

 

4.7           A “Potential Change in Control” shall exist during any period in which the circumstances described in paragraphs (i), (ii), (iii) or (iv), below, exist (provided, however, that a Potential Change in Control shall cease to exist not later than the occurrence of a Change in Control):

 

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(i)                                     The Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control, provided that a Potential Change in Control described in this paragraph (i) shall cease to exist upon the expiration or other termination of all such agreements.

 

(ii)                                  Any Person (without regard to the exclusions set forth in subsections (i) through (iv) of such definition) publicly announces an intention to take or to consider taking actions the consummation of which would constitute a Change in Control; provided that a Potential Change in Control described in this paragraph (ii) shall cease to exist upon the withdrawal of such intention, or upon a determination by the Board of Directors that there is no reasonable chance that such actions would be consummated.

 

(iii)                               Any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 10% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company’s then outstanding securities (not including any securities beneficially owned by such Person which are or were acquired directly from the Company or its Affiliates).

 

(iv)                              The Board of Directors adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control exists; provided that a Potential Change in Control described in this paragraph (iv) shall cease to exist upon a determination by the Board of Directors that the reasons that gave rise to the resolution providing for the existence of a Potential Change in Control have expired or no longer exist.

 

4.8           The provisions of Sections 4.5, 4.6, 4.7 and this Section 4.8 may not be amended or deleted, nor superseded by any other provision of this Plan, (i) during the pendency of a Potential Change in Control and (ii) during the period beginning on the date of a Change in Control and ending on the date five (5) years following such Change in Control.

 

SECTION 5.
DIRECTORS’ RETIREMENT BENEFIT

 

5.1           Effective April 30, 1998, each of the persons serving as a Director on December 12, 1997 shall be credited with a retirement benefit of $4,167 a month for 120 months of continuous service and no additional retirement benefits shall accrue under the Plan. Each of the persons serving as a Director on December 12, 1997 may elect: (a) to have his or her retirement benefit under the Plan treated as provided in Section 5.2 of the Plan; or (b) to have the present value of that retirement benefit credited to an unfunded phantom stock account and converted into phantom stock units based on the closing price of the Company’s common stock on April 30, 1998, with those phantom stock units then being credited with the same cash and stock dividends,

 

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stock splits and other distributions and adjustments as are paid on the Company’s common stock. The phantom stock units shall be payable to the Director in annual payments commencing on the first day of the calendar month next following the earlier of the Director’s death or termination of service as a Director, in an amount determined by the closing price of the Company’s common stock on the first business day preceding the payment date. Unless the retirement benefit is terminated, the annual benefit shall continue to be paid on the anniversary of the day on which the first such retirement benefit payment was made, until the benefit has been paid for ten years, or until the death of the Director or surviving spouse, if earlier. If a Director should die with such benefit still in effect, prior to receipt of all payments due hereunder, the annual benefit shall continue to be paid to the surviving spouse of such Director until all payments due hereunder have been made or until the death of the surviving spouse, if earlier.

 

5.2           Any person serving as a Director on December 12, 1997 who elects to have his or her retirement benefit paid pursuant to this Section 5.2 shall receive a monthly benefit equal to $4,167. Payment of the monthly benefit shall commence on the first day of the calendar month next following the earlier of the Director’s death or termination of service as a Director. Unless the retirement benefit is terminated, the monthly benefit shall continue to be paid on the first day of each calendar month thereafter, until the benefit has been paid for one hundred and twenty (120) months, or until the death of the Director or surviving spouse, if earlier. If a Director should die with such benefit still in effect, prior to receipt of all payments due hereunder, the monthly benefit shall continue to the surviving spouse of such Director until all payments due hereunder have been made or until the death of the surviving spouse, if earlier.

 

5.3           Directors who retired on or before December 12, 1997 will receive the form and amount of retirement benefit payable under the terms of the Plan in effect at the time of their retirement.

 

5.4           Each Director who is granted a retirement benefit hereunder shall make him or herself available for such consultation with the Board of Directors or any committee or member thereof, as may be reasonably requested from time to time by the Chairman of the Board of Directors, following such Director’s termination of service as a Director. The Company shall reimburse each such Director for all reasonable travel, lodging and subsistence expenses incurred by the Director at the request of the Company in rendering such consultation. The Company may terminate the retirement benefit if the Director should fail to render such consultation, unless prevented by disability or other reason beyond the Director’s control.

 

5.5           It is recognized that during a Director’s period of service as a Director and as a consultant hereunder, a Director will acquire knowledge of the affairs of the Company and its subsidiaries, the disclosure of which would be contrary to the best interests of the Company. Accordingly, the Company may terminate the retirement benefit if, without the express consent of the Company, the Director accepts election to the Board of Directors of, acquires a partnership or proprietary interest in, or renders services as an employee or consultant to, any business entity which is engaged in substantial competition with the Company or any of its subsidiaries.

