ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Abbott Laboratories is an Illinois corporation, incorporated in 1900. The Company's* principal business is the discovery, development, manufacture, and sale of a broad and diversified line of health care products and services.
FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS, GEOGRAPHIC AREAS, AND CLASSES OF SIMILAR PRODUCTS
Incorporated herein by reference is the footnote entitled "Industry Segment and Geographic Area Information" of the Consolidated Financial Statements in the Abbott Laboratories Annual Report for the year ended December 31, 1996 (1996 Annual Report), filed as an exhibit to this report. Also incorporated herein by reference is the text and table of sales by class of similar products included in the section of the 1996 Annual Report captioned "Financial Review."
NARRATIVE DESCRIPTION OF BUSINESS
PHARMACEUTICAL AND NUTRITIONAL PRODUCTS
Included in this segment is a broad line of adult and pediatric pharmaceuticals and nutritionals. These products are sold primarily on the prescription or recommendation of physicians or other health care professionals. The segment also includes agricultural and chemical products, bulk pharmaceuticals, and consumer products.
Principal pharmaceutical and nutritional products include the anti-infectives clarithromycin, sold in the United States under the trademark Biaxin-Registered Trademark- and outside the United States primarily under the trademark Klacid-Registered Trademark-, and tosufloxacin, sold in Japan under the trademark Tosuxacin-Registered Trademark-, various forms of the antibiotic erythromycin, sold primarily as PCE-Registered Trademark- or polymer coated erythromycin, Erythrocin-Registered Trademark-, and E.E.S.-Registered Trademark-, and Norvir-Registered Trademark- , a protease inhibitor for the treatment of HIV infection; agents for the treatment of epilepsy and bipolar disorder, including Depakote-Registered Trademark-; a broad line of cardiovascular products, including Loftyl-Registered Trademark-, a vasoactive agent sold outside the United States; Hytrin-Registered Trademark-, used as an anti-hypertensive and for the treatment of benign prostatic hyperplasia; Abbokinase-Registered Trademark-, a thrombolytic drug; Survanta-Registered Trademark-, a bovine derived lung surfactant; various forms of prepared infant formula, including Similac-Registered Trademark-, Isomil-Registered Trademark-, Alimentum-Registered Trademark-, and Similac NeoCare-Registered Trademark-; and other medical and pediatric nutritionals, including Ensure-Registered Trademark-, Ensure Plus-Registered Trademark-, Ensure-Registered Trademark- High Protein, Ensure-Registered Trademark- Light, Jevity-Registered Trademark-, Glucerna-Registered Trademark-, Advera-Registered Trademark-, PediaSure-Registered Trademark-, Pedialyte-Registered Trademark-, Pulmocare-Registered Trademark- and Gain-Registered Trademark-. Consumer products include the dandruff shampoo Selsun Blue-Registered Trademark-; Murine-Registered Trademark- eye care and ear care products; and Tronolane-Registered Trademark- hemorrhoid medication. Agricultural, animal health, and chemical products include plant growth regulators, including ProGibb-Registered Trademark-; herbicides; larvicides, including VectoBac-Registered Trademark-; biologically derived insecticides, including DiPel-Registered Trademark- and XenTari-Registered Trademark-; and anti-infectives, including Saraflox-Registered Trademark- and Sarafin-Registered Trademark-.
Pharmaceutical and nutritional products are generally sold directly to retailers, wholesalers, health care facilities, and government agencies. In most cases, they are distributed from Company-owned distribution centers or public warehouses. Certain products are co-marketed with other companies. In
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* As used throughout the text of this report on Form 10-K, the term "Company" refers to Abbott Laboratories, an Illinois corporation, or Abbott Laboratories and its consolidated subsidiaries, as the context requires.
certain overseas countries, some of these products are marketed and distributed through distributors. Primary marketing efforts for pharmaceutical and nutritional products are directed toward securing the prescription or recommendation of the Company's brand of products by physicians or other health care professionals. In the United States managed care purchasers, for example health maintenance organizations (HMOs) and pharmacy benefit managers, are becoming increasingly important customers. Competition is generally from other broad line and specialized health care manufacturers. A significant aspect of competition is the search for technological innovations. The introduction of new products by competitors and changes in medical practices and procedures can result in product obsolescence. In addition, the substitution of generic drugs for the brand prescribed has increased competitive pressures on pharmaceutical products.
Consumer products are promoted directly to the public by consumer advertising. These products are generally sold directly to retailers and wholesalers. Competitive products are sold by other diversified consumer and health care companies. Competitive factors include consumer advertising, scientific innovation, price, and availability of generic product forms.
Agricultural, animal health and chemical products are generally sold to agricultural distributors, animal health companies and pharmaceutical companies. Competition is primarily from chemical, animal health and agricultural companies. Competition is based on numerous factors depending on the market served. Competitive factors include product performance, quality, price, and technological advantages.
The Company is the leading worldwide producer of the antibiotic erythromycin. Ensure-Registered Trademark- is the leading medical nutritional worldwide. Similac-Registered Trademark- is a leading infant formula in the United States.
Under an agreement between the Company and Takeda Chemical Industries, Ltd. of Japan (Takeda), TAP Holdings Inc., (owned 50 percent by the Company and 50 percent by Takeda) together with its subsidiary, TAP Pharmaceuticals Inc. (TAP), develops and markets products in the United States. TAP markets Lupron-Registered Trademark-, an LH-RH analog, and Lupron Depot-Registered Trademark-, a sustained release form of Lupron-Registered Trademark- in the United States. Lupron-Registered Trademark- and Lupron Depot-Registered Trademark- are used for the palliative treatment of advanced prostate cancer, treatment of endometriosis and central precocious puberty, and for preoperative treatment of patients with anemia caused by uterine fibroids. TAP also markets Prevacid-Registered Trademark- (lansoprazole), a proton pump inhibitor, and has a co-promotion arrangement with the Company for Prevacid-Registered Trademark-. Prevacid-Registered Trademark- is indicated for short-term treatment of duodenal ulcers, esophagitis, and long-term treatment of Zollinger-Ellison syndrome, as well as the maintenance of healed erosive esophagitis. The Company also has marketing rights to certain Takeda products in select Latin American markets. The Company also markets Lupron-Registered Trademark-, Lupron Depot-Registered Trademark-, Lupron Depot-Ped-Registered Trademark-, and Prevacid-Registered Trademark- in select markets outside the United States.
HOSPITAL AND LABORATORY PRODUCTS
Hospital and laboratory products include diagnostic systems for blood banks, hospitals, commercial laboratories, alternate-care testing sites and consumers; intravenous and irrigation fluids and related administration equipment, including electronic drug delivery systems; drugs and drug delivery systems; anesthetics; critical care products; diagnostic imaging products; and other medical specialty products for hospitals and alternate-care sites. In the second and third quarters of 1996, the Company acquired, for cash, all of the outstanding shares of MediSense, Inc., a manufacturer of blood glucose self-testing systems.