 

5.6           An individual will be considered a Director’s “surviving spouse” for purposes of Section 5 only if the Director and such individual were married in a religious or civil ceremony

 

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recognized under the laws of the state where the marriage was contracted and the marriage remained legally effective at the date of the Director’s death.

 

SECTION 6.
CONVERSION TO COMMON STOCK UNITS

 

6.1           Any Director who is then serving as a director may, by written notice filed with the Secretary of the Company, irrevocably elect to have all or any portion of deferred fees previously earned but not yet paid, transferred from the Director’s Deferred Fee Account to a Stock Account established under this Section 6. Any election as to a portion of such fees shall be expressed as a percentage and the same percentage shall be applied to all such fees regardless of the calendar year in which earned or to all deferred fees earned in designated calendar years, as specified by the Director. A Director may make no more than one notional investment election under this Section 6.l in any calendar year. All such elections may apply only to deferred fees for which an election has not previously been made and shall be irrevocable.

 

6.2           Any Director may, by written notice filed with the Secretary of the Company, elect to have all or any portion of deferred fees earned subsequent to the date such notice is filed credited to a Stock Account established under this Section 6. Fees covered by such election shall be credited to such account at the end of each calendar quarter in, or for which, such fees are earned. Such election may be revoked or modified by such Director, by written notice filed with the Secretary of the Company, as to deferred fees to be earned in calendar years subsequent to the calendar year such notice is filed, but shall be irrevocable as to deferred fees earned prior to such year.

 

6.3           Deferred fees credited to a Stock Account under Section 6.1 shall be converted to Common Stock Units by dividing the deferred fees so credited by the closing price of common shares of the Company on the date the notice of election under Section 6 is received by the Company (or the next business day, if there are no sales on such date) as reported on the New York Stock Exchange Composite Reporting System. Deferred fees credited to a Stock Account under Section 6.2 shall be converted to Common Stock Units by dividing the deferred fees so credited by the closing price of common shares of the Company as of the last business day of the calendar quarter for which the credit is made, as reported on the New York Stock Exchange Composite Reporting System.

 

6.4           Each Common Stock Unit shall be credited with (or adjusted for) the same cash and stock dividends, stock splits and other distributions and adjustments as are received by or applicable to one common share of the Company. All cash dividends and other cash distributions credited to Common Stock Units shall be converted to additional Common Stock Units by dividing each such dividend or distribution by the closing price of common shares of the Company on the payment date for such dividend or distribution, as reported by the New York Stock Exchange Composite Reporting System.

 

6.5           The value of the Common Stock Units credited each Director shall be paid to the Director in cash on the dates specified in Section 4.3 (or, if applicable, Section 4.5). The amount of each payment shall be determined by multiplying the Common Stock Units payable on each date specified in Section 4.3 (or, if applicable, Section 4.5) by the closing price of common

 

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shares of the Company on the day prior to the payment date (or the next preceding business day if there are no sales on such date), as reported by the New York Stock Exchange Composite Reporting System.

 

SECTION 7.
MISCELLANEOUS

 

7.1           Each Director or former Director entitled to payment of deferred fees hereunder, from time to time may name any person or persons (who may be named contingently or successively) to whom any deferred Director’s fees earned by him and payable to him are to be paid in case of his death before he receives any or all of such deferred Director’s fees.  Each designation will revoke all prior designations by the same Director or former Director, shall be in a form prescribed by the Company, and will be effective only when filed by the Director or former Director in writing with the Secretary of the Company during his lifetime. If a deceased Director or former Director shall have failed to name a beneficiary in the manner provided above, or if the beneficiary named by a deceased Director or former Director dies before him or before payment of all the Director’s or former Director’s deferred Directors’ fees, the Company, in its discretion, may direct payment of the remaining installments required by Section 4.3 to either:

 

(a)           any one or more or all of the next of kin (including the surviving spouse) of the Director or former Director, and in such proportions as the Company determines; or

 

(b)           the legal representative or representatives of the estate of the last to die of the Director or former Director and his last surviving beneficiary.

 

The person or persons to whom any deceased Director’s or former Director’s deferred Directors’ fees are payable under this Section will be referred to as his “beneficiary.”

 

7.2           Establishment of the Plan and coverage thereunder of any person shall not be construed to confer any right on the part of such person to be nominated for reelection to the Board of Directors of the Company, or to be reelected to the Board of Directors.