The principal products included in this segment are parenteral (intravenous or I.V.) solutions and related administration equipment sold as the LifeCare-Registered Trademark- line of products, LifeShield-Registered Trademark- needleless products, and Venoset-Registered Trademark- products; irrigating fluids; parenteral nutritionals such as Aminosyn-Registered Trademark- and Liposyn-Registered Trademark-; Plum-Registered Trademark-, Omni-Flow-Registered Trademark- and Abbott AIM-Registered Trademark- electronic drug delivery systems; Abbott Pain Manager-Registered Trademark-; patient-controlled analgesia (PCA) systems; venipuncture products; hospital injectables including FirstChoice-Registered Trademark- generics; premixed I.V. drugs in various containers; ADD-Vantage-Registered Trademark- and Nutrimix-Registered Trademark- drug and nutritional delivery systems; Anne-Registered Trademark- anesthetic infusion systems; anesthetics, including Pentothal-Registered Trademark-, Amidate-Registered Trademark-, sevoflurane (sold in the United States and a few other markets as Ultane-Registered Trademark- and outside of the United States
primarily under the trademark Sevorane-Registered Trademark-), isoflurane and enflurane; Calcijex-Registered Trademark-, an injectable agent for treatment of bone disease in hemodialysis patients; critical care products including Opticath-Registered Trademark- and OptiQue-TM- advanced sensor catheters, Transpac-Registered Trademark- for hemodynamic monitoring, specialty cardiac products; and Faultless-Registered Trademark- rubber sundry products; diagnostic imaging products used in MRI (magnetic resonance imaging) and CT (computed tomography) imaging; screening tests for hepatitis B, HTLV-1, hepatitis B core, and hepatitis C; tests for detection of AIDS antibodies and antigens, and other infectious disease detection systems; tests for determining levels of abused drugs with the ADx-Registered Trademark- instrument; physiological diagnostic tests; cancer monitoring tests including tests for prostate specific antigen; laboratory tests and therapeutic drug monitoring systems such as TDx-Registered Trademark-; clinical chemistry systems such as Abbott Spectrum-Registered Trademark-, Abbott Spectrum-Registered Trademark- EPx-Registered Trademark-, Abbott Spectrum-Registered Trademark- CCx-TM-, and Quantum-TM-; AxSYM-Registered Trademark-, Commander-Registered Trademark-, IMx-Registered Trademark-, and Abbott Prism-Registered Trademark- lines of diagnostic instruments and chemical reagents used with immunoassay diagnostics; the LCx-Registered Trademark- amplified DNA probe system and reagents; Abbott Vision-Registered Trademark-, a desk-top blood analyzer; the Abbott TestPack-Registered Trademark- system for diagnostic testing; a full line of hematology systems and reagents known as the Cell-Dyn-Registered Trademark- series; and the MediSense line of blood glucose monitoring meters and test strips for diabetics including Precision Q.I.D.-TM-, the ExacTech-Registered Trademark-, the MediSense II-TM-, and the ExacTech RSG-TM-.
The Company markets hospital and laboratory products in the United States and many other countries. These products are generally distributed to wholesalers and directly to hospitals, laboratories, and physicians' offices from distribution centers maintained by the Company. Sales in the home infusion services market are also made directly to patients receiving treatment outside the hospital through marketing arrangements with hospitals and other health care providers. Overseas sales are made either directly to customers or through distributors, depending on the market served. Blood glucose monitoring meters and test strips for diabetics are sold over the counter to consumers.
The hospital and laboratory products industry segment is highly competitive, both in the United States and overseas. This segment is subject to competition in technological innovation, price, convenience of use, service, instrument warranty provisions, product performance, long-term supply contracts, and product potential for overall cost effectiveness and productivity gains. Products in this segment can be subject to rapid product obsolescence. The Company has benefitted from technological advantages of certain of its current products; however, these advantages may be reduced or eliminated as competitors introduce new products.
The Company is one of the leading domestic manufacturers of I.V. and irrigating solutions and related administration equipment, parenteral nutritional products, anesthesia products, and drug delivery systems. It is also the worldwide leader in in vitro diagnostic products, including thyroid tests, therapeutic drug monitoring, cancer monitoring tests, diagnostic tests for the detection of hepatitis and AIDS antibodies, and immunodiagnostic instruments.
INFORMATION WITH RESPECT TO THE COMPANY'S BUSINESS IN GENERAL
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company purchases, in the ordinary course of business, necessary raw materials and supplies essential to the Company's operations from numerous suppliers in the United States and overseas. There have been no recent availability problems or significant supply shortages.
PATENTS, TRADEMARKS, AND LICENSES
The Company is aware of the desirability for patent and trademark protection for its products. Accordingly, where possible, patents and trademarks are sought and obtained for the Company's products in the United States and all countries of major marketing interest to the Company. The Company owns, has applications pending for, and is licensed under a substantial number of patents. Principal trademarks and the products they cover are discussed in the Narrative Description of Business on pages 1, 2 and 3. These, and various patents which expire during the period 1997 to 2017, in the aggregate, are believed to
be of material importance in the operation of the Company's business. The Company believes that no single patent, license, trademark (or related group of patents, licenses, or trademarks), except for those related to clarithromycin, is material in relation to the Company's business as a whole. The principal patents covering clarithromycin are licensed from Taisho Pharmaceutical Co., Ltd. of Tokyo, Japan. The Uruguay Round Agreements Act implemented the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in the United States. It appears that under the intellectual property provisions of GATT the patent on the clarithromycin compound is scheduled to expire in the United States in 2005.
SEASONAL ASPECTS, CUSTOMERS, BACKLOG, AND RENEGOTIATION
There are no significant seasonal aspects to the Company's business. The incidence of certain infectious diseases which occur at various times in different areas of the world does, however, affect the demand for the Company's anti-infective products. Orders for the Company's products are generally filled on a current basis, and order backlog is not material to the Company's business. No single customer accounted for sales equaling 10 percent or more of the Company's consolidated net sales. No material portion of the Company's business is subject to renegotiation of profits or termination of contracts at the election of the government.
RESEARCH AND DEVELOPMENT
The Company spent $1,204,841,000 in 1996, $1,072,745,000 in 1995, and $963,516,000 in 1994 on research to discover and develop new products and processes and to improve existing products and processes. The Company continues to concentrate research expenditures in pharmaceutical and diagnostic products.
ENVIRONMENTAL MATTERS
The Company believes that its operations comply in all material respects with applicable laws and regulations concerning environmental protection. Regulations under federal and state environmental laws impose stringent limitations on emissions and discharges to the environment from various manufacturing operations. The Company's capital and operating expenditures for pollution control in 1996 were approximately $29 million and $50 million, respectively. Capital and operating expenditures for pollution control are estimated to approximate $18 million and $50 million, respectively, in 1997.
The Company is participating as one of many potentially responsible parties in investigation and/or remediation at eleven locations in the United States and Puerto Rico under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as Superfund. The aggregate costs of remediation at these sites by all identified parties are uncertain but have been subject to widely ranging estimates totaling as much as several hundred million dollars. In many cases, the Company believes that the actual costs will be lower than these estimates, and the fraction for which the Company may be responsible is anticipated to be considerably less and will be paid out over a number of years. The Company expects to participate in the investigation or cleanup at these sites. The Company is also voluntarily investigating potential contamination at two Company-owned sites, and has initiated voluntary remediation at four sites, in cooperation with the Environmental Protection Agency (EPA) or similar state agencies.
While it is not feasible to predict with certainty the costs related to the previously described investigation and cleanup activities, the Company believes that such costs, together with other expenditures to maintain compliance with applicable laws and regulations concerning environmental protection, should not have a material adverse effect on the Company's financial position, cash flows, or results of operations.
EMPLOYEES
The Company employed 52,817 persons as of December 31, 1996.
REGULATION
The development, manufacture, sale, and distribution of the Company's products are subject to comprehensive government regulation, and the general trend is toward more stringent regulation. Government regulation by various federal, state, and local agencies, which includes detailed inspection of and controls over research and laboratory procedures, clinical investigations, and manufacturing, marketing, sampling, distribution, recordkeeping, storage and disposal practices, substantially increases the time, difficulty, and costs incurred in obtaining and maintaining the approval to market newly developed and existing products. Government regulatory actions can result in the seizure or recall of products, suspension or revocation of the authority necessary for their production and sale, and other civil or criminal sanctions.
Continuing studies of the utilization, safety, and efficacy of health care products and their components are being conducted by industry, government agencies, and others. Such studies, which employ increasingly sophisticated methods and techniques, can call into question the utilization, safety, and efficacy of previously marketed products and in some cases have resulted, and may in the future result, in the discontinuance of marketing of such products and give rise to claims for damages from persons who believe they have been injured as a result of their use.
The cost of human health care products continues to be a subject of investigation and action by governmental agencies, legislative bodies, and private organizations in the United States and other countries. In the United States, most states have enacted generic substitution legislation requiring or permitting a dispensing pharmacist to substitute a different manufacturer's version of a pharmaceutical product for the one prescribed. Federal and state governments continue to press efforts to reduce costs of Medicare and Medicaid programs, including restrictions on amounts agencies will reimburse for the use of products. Manufacturers must pay certain statutorily-prescribed rebates on Medicaid purchases for reimbursement on prescription drugs under state Medicaid plans. In addition, the federal government follows a diagnosis-related group (DRG) payment system for certain institutional services provided under Medicare or Medicaid. The DRG system entitles a health care facility to a fixed reimbursement based on discharge diagnoses rather than actual costs incurred in patient treatment, thereby increasing the incentive for the facility to limit or control expenditures for many health care products. The Veterans Health Care Act of 1992 requires manufacturers to extend additional discounts on pharmaceutical products to various federal agencies, including the Department of Veterans Affairs, Department of Defense, and Public Health Service entities and institutions.
In the United States, governmental cost-containment efforts have extended to the federally funded Special Supplemental Nutrition Program for Women, Infants, and Children (WIC). All states participate in WIC and have sought and obtained rebates from manufacturers of infant formula whose products are used in the program. All of the states have also conducted competitive bidding for infant formula contracts which require the use of specific infant formula products for the state WIC program. The Child Nutrition and WIC Reauthorization Act of 1989 requires all states participating in WIC to engage in competitive bidding or to use any other cost containment measure that yields savings equal to or greater than the savings generated by a competitive bidding system.
Governmental regulatory agencies now require prescription drug manufacturers to pay additional fees. Under the Prescription Drug User Fee Act of 1992, the Federal Food and Drug Administration (FDA) imposes substantial fees on various aspects of the approval, manufacture and sale of proprietary prescription drugs. Congress is now considering expanding user fees to generic drugs and medical devices. The Company believes that such legislation, if enacted, will add considerable expense for the Company.
The Company expects debate to continue during 1997 at both the federal and the state level over the availability, method of delivery, and payment for health care products and services. The Company believes that if legislation is enacted, it could have the effect of reducing prices, or reducing the rate of price increases, for medical products and services.
International operations are also subject to a significant degree of government regulation. Many countries, directly or indirectly through reimbursement limitations, control the selling price of most health care products. Furthermore, many developing countries limit the importation of raw materials and finished products. International regulations are having an impact on United States regulations, as well. The International Organization for Standardization (ISO) provides the criteria for regulating medical devices within the European Economic Community. The Company has made significant strides in gaining ISO 9000 and European Norm 46000 certification for facilities that manufacture devices for European markets. The FDA has announced that it will attempt to harmonize its regulation of medical devices with that of the ISO. Proposed changes to the FDA's regulations governing the manufacture of medical devices appear to encompass and exceed the ISO's approach to regulating medical devices. The FDA's adoption of the ISO's approach to regulation and other changes to the manner in which the FDA regulates medical devices will increase the cost of compliance with those regulations.
Efforts to reduce health care costs are also being made in the private sector. Health care providers have responded by instituting various cost reduction and containment measures.
It is not possible to predict the extent to which the Company or the health care industry in general might be affected by the matters discussed above.
INTERNATIONAL OPERATIONS
The Company markets products in approximately 130 countries through affiliates and distributors. Most of the products discussed in the preceding sections of this report are also sold outside the United States. In addition, certain products of a local nature and variations of product lines to meet local regulatory requirements and marketing preferences are manufactured and marketed to customers outside the United States. International operations are subject to certain additional risks inherent in conducting business outside the United States, including price and currency exchange controls, changes in currency exchange rates, limitations on foreign participation in local enterprises, expropriation, nationalization, and other governmental action.
ITEM 2.

ITEM 2. PROPERTIES
The Company's corporate offices are located at 100 Abbott Park Road, Abbott Park, Illinois 60064-3500. The locations of the Company's principal plants are listed below.
In addition to the above, the Company has manufacturing facilities in six other locations in the United States and Puerto Rico. Overseas manufacturing facilities are located in thirteen other countries. The Company's facilities are deemed suitable, provide adequate productive capacity, and are utilized at normal and acceptable levels.
In the United States and Puerto Rico, the Company owns five distribution centers. The Company also has twelve United States research and development facilities located at Abbott Park, Illinois; Ashland, Ohio; Columbus, Ohio (2 locations); Irving, Texas; Long Grove, Illinois; Madera, California; Morgan Hill, California; North Chicago, Illinois; Salt Lake City, Utah; Bedford, Massachusetts; and Santa Clara, California. Overseas, the Company has research and development facilities in Argentina, Australia, Canada, Germany, Italy, Japan, The Netherlands, Spain and the United Kingdom.
The corporate offices, and those principal plants in the United States that are listed above, are owned. The remaining manufacturing plants and all other facilities are owned or leased by the Company or subsidiaries of the Company.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and legal proceedings, including (as of January 31, 1997) 6 antitrust suits and 5 investigations in connection with the Company's sale and marketing of infant formula products, and 142 antitrust suits and two investigations in connection with the Company's pricing of prescription pharmaceuticals. The Company was also involved in a civil proceeding involving certain Illinois environmental laws.
The infant formula antitrust suits allege that the Company conspired with one or more of its competitors to fix prices, restrain trade and monopolize the market for infant formula products in violation of state and federal antitrust laws. The suits have been brought on behalf of individuals, the Nestle Food Company, and state government agencies and name the Company, certain other infant formula manufacturers and, in some instances, the American Academy of Pediatrics as defendants. The cases seek treble damages, civil penalties and other relief.
In its 10-Q for the quarter ended March 31, 1996, the Company reported that it had entered into a settlement agreement with plaintiffs involving 20 infant formula antitrust cases that had been pending in 17 states. Each individual state settlement, except Mississippi, is subject to approval by the individual state courts. Courts in Colorado, Florida, Illinois, Kansas, Kentucky, Minnesota, North Carolina, North Dakota, South Dakota, Tennessee, West Virginia and Wisconsin have now given their final approval to their respective state settlements. Courts have not yet given their final approval for the cases pending in Alabama, Michigan, and Nevada. The court in Louisiana denied final approval on January 22, 1997. An infant formula antitrust case is also pending in Federal District Court in Massachusetts. It purports to be a statewide consumer class action. The case that was pending in Federal District Court in Tallahassee, Florida was dismissed. On June 19, 1995, a jury in federal court in Los Angeles, California found in favor of the Company and the American Academy of Pediatrics in the infant formula antitrust case brought by Nestle Food Company. The Ninth Circuit Court of Appeals affirmed the jury's verdict on January 9, 1997. Nestle has the right to petition for certiorari to the United States Supreme Court. The shareholder derivative suit that had been pending in state court in Cook County, Illinois was dismissed on December 15, 1995. The shareholder derivative suit named all of the Company's present directors (other than Allen F. Jacobson) and a former executive officer as defendants and alleged that the defendants breached their fiduciary duty to the Company by permitting antitrust violations in connection with the Company's sale and marketing of infant formula products. The court dismissed this lawsuit. The appeal of the dismissal was voluntarily dismissed on May 22, 1996. The investigations are being conducted by the Attorneys General of the states of California, Connecticut, New York, Pennsylvania and Wisconsin.
As of January 31, 1997, 118 prescription pharmaceutical pricing antitrust cases were pending in federal court, 23 were pending in state courts, and 1 was pending in a District of Columbia court. The prescription pharmaceutical pricing antitrust suits allege that various pharmaceutical manufacturers have conspired to fix prices for prescription pharmaceuticals and/or to discriminate in pricing to retail pharmacies by providing discounts to mail-order pharmacies, institutional pharmacies and HMOs in violation of state and federal antitrust laws. The suits have been brought on behalf of individuals and retail pharmacies and name both the Company and certain other pharmaceutical manufacturers and pharmaceutical wholesalers and at least one mail-order pharmacy company as defendants. The cases seek treble damages, civil penalties, injunctive and other relief. The Company has filed or intends to file a response to each of the complaints denying all substantive allegations. The state cases are pending in the following state courts: Clarke County, Alabama; Yavapai County, Arizona; Alameda County, California; Monterey County, California; San Francisco County, California (8 cases); San Joaquin County, California; Dade County, Florida; Johnson County, Kansas; Cumberland County, Maine; Oakland County, Michigan; Hennepin County, Minnesota (2 cases); and Dane County and Washington County, Wisconsin. A case is also pending in the Superior Court for the District of Columbia. The cases which had been pending in New York County, New York and King County, Washington have been dismissed and are now on appeal. The case pending in Greene County, Alabama was removed to the U.S. District Court for the Northern District of Illinois. The plaintiffs have sought an interlocutory appeal of the removal order. The federal cases are pending in the United States District Court for the Northern District of Illinois under the Multidistrict Litigation Rules as IN RE: BRAND NAME PRESCRIPTION DRUG ANTITRUST LITIGATION, MDL 997. One of the cases which is pending in the MDL 997 litigation has been certified as a class action on behalf of certain retail pharmacies. A number of appeals to the Seventh Circuit Court of Appeals have been filed arising out of the MDL 997 litigation. All litigation in the U.S. District Court for the Northern District of Illinois is stayed pending the resolution of the appeals. The investigations are being conducted by the Attorney General of Illinois and the Federal Trade Commission.