 

7.3           Payment of deferred Directors’ fees will be made only to the person entitled thereto in accordance with the terms of the Plan, and deferred Directors’ fees are not in any way subject to the debts or other obligations of persons entitled thereto, and may not be voluntarily or involuntarily sold, transferred or assigned. When a person entitled to a payment under the Plan is under legal disability or, in the Company’s opinion, is in any way incapacitated so as to be unable to manage his financial affairs, the Company may direct that payment be made to such person’s legal representative, or to a relative or friend of such person for his benefit. Any payment made in accordance with the preceding sentence shall be in complete discharge of the Company’s obligation to make such payment under the Plan.

 

7.4           Any action required or permitted to be taken by the Company under the terms of the Plan shall be by affirmative vote of a majority of the members of the Board of Directors then in office.

 

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7.5           Notwithstanding anything in the Plan to the contrary, any amounts under the Plan that were earned and vested before January 1, 2005 (as determined in accordance with Code Section 409A) with respect to a Director who retired before January 1, 2005 (“Grandfathered Amounts”) shall be subject to the terms and conditions of the Plan as administered and as in effect on December 31, 2004.  Amendments made to the Plan pursuant to this amendment and restatement or otherwise shall not affect the Grandfathered Amounts unless expressly provided for in the amendment.  The terms and conditions applicable to the Grandfathered Amounts are set forth in Exhibit A attached hereto.

 

7.6           To the extent applicable, it is intended that the Plan comply with the provisions of Section 409A of the Code.  The Plan will be administered and interpreted in a manner consistent with this intent, and any provision that would cause the Plan to fail to satisfy Section 409A of the Code will have no force and effect until amended to comply therewith (which amendment may be retroactive to the extent permitted by Section 409A of the Code).  Notwithstanding anything contained herein to the contrary, for all purposes of this Plan, a Director shall not be deemed to have had a termination of service as a Director until the Director has incurred a separation from service as defined in Treasury Regulation §1.409A-1(h) and, to the extent required to avoid accelerated taxation and/or tax penalties under Code Section 409A and applicable guidance issued thereunder, payment of the amounts payable under the Plan that would otherwise be payable during the six-month period after the date of termination shall instead be paid on the first business day after the expiration of such six-month period, plus interest thereon, at a rate equal to the rate specified in Section 9.8 (to the extent that such interest is not already provided to the participant under Section 9.10), from the respective dates on which such amounts would otherwise have been paid until the actual date of payment.  In addition, for purposes of the Plan, each amount to be paid and each installment payment shall be construed as a separate identified payment for purposes of Section 409A of the Code.

 

SECTION 8.
AMENDMENT AND DISCONTINUANCE

 

While the Company expects to continue the Plan, it must necessarily reserve, and does hereby reserve, the right to amend or discontinue the Plan at any time; provided, however, that any amendment or discontinuance of the Plan shall be prospective in operation only, and shall not affect the payment of any deferred Directors’ fees theretofore earned by any Director, or the conditions under which any such fees are to be paid or forfeited under the Plan. Any discontinuance of the Plan by the Company shall comply with the requirements of Section 409A of the Code.

 

SECTION 9.
ALTERNATE PAYMENT OF FEES

 

9.1           By written notice filed with the Secretary of the Company prior to each calendar year beginning after December 31, 1988, a Director may elect to receive all or a portion of his fees earned in the following calendar year in accordance with the provisions of Section 9.  An election under this Section 9.1 shall become irrevocable as of December 31 of the calendar year prior to the year in which such monthly and meeting fees will be earned (or, in the case of a new Director, on the 30th day following the Director’s first participation in the Plan and all plans that

 

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would be aggregated with the Plan pursuant to Treasury Regulation §1.409A-1(c)(2)(i), provided, that the compensation subject to such election relates solely to services performed after the date of such election).

 

9.2           If payment of a Director’s fees is made pursuant to Section 9.1, such fees shall not be deferred and a portion of such fees shall be paid currently in cash for the Director directly to a “Grantor Trust” established by the Director, provided such trust is in a form which the Company determines to be substantially similar to the trust attached to this plan as Exhibit B; and the balance of the fees shall be paid currently in cash directly to the Director, provided that the payment made directly to the Director shall equal the aggregate federal, state and local individual income taxes attributable to the fees paid pursuant to this Section 9.2 (determined in accordance with Section 9.14).  In no event shall such fees be paid to the Grantor Trust or directly to the Director later than the last day of the “applicable 2 ½ month period”, as such term is defined in Treasury Regulation § 1.409A-1(b)(4)(i)(A).

 

9.3           The Company will establish and maintain four separate accounts in the name of each Director who has made an election under Section 9.1 as follows: a “Pre-Tax Fee Account”, an “After-Tax Fee Account”, a “Pre-Tax Stock Account” and an “After-Tax Stock