On March 31, 1995, the Illinois Attorney General informed the Company that it proposed the assessment of a civil penalty of $750,000 in connection with an administrative enforcement action initiated in May of 1993 by the Illinois Environmental Protection Agency (the "IEPA") against the Company. The enforcement action alleged that the Company violated its waste water discharge permits and certain Illinois environmental laws at its North Chicago, Illinois facility. On May 9, 1996, the Company and the Illinois Attorney General concluded the action by executing a settlement agreement. Under the settlement agreement, the Company did not admit liability but did agree to pay a civil penalty of $400,000 to the IEPA, to pay an additional $200,000 to the state of Illinois for the purchase of land for use as a wetlands preserve, and to take further steps to reduce the chances of an unlawful discharge of waste water from the North Chicago, Illinois facility.
While it is not feasible to predict the outcome of such pending claims, proceedings, and investigations with certainty, management is of the opinion that their ultimate disposition should not have a material adverse effect on the Company's financial position, cash flows, or results of operations.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Officers of the Company are elected annually by the board of directors at the first meeting held after the annual shareholders meeting. Each officer holds office until a successor has been duly elected and qualified or until the officer's death, resignation, or removal. Vacancies may be filled at any meeting of the board. Any officer may be removed by the board of directors when, in its judgment, removal would serve the best interests of the Company.
Current corporate officers, and their ages as of February 14, 1997, are listed below. The officers' principal occupations and employment from January 1992 to the present and the dates of their first election as officers of the Company are also shown. Unless otherwise stated, employment was by the Company for the period indicated. There are no family relationships between any corporate officers or directors.
DUANE L. BURNHAM**, 55
1992 to present -- Chairman of the Board and Chief Executive Officer, and Director.
Elected Corporate Officer -- 1982.
THOMAS R. HODGSON**, 55
1992 to present -- President and Chief Operating Officer, and Director.
Elected Corporate Officer -- 1980.
JOY A. AMUNDSON**, 42
1992 to 1994 -- Vice President, Corporate Hospital Marketing.
1994 to 1995 -- Vice President, HealthSystems.
1995 to present -- Senior Vice President, Chemical and Agricultural Products.
Elected Corporate Officer -- 1990.
PAUL N. CLARK**, 50
1992 to present -- Senior Vice President, Pharmaceutical Operations.
Elected Corporate Officer -- 1985.
GARY P. COUGHLAN**, 52
1992 to present -- Senior Vice President, Finance and Chief Financial Officer.
Elected Corporate Officer -- 1990.
JOSE M. DE LASA**, 55
1992 to 1994 -- Vice President and Associate General Counsel, Bristol-Myers Squibb Company (Health and personal care products company).
1994 -- Vice President, Secretary and Associate General Counsel, Bristol-Myers Squibb Company.
1994 to present -- Senior Vice President, Secretary and General Counsel.
Elected Corporate Officer -- 1994.
JOHN G. KRINGEL**, 57
1992 to present -- Senior Vice President, Hospital Products.
Elected Corporate Officer -- 1981.
THOMAS M. MCNALLY**, 49
1992 to 1993 -- Senior Vice President, Chemical and Agricultural Products.
1993 to present -- Senior Vice President, Ross Products.
Elected Corporate Officer -- 1989.
ROBERT L. PARKINSON, JR.**, 46
1992 to 1993 -- Vice President, European Operations.
1993 to 1995 -- Senior Vice President, Chemical and Agricultural Products.
1995 to present -- Senior Vice President, International Operations.
Elected Corporate Officer -- 1989.
ELLEN M. WALVOORD**, 57
1992 to 1995 -- Vice President, Investor Relations and Public Affairs.
1995 to present -- Senior Vice President, Human Resources.
Elected Corporate Officer -- 1991.
MILES D. WHITE**, 41
1992 -- Divisional Vice President and General Manager, Hospital Laboratory Sector.
1992 to 1993 -- Divisional Vice President and General Manager, Diagnostic Systems and Operations.
1993 to 1994 -- Vice President, Diagnostic Systems and Operations.
1994 to present -- Senior Vice President, Diagnostic Operations.
Elected Corporate Officer -- 1993.
CATHERINE V. BABINGTON**, 44
1992 to 1995 -- Director, Corporate Communications.
1995 to present -- Vice President, Investor Relations and Public Affairs.
Elected Corporate Officer -- 1995.
PATRICK J. BALTHROP, 40
1992 to 1995 -- Divisional Vice President and Sector General Manager, Diagnostic Products.
1995 to 1996 -- Divisional Vice President and General Manager, U.S. and Canada, Diagnostic Products.
1996 to present -- Vice President, Diagnostic Operations, U.S. and Canada.
Elected Corporate Officer -- 1996.
MARK E. BARMAK, 55
1992 to 1995 -- Divisional Vice President and Associate General Counsel, Litigation.
1995 to present -- Vice President, Litigation and Government Affairs.
Elected Corporate Officer -- 1995.
CHRISTOPHER B. BEGLEY, 44
1992 to 1993 -- Divisional Vice President and General Manager, Hospital Products Business Sector.
1993 to 1996 -- Vice President, Hospital Products Business Sector.
1996 to present -- Vice President, MediSense Operations.
Elected Corporate Officer -- 1993.
THOMAS D. BROWN, 48
1992 -- Divisional Vice President and General Manager, Western Hemisphere.
1992 to 1993 -- Divisional Vice President, Diagnostic Commercial Operations.
1993 to present -- Vice President, Diagnostic Commercial Operations.
Elected Corporate Officer -- 1993.
GARY R. BYERS**, 55
1992 to 1993 -- Divisional Vice President, Corporate Auditing.
1993 to present -- Vice President, Internal Audit.
Elected Corporate Officer -- 1993.
WILLIAM G. DEMPSEY, 45
1992 to 1995 -- Divisional Vice President and General Manager, Abbott Critical Care Systems.
1995 to 1996 -- Divisional Vice President and General Manager, Hospital Products Business Sector.
1996 to present -- Vice President, Hospital Products Business Sector.
Elected Corporate Officer -- 1996.
KENNETH W. FARMER**, 51
1992 to present -- Vice President, Management Information Services and Administration.
Elected Corporate Officer -- 1985.
THOMAS C. FREYMAN**, 42
1992 to present -- Vice President and Treasurer.
Elected Corporate Officer -- 1991.
DAVID B. GOFFREDO, 42
1992 to 1993 -- Divisional Vice President, Pharmaceutical Products Marketing.
1993 to 1995 -- Divisional Vice President, Pharmaceutical Products Sales and Marketing.
1995 to present -- Vice President, Pharmaceutical Products Sales and Marketing.
Elected Corporate Officer -- 1995.
RICHARD A. GONZALEZ**, 43
1992 to 1995 -- Divisional Vice President and General Manager, U.S. and Canada Diagnostics.
1995 to present -- Vice President, HealthSystems.
Elected Corporate Officer -- 1995.
GUILLERMO A. HERRERA, 43
1992 to 1994 -- Regional Director, Europe, Abbott International.
1994 -- General Manager, Abbott Spain and Portugal.
1994 to 1996 -- Area Vice President, Latin America.
1996 to present -- Vice President, Latin America Operations.
Elected Corporate Officer -- 1996.
ARTHUR J. HIGGINS, 40
1992 to 1994 -- Regional Director, Europe, Africa, and Middle East.
1994 to 1995 -- Divisional Vice President, Commercial Operations.
1995 to 1996 -- Divisional Vice President, Pacific, Asia, and Africa Operations.
1996 to present -- Vice President, Pacific, Asia, and Africa Operations.
Elected Corporate Officer -- 1996.
JAY B. JOHNSTON, 53
1992 -- President, Dainabot Co., Ltd. (an affiliate of the Company) and General Manager, Asia Pacific, Abbott Diagnostics Division.
1992 -- Divisional Vice President, Business Development.
1992 to 1993 -- Divisional Vice President and General Manager, Diagnostic Assays and Operations.
1993 to present -- Vice President, Diagnostic Assays and Systems.
Elected Corporate Officer -- 1993.
JAMES J. KOZIARZ, 48
1992 -- Divisional Vice President and General Manager, Diagnostic Assays.
1992 to 1993 -- Divisional Vice President, Diagnostic Products Research and Development.
1993 to present -- Vice President, Diagnostic Products Research and Development.
Elected Corporate Officer -- 1993.
JOHN F. LUSSEN**, 55
1992 to present -- Vice President, Taxes.
Elected Corporate Officer -- 1985.
EDWARD L. MICHAEL, 39
1992 to 1994 -- Business Unit Manager.
1995 to 1996 -- Director, Area Operations and Scientific Development.
1997 to present -- Vice President, Diagnostic Operations, Europe, Africa, and Middle East.
Elected Corporate Officer -- 1997.
THEODORE A. OLSON**, 58
1992 to present -- Vice President and Controller.
Elected Corporate Officer -- 1988.
ANDRE G. PERNET, 52
1992 -- Divisional Vice President, Therapeutic Area Ventures, Pharmaceutical Products Division.
1992 to 1994 -- Divisional Vice President, Pharmaceutical Development, Pharmaceutical Products Division.
1994 to present -- Vice President, Pharmaceutical Products Research and Development.
Elected Corporate Officer -- 1994.
CARL A. SPALDING, 51
1992 -- Vice President, International, Johnson & Johnson (manufacturer of health care products serving the consumer, pharmaceutical and professional markets).
1992 to 1993 -- Divisional Vice President and General Manager, Ross Pediatric Products.
1993 to present -- Vice President, Ross Pediatric Products.
Elected Corporate Officer -- 1993.
WILLIAM H. STADTLANDER, 51
1992 -- Divisional Vice President, Medical Nutritionals.
1992 to 1993 -- Divisional Vice President and General Manager, Medical Nutritionals.
1993 to present -- Vice President, Ross Medical Nutritional Products.
Elected Corporate Officer -- 1993.
MARCIA A. THOMAS **, 49
1992 to 1995 -- Divisional Vice President and General Manager, Infectious Diseases Diagnostics.
1995 to 1996 -- Divisional Vice President, Quality Assurance and Regulatory Affairs, Diagnostics Division.
1996 to present -- Vice President, Quality Assurance and Regulatory Affairs.
Elected Corporate Officer -- 1996.
H. THOMAS WATKINS, 44
1992 to 1993 -- Divisional Vice President and Sector General Manager, Diagnostics Division.
1994 to 1996 -- Divisional Vice President and General Manager, Asia and Pacific Diagnostics.
1996 to present -- Vice President, Diagnostic Operations, Asia and Pacific.
Elected Corporate Officer -- 1996.
STEVEN J. WEGER, JR.**, 52
1992 to 1993 -- Director, Strategic Planning, Diagnostics Division.
1994 to 1996 -- Divisional Vice President, Strategic Planning and Technology Assessment, Diagnostics Division.
1996 to present -- Vice President, Corporate Planning and Development.
Elected Corporate Officer -- 1996.
JOSEF WENDLER, 47
1992 -- Regional Director, Europe, Diagnostics Division.
1992 to 1993 -- Divisional Vice President, Pacific, Asia, and Africa.
1993 to 1995 -- Vice President, Pacific, Asia, and Africa Operations.
1995 to present -- Vice President, European Operations.
Elected Corporate Officer 1993.
LANCE B. WYATT**, 52
1992 to 1995 -- Divisional Vice President, Quality Assurance and Regulatory Affairs.
1995 to present -- Vice President, Corporate Engineering.
Elected Corporate Officer -- 1995.
- ------------------------
** Pursuant to Item 401(b) of Regulation S-K the Company has identified these persons as "executive officers" within the meaning of Item 401(b).
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRINCIPAL MARKET
The principal market for the Company's common shares is the New York Stock Exchange. Shares are also listed on the Chicago and Pacific Stock Exchanges and are traded on the Boston, Cincinnati, and Philadelphia Exchanges. Overseas, the Company's shares are listed on the London Stock Exchange and the Swiss Stock Exchange.
Market prices are as reported by the New York Stock Exchange composite transaction reporting system.
SHAREHOLDERS
There were 99,513 shareholders of record of Abbott common shares as of December 31, 1996.
DIVIDENDS
Quarterly dividends of $.24 per share and $.21 per share were declared on common shares in 1996 and 1995, respectively.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference for the years 1992 through 1996 are the applicable portions of the section captioned "Summary of Selected Financial Data" of the 1996 Annual Report.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Incorporated herein by reference is management's discussion and analysis of financial condition and results of operations for the years 1996, 1995, and 1994 found under the section captioned "Financial Review" of the 1996 Annual Report.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference are the portions of the 1996 Annual Report captioned Consolidated Balance Sheet, Consolidated Statement of Earnings, Consolidated Statement of Cash Flows, Consolidated Statement of Shareholders' Investment, Notes to Consolidated Financial Statements and Report of Independent Public Accountants (which contains the related report of Arthur Andersen LLP dated January 15, 1997). Data relating to quarterly results is found in Note 8.
ITEM 9.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference are "Committees of the Board of Directors," and "Information Concerning Nominees for Directors" found in the 1997 Abbott Laboratories Proxy Statement (1997 Proxy Statement).
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The material in the 1997 Proxy Statement under the heading "Executive Compensation," other than the Report of the Compensation Committee, the Performance Graph, and Security Ownership of Officers and Directors are hereby incorporated by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the text found under the caption "Information Concerning Security Ownership" and the material under the heading "Security Ownership of Executive Officers and Directors" in the 1997 Proxy Statement.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS FORM 10-K.
1. FINANCIAL STATEMENTS: The Consolidated Financial Statements for the years ended December 31, 1996, 1995, and 1994 and the related report of Arthur Andersen LLP dated January 15, 1997, appearing under the portions of the 1996 Annual Report captioned Consolidated Balance Sheet, Consolidated Statement of Earnings, Consolidated Statement of Cash Flows, Consolidated Statement of Shareholders' Investment, Notes to Consolidated Financial Statements and Report of Independent Public Accountants, respectively, are incorporated by reference in response to Item 14(a)1. With the exception of the portions of the 1996 Annual Report specifically incorporated herein by reference, such Report shall not be deemed filed as part of this Annual Report on Form 10-K or otherwise deemed subject to the liabilities of Section 18 of the Securities Exchange Act of 1934.
2. FINANCIAL STATEMENT SCHEDULES: The required financial statement schedules are found on the pages indicated below. These schedules should be read in conjunction with the Consolidated Financial Statements in the 1996 Annual Report:
3. EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K: The information called for by this paragraph is incorporated herein by reference to the Exhibit Index on pages 21 and 22 of this Form 10-K.
(b) REPORTS ON FORM 8-K DURING THE QUARTER ENDED DECEMBER 31, 1996:
No reports on Form 8-K were filed during the quarter ended December 31, 1996.
(c) EXHIBITS FILED (SEE EXHIBIT INDEX ON PAGES 21 AND 22).
(d) FINANCIAL STATEMENT SCHEDULES FILED (PAGE 23).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Abbott Laboratories has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ABBOTT LABORATORIES
By /s/ DUANE L. BURNHAM Duane L. Burnham Chairman of the Board and Chief Executive Officer
Date: February 14, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Abbott Laboratories on February 14, 1997 in the capacities indicated below.
/s/ DUANE L. BURNHAM Duane L. Burnham Chairman of the Board, Chief Executive Officer and Director of Abbott Laboratories (principal executive officer)
/s/ GARY P. COUGHLAN Gary P. Coughlan Senior Vice President, Finance and Chief Financial Officer (principal financial officer)
/s/ THOMAS R. HODGSON Thomas R. Hodgson President, Chief Operating Officer and Director of Abbott Laboratories
/s/ THEODORE A. OLSON Theodore A. Olson Vice President and Controller (principal accounting officer)
/s/ K. FRANK AUSTEN, M.D. K. Frank Austen, M.D. Director of Abbott Laboratories
/s/ H. LAURANCE FULLER H. Laurance Fuller Director of Abbott Laboratories
/s/ ALLEN F. JACOBSON Allen F. Jacobson Director of Abbott Laboratories
/s/ DAVID A. JONES David A. Jones Director of Abbott Laboratories
/s/ DAVID A. L. OWEN David A. L. Owen Director of Abbott Laboratories
/s/ BOONE POWELL, JR. Boone Powell, Jr. Director of Abbott Laboratories
/s/ A. BARRY RAND A. Barry Rand Director of Abbott Laboratories
/s/ W. ANN REYNOLDS W. Ann Reynolds Director of Abbott Laboratories
/s/ WILLIAM D. SMITHBURG William D. Smithburg Director of Abbott Laboratories
/s/ JOHN R. WALTER John R. Walter Director of Abbott Laboratories
/s/ WILLIAM L. WEISS William L. Weiss Director of Abbott Laboratories
EXHIBIT INDEX ABBOTT LABORATORIES ANNUAL REPORT FORM 10-K
- ------------------------
* Incorporated herein by reference.
** Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto.
The Company will furnish copies of any of the above exhibits to a shareholder upon written request to the Corporate Secretary, Abbott Laboratories, 100 Abbott Park Road, Abbott Park, Illinois 60064-3500.
ABBOTT LABORATORIES AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (DOLLARS IN THOUSANDS)
- ------------------------
(a) Represents provisions related to allowances for doubtful accounts and the net change in the allowances for sales deductions.


ITEM 1 - BUSINESS
The Company's two business segments are Lighting and Graphics. Sales by continuing operations by segment are as follows (in thousands):
The Lighting segment manufactures and sells outdoor, indoor, and landscape lighting fixtures to the retail petroleum, commercial and industrial markets. Additionally, this segment produces and markets menu boards to the restaurant and other markets. The Lighting segment includes the operations of LSI Lighting Systems Commercial and Petroleum Lighting divisions, Abolite Lighting division, Greenlee Lighting, the LSI Metal Fabrication division, and the LSI IMAGES division.
The Graphics segment manufactures and sells screen printed materials and architectural graphic structures to the retail petroleum and other markets. The Graphics segment includes the operations of SGI Integrated Graphics Systems and the Insight Graphic Systems division.
See Note 3 of Notes to Consolidated Financial Statements beginning on page S-13 of this Form 10-K for additional information on business segments.
The Company believes that it is a low-cost producer for its types of products, and as such, is in a position to promote its product lines with substantial marketing and sales activities.
The Company is not dependent on any one supplier for any of its component parts.
The Company's sales are partially seasonal as installation of outdoor lighting and graphic systems in the northern states lessens during the harshest winter months. One customer, Chevron U.S.A. Inc. accounted for 12% of consolidated net sales in 1996, 14% in 1995, and 13% in 1994. The Company had a backlog of orders, believed by it to be firm, of $9.6 million and $13.8 million at June 30, 1996 and 1995, respectively. All orders are scheduled to ship within twelve months.
The Company has approximately 900 full-time and 200 temporary employees. The Company has a comprehensive compensation and benefit program for employees, including competitive wages, a discretionary bonus plan, a profit-sharing plan and retirement plan, a 401(k) savings plan, a non-qualified deferred compensation plan (for certain employees), a stock option plan, and medical and dental insurance.
The Company sells its products throughout the United States and Canada.
LSI Industries encounters strong competition in all markets served by the Company's product lines. The Company has many competitors, some of which have greater financial and other resources. The Company considers product quality and performance, price, customer service, prompt delivery, and reputation to be important competitive factors.
The Company has several product and process patents which it has obtained in the normal course of business. The Company does not believe that patent protection is critical to its business.
ITEM 2

ITEM 2 - PROPERTIES
The Company has five facilities:
The Company considers these facilities adequate for its current level of operations.
ITEM 3

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the year covered by this report.
PART II -------
ITEM 5

ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERS' MATTERS
"Common Share Information" appears on page S-18 of this Form 10-K.
ITEM 6

ITEM 6 - SELECTED FINANCIAL DATA
"Selected Financial Data" appears on page S-19 of this Form 10-K.
ITEM 7

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of Operations" appears on pages S-1 through S-3 of this Form 10-K.
ITEM 8

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Schedules other than those listed above are omitted for the reason(s) that they are either not applicable or not required or because the information required is contained in the financial statements or notes thereto.
ITEM 9

ITEM 9 - DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III --------
ITEMS 10, 11, 12 and 13 of Part III are incorporated by reference from the LSI Industries Inc. Proxy Statement for its Annual Meeting of Shareholders to be held November 14, 1996, as filed with the Commission pursuant to Regulation 14A.
PART IV -------
ITEM 14

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
Appear as part of Item 8 of this Form 10-K.
(2) Financial Statement Schedules
Appear as part of Item 8 of this Form 10-K.
(3) Exhibit list - listing of exhibits required to be filed with Form 10-K incorporated by reference to Exhibit(s) filed as part of:
Proxy-89 = Proxy statement for 1989 Annual Shareholders' Meeting
10K-89 = Annual Report on Form 10-K for the fiscal year ended June 30, 1989
10K-95 = Annual Report on Form 10-K for the fiscal year ended June 30, 1995
S-8 (95-1) = Form S-8 Registration Statement No. 33-64721 for the LSI Industries Inc. 1995 Stock Option Plan
S-8 (95-2) = Form S-8 Registration Statement No. 33-64723 for the LSI Industries Inc. 1995 Directors' Stock Option Plan
S-3 (96) = Form S-3 Registration Statement No. 33-65043
or filed herewith where so noted.
EXHIBIT INDEX -------------
(b) Form 8-K:
A report on Form 8-K was filed April 5, 1996 to report a change in the Company's certifying accountant from Price Waterhouse LLP to Arthur Andersen LLP effective March 29, 1996.
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) 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.
LSI INDUSTRIES INC.
September 4, 1996 BY: /s/ Robert J. Ready - --------------------------------- ----------------------------------- Date Robert J. Ready Chairman of the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
*The undersigned, by signing his name hereto, executed this Annual Report on Form 10-K on September 4, 1996, pursuant to Powers of Attorney executed by the above named Directors of the Registrant and filed with the Securities and Exchange Commission as Exhibit 25 hereto.
September 4, 1996 By: /s/ Ronald S. Stowell - ------------------- ----------------------------- Date Attorney-in-Fact
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SALES BY BUSINESS SEGMENT (In thousands)
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Net sales of $152,733,000 for 1996 increased 27% over 1995 net sales of $119,927,000 with Lighting segment sales increasing 28% and Graphics segment sales increasing 26%. The Company experienced sales growth in both the multi-site retail market and the commercial / industrial lighting market, and had significant growth in its largest market, the petroleum / convenience store market. One customer, Chevron U.S.A., accounted for 12% of net sales in 1996 and 14% of net sales in 1995. The Company believes that it continues to maintain a good business relationship with this major customer; however, the level of total sales is never assured in the future. The increase in net sales in 1996 was primarily the result of increased volume. While sales prices were increased, inflation did not have a significant impact on sales in 1996 as competitive pricing pressures held price increases to a minimum.
Gross profit of $48,512,000, or 31.8% of net sales, increased over last year's gross profit of $39,771,000 or 33.2% of net sales. The increase in amount of gross profit is attributed primarily to the 27% increase in net sales. A sales mix shift in the Company's Graphics segment to somewhat lower gross margin programs (including an increased level of prototype image programs), lower utilization of manufacturing capacity in the Graphics segment, and an increase in lighting sales to the petroleum / convenience store market provided influences that reduced the gross profit percentage. Selling and administrative expenses increased to $35,101,000 from $29,509,000 primarily as a result of increased sales volume, and were reduced to 23% of net sales in 1996 as compared to 25% last year.
Interest expense decreased in 1996 from $459,000 to $344,000, primarily as a result of the paydown of substantially all of the Company's outstanding debt in February 1996 with a portion of the net proceeds from the Company's public offering of common shares (see also LIQUIDITY AND CAPITAL RESOURCES). Other expense consists primarily of loss on disposition of fixed assets, of which there was a greater amount in 1995. The Company's effective tax rate increased to 36.4% from 36.0% last year as a result of the increased provision for state income taxes.
Income from continuing operations of $8,270,000 or $.98 per share increased 34% over 1995 levels of $6,174,000 or $.79 per share as a result of increased net sales and gross profit, partially offset by increased selling and administrative expenses and an increased provision for income taxes. The weighted average common shares outstanding increased 8.4% in 1996 to 8,456,000 shares from 7,802,000 shares in 1995 primarily as a result of the effect of the 1.2 million common shares issued in the Company's public offering in February 1996.
S-1
The Company recorded a $1.5 million or $.18 per share charge to Discontinued Operations in 1996 to increase the reserve for remaining liabilities associated with its discontinued European operations. As discussed in Note 9 to the financial statements, the Company had been involved in a dispute with the Internal Revenue Service (IRS) in which the IRS proposed audit adjustments to the Company's 1989 through 1992 federal income tax returns which could have resulted in a payment of income taxes by the Company of approximately $2.0 million, plus interest, which had been refunded to the Company with the filing of its 1992 income tax return. The IRS questioned the tax treatment of the loss associated with the discontinued operations, specifically as to whether it should receive ordinary loss or capital loss treatment. The settlement discussions with the IRS Appeals Division relating to the proposed audit assessment were concluded in December 1995. An agreement was reached that re-characterized a portion of the 1992 loss associated with discontinued European operations as a long term capital loss. The agreement resulted in payment of $1.7 million (composed of taxes and interest), and in the $1.5 million charge to discontinued operations.
Net income of $6.8 million or $.80 per share compares to last year's net income of $6.2 million or $.79 per share. The change resulted from increased income from continuing operations, partially reduced by the charge to discontinued operations.
Certain recently issued accounting pronouncements will affect the Company's future financial statements and/or disclosures. See Note 1 to these financial statements for additional discussion.
1995 COMPARED TO 1994
Net sales of $119,927,000 increased 28% over 1994 sales of $93,535,000. Lighting segment sales increased 30% with sales increases in all major markets served: the petroleum / convenience store market, the multi-site retail market, and the commercial / industrial lighting market. Graphics segment sales increased 26%, primarily as a result of strong sales into the petroleum / convenience store market. One customer, Chevron U.S.A., accounted for 14% of net sales in 1995 and 13% of net sales in 1994. The Company believes that it continues to maintain a good business relationship with this major customer; however, the level of total sales is never assured in the future. The increase in sales in 1995 was primarily the result of increased volume. While sales prices were increased, inflation did not have a significant impact on sales in 1995 as competitive pricing pressures held price increases to a minimum.
Gross profit of $39,771,000, or 33.2% of net sales, increased over last year's gross profit of $31,105,000 or 33.3% of net sales. The increase in amount of gross profit is attributed primarily to the 28% increase in sales. Increased sales volume caused some manufacturing inefficiencies, increased employment levels and related training, and overtime and additional shifts in the first half of the year. The Company experienced cost increases in several raw materials and components from suppliers in the first half for which sales price increases were implemented in the second half of the year. Selling and administrative expenses of $29,509,000 increased from $23,965,000, but decreased as a percentage of net sales to 25% from 26%, primarily as a result of increased sales volume.
Interest expense increased in 1995 from $199,000 to $459,000 as a result of increased average borrowings on the Company's revolving lines of credit and long-term debt facilities in addition to increased effective borrowing rates. Other expense consists primarily of losses on disposition of assets of $122,000 and $250,000 in 1995 and 1994, respectively. Income tax expense of
S-2
$3,469,000 or 36% of income before taxes compares to tax expense of $2,461,000 or 37% last year. The increase in income tax expense is related primarily to the increased taxable income.
Net income of $6,174,000 or $.79 per share increased from last year's net income of $4,190,000 or $.55 per share as a result of increased sales and gross profit, partially offset by increased selling and administrative expenses and an increased provision for taxes. See additional comments regarding earnings per share in LIQUIDITY AND CAPITAL RESOURCES.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996 the Company had working capital of $36,146,000, compared to $17,788,000 at June 30, 1995. The ratio of current assets to current liabilities increased to 2.66 to 1 from 1.74 to 1. The increased working capital is primarily attributed to increases in cash and cash equivalents, accounts receivable, inventories, and other current assets, and to reductions in accrued expenses and current maturities of long-term debt.
The Company generated $19,581,000 in net proceeds from a public offering of 1.2 million common shares in February 1996. The Company used a portion of the net proceeds to repay all outstanding indebtedness under its revolving lines of credit and its term loan facility with its banks. The significant increase in cash and cash equivalents is directly related to this public offering.
The Company generated $406,000 of cash from operating activities in 1996 as compared to $1,818,000 in 1995. The Company used more cash in fiscal 1996 primarily because of the payment of approximately $1.7 million associated with the settlement of the IRS audit related to the discontinued European operations. In 1996, the increased level of business resulted in increases in accounts receivable and inventories. As of June 30, 1996, the Company's days sales outstanding were approximately 59 days as compared to 62 days at year end last year.
In addition to cash and cash equivalents (high grade, short-term investments), the Company's primary source of liquidity continues to be its lines of credit. The Company has two revolving lines of credit totaling $13 million, all of which is available as of August 21, 1996. The Company believes that the total of available lines of credit plus cash flows from operating activities is adequate for the Company's 1997 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants. Capital expenditures of $3.4 million in 1996 compare to $5.1 million in 1995. Spending in fiscal year 1996 is primarily related to manufacturing equipment and process improvements. Capital expenditures of $4 million are planned for 1997.
In August 1996, the Board of Directors declared regular quarterly and special year-end cash dividends of $.04 per share each to be paid September 17, 1996 to shareholders of record on September 10, 1996. During fiscal 1996, the Company paid cash dividends each quarter.
The Company continues to seek opportunities to invest in new products and markets, and in acquisitions which fit its strategic growth plans in the lighting and graphics markets. The Company believes that adequate financing for any such investments or acquisitions will be available through future borrowings due to the enhanced financial condition of the Company after the public offering or through the issuance of common or preferred shares in payment for acquired businesses.
S-3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------
To the Board of Directors and Shareholders of LSI Industries Inc.:
We have audited the accompanying consolidated balance sheet of LSI Industries Inc. (an Ohio corporation) and subsidiaries as of June 30, 1996, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of LSI Industries Inc. and subsidiaries as of June 30, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to the financial statements is presented for purposes of complying with the Securities and Exchange Commissions rules and is not part of the basic financial statements. The information in this schedule as of and for the year ended June 30, 1996 has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in a material respects the financial data required to be set forth therein in relation to the basic statements taken as a whole.
/s/ Arthur Andersen LLP Arthur Andersen LLP
Cincinnati, Ohio August 14, 1996
S-4
REPORT OF INDEPENDENT ACCOUNTANTS ---------------------------------
To the Board of Directors and Shareholders of LSI Industries Inc.
In our opinion, the accompanying consolidated financial statements listed in the index appearing under ITEM 8 of this Form 10-K present fairly, in all material respects, the financial position of LSI Industries Inc. and its subsidiaries at June 30, 1995, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP Cincinnati, Ohio August 18, 1995
S-5
LSI INDUSTRIES INC. CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED JUNE 30, 1996, 1995, AND 1994 (In thousands, except per share)
S-6
LSI INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 AND 1995 (in thousands)
S-7
LSI INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) JUNE 30, 1996 AND 1995 (in thousands)
S-8
LSI INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended June 30, 1996, 1995 and 1994 (In thousands)
S-9
LSI INDUSTRIES INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended June 30, 1996, 1995, and 1994 (In thousands)
S-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION:
The consolidated financial statements include the accounts of LSI Industries Inc. and its subsidiaries, all of which are wholly owned. All significant intercompany transactions have been eliminated.
RECLASSIFICATION:
Certain reclassifications have been made to prior year amounts in order to be consistent with the presentation for the current year.
USE OF ESTIMATES:
The preparation of the financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION:
Revenue is recognized when the customer accepts title and the resultant risks and rewards of ownership. Generally this occurs upon shipment of goods or shortly thereafter. Amounts received from customers prior to the recognition of revenue are accounted for as customer pre-payments under accrued expenses.
CASH AND CASH EQUIVALENTS:
The cash balance includes cash and cash equivalents which have original maturities of less than three months.
INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT AND RELATED DEPRECIATION:
Property, plant and equipment are stated at cost. Major additions and betterments are capitalized while maintenance and repairs are expensed. For financial reporting purposes, depreciation is computed on the straight-line method over the estimated useful lives of the assets as follows:
Buildings 31 - 39 years Machinery and equipment 3 - 10 years
S-11
GOODWILL:
The excess of cost over fair value of assets acquired ("goodwill") is amortized over a forty year period. As of June 30, 1996 and 1995, accumulated amortization of goodwill was $287,000 and $248,000, respectively. The Company periodically evaluates goodwill and other long-lived assets for permanent impairment based upon anticipated cash flows. To date no impairments have been recorded, nor are any anticipated.
FINANCIAL INSTRUMENTS:
The Company has financial instruments consisting primarily of cash and cash equivalents, revolving lines of credit, and long-term debt. The fair value of these financial instruments approximates carrying value because of their short-term maturity and variable, market-driven interest rates. The Company has no financial instruments with off balance sheet risk.
EMPLOYEE BENEFIT PLANS:
The Company has a defined contribution retirement plan and a discretionary profit sharing plan covering substantially all of its employees, and a non-qualified deferred compensation plan covering certain employees. The costs of employee benefit plans are charged to expense and funded annually. Total costs relating to continuing operations were $1,378,000 in 1996, $1,004,000 in 1995, and $942,000 in 1994.
INCOME TAXES:
Deferred income taxes are provided on items reported in income in different periods for financial reporting and tax purposes.
NET INCOME PER COMMON SHARE:
The computation of net income per common share is based on the weighted average common shares outstanding for the period, including Common Share equivalents (dilutive stock options). Dilutive stock options amounted to 360,000 shares in 1996, 287,000 shares in 1995, and 236,000 shares in 1994. See also Note 6.
RECENT PRONOUNCEMENTS:
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. This statement also addresses the accounting for long-lived assets that are expected to be disposed of in the future. The Company will adopt this standard in fiscal year 1997 and, based on current circumstances, does not believe the effect of adoption will be material.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The Company
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intends to adopt this standard in fiscal year 1997 by making the required footnote disclosures only. Therefore, the adoption of this standard is not expected to have an effect on the Company's financial position or results of operations.
NOTE 2 - DISCONTINUED OPERATIONS
In 1992 the Company sold the assets and operations of its U.K. subsidiary, Duramark, to its management and reported a loss from Discontinued Operations. Consideration received included cash, assumption of liabilities by management, and rights to a percentage of future profits of the operation earned on or before May 31, 1996 (to which no value was assigned). The maximum amount receivable is not material, is subject to a time limit, and realizability is believed not to be certain.
The remaining liabilities which were not assumed by the management buy-out group of the discontinued operations, net of related taxes, have been classified in the consolidated balance sheets as follows:
NOTE 3 - BUSINESS SEGMENT INFORMATION
LSI operates in two business segments - Lighting and Graphics. The Lighting segment manufactures and sells outdoor, indoor and landscape lighting fixtures as well as menu boards and light boxes to the petroleum / convenience store, multi-site retail and commercial/industrial markets. The Lighting segment includes the operations of LSI Lighting Systems, Abolite Lighting, Greenlee Lighting, LSI Images, and LSI Metal Fabrication. The Graphics segment manufactures and sells screen printed materials and architectural graphic structures for the petroleum / convenience store and multi-site retail markets. The Graphics segment includes the operations of SGI and Insight Graphics. The Company's most significant market is the petroleum / convenience store market with slightly over 50% of net sales of lighting and graphics concentrated in this market.
The following information is provided for the following periods:
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Operating income of the business segments includes sales less all operating expenses including allocations of corporate expense, but excluding interest expense. Sales between business segments are immaterial.
Identifiable assets are those assets used by each segment in its operations, including allocations of shared assets. Corporate assets consist primarily of cash and cash equivalents, and refundable income taxes.
NOTE 4 - BALANCE SHEET DATA
The following information is provided as of June 30:
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NOTE 5 - REVOLVING LINES OF CREDIT AND LONG-TERM DEBT
The Company has lines of credit with its banks in the aggregate amount of $13,000,000, all of which was available at June 30, 1996. These revolving lines of credit are unsecured and expire in fiscal year 1997. Interest on the revolving lines of credit is charged based upon a 1.0 percentage point increment over the LIBOR rate as periodically determined, or at the banks' base lending rate less 1.25 percentage points, at the Company's option. Under terms of these agreements, the Company has agreed to maintain minimum levels of profitability and net worth, and is subject to certain maximum levels of leverage.
The Company has an Industrial Revenue Development Bond (IRB) borrowing in the amount of $1,195,000 associated with its facility in Northern Kentucky. The term of this IRB is 15 years with semi-annual interest payments and annual principal payments for retirement of bond principal in increasing amounts over the term of the bonds. The IRB interest rate, which is reestablished semi-annually, is currently 4.5%, plus a .9% letter of credit fee. The IRB is secured by the Company's Kentucky real estate, which has a net carrying value of $1.4 million.
The Company has equipment loans outstanding totaling $367,000 with two governmental agencies in Kentucky. The loans are for terms of five years at a weighted average interest rate of 2.2% and are secured by the Company's Kentucky equipment which has a net carrying value of $1.4 million. The Company makes quarterly principal and interest payments of $32,000 through June 1999 and has committed to specified job growth in its Kentucky facility.
Future maturities of long-term debt at June 30, 1996 are as follows (in thousands):
NOTE 6 - SHAREHOLDERS' EQUITY
The Company generated $19.6 million in net proceeds from a public offering of 1,232,894 common shares in February 1996. The Company used a portion of the net proceeds to repay all outstanding indebtedness under its revolving lines of credit and its term loan facility with its banks.
The Company has stock option plans which cover all of its full-time employees and has a plan covering all non-employee directors. The options granted pursuant to these plans are granted at
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fair market value at date of grant and generally become exercisable 25% per year (cumulative) beginning one year after the date of grant at the fair market value of the Common Shares at the date of grant. The number of shares reserved for issuance is 785,100, of which 166,400 shares were available for future grant as of June 30, 1996. The plans allow for the grant of both incentive stock options and non-qualified stock options.
At June 30, 1996, there were 184,000 options exercisable at an average price of $4.99 per share.
On August 21, 1996, the Board of Directors declared a regular quarterly dividend of $.04 per share and a special $.04 per share cash dividend to be paid September 17, 1996 to shareholders of record on September 10, 1996. Annual cash dividend payments made during fiscal years 1996, 1995 and 1994 were $.21, $.15, and $.03 per share, respectively.
NOTE 7 - SALES TO MAJOR CUSTOMERS
The Company made sales in both the Lighting and Graphics segments to a major customer which exceeded 10% of consolidated net sales. Sales to Chevron U.S.A. represented 12% of consolidated net sales in 1996, 14% in 1995, and 13% in 1994.
NOTE 8 - LEASES
The Company leases certain of its facilities and equipment under operating lease arrangements. Rental expense was $656,000 in 1996, $835,000 in 1995, and $846,000 in 1994. Minimum annual rental commitments under non-cancelable operating leases are: $600,000 in 1997; $505,000 in 1998; and $345,000 in 1999.
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NOTE 9 - INCOME TAXES
The following information is provided for the years ended June 30:
The components of deferred income tax assets and liabilities at June 30, 1996 and 1995 are as follows:
The Company discontinued its European operations in 1992 and reported a $4.3 million loss, net of a $3.2 million income tax benefit. The Internal Revenue Service (IRS) completed its audit of the Company's 1989 through 1992 federal income tax returns and proposed audit adjustments which would have resulted in a return of approximately $2 million of income taxes (plus interest) to the IRS which had been refunded to the Company with the filing of its 1992 income tax return. The IRS questioned the tax treatment of the loss associated with the discontinued operations, specifically as to whether it should receive ordinary loss or capital loss treatment.
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The Company's settlement discussions with the IRS Appeals Division relating to the proposed audit assessment were concluded in December 1995. An agreement was reached that re-characterized a portion of the 1992 loss associated with discontinued European operations as a long term capital loss. The agreement resulted in payment of $1.7 million (composed of taxes and interest), and in a charge to discontinued operations of $1.5 million to increase the Company's reserve for remaining liabilities associated with the discontinued operations.
NOTE 10 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
At August 6, 1996, there were 517 shareholders of record. The Company believes this represents approximately 2,800 beneficial shareholders.
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LSI INDUSTRIES INC. SELECTED FINANCIAL DATA (In thousands except per share)
The following data has been selected from the Consolidated Financial Statements of the Company for the periods and dates indicated:
INCOME STATEMENT DATA:
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LSI INDUSTRIES INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(IN THOUSANDS)
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LSI INDUSTRIES INC.
Form 10-K
June 30, 1996
INDEX TO EXHIBITS
Exhibit Number Description of Exhibit - ------ ----------------------
10.5 LSI Industries Inc. Nonqualified Deferred Compensation Plan, and Rabbi Trust Agreement
11 Statement Re Computation of Earnings Per Share
22 Subsidiaries of the Registrant
23 Consent of Independent Public Accountants (2)
24 Powers of Attorney (5)
27 Financial Data Schedule