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Management's Discussion and Analysis

• Realized record sales volume of $1.8 billion as well as a record 12% operating margin.
• Launched three key products — the Coulter® HmX Hematology System, Fragment Analysis on the CEQ™ 2000 DNA Analysis System, and the Avanti® J High Capacity Centrifuge.
• Entered into an alliance with Instrumentation Laboratory for an expanded bilateral distribution agreement covering North America and Spain, an example of our strategy to leverage our global infrastructure with additional product lines.

1. Acquisition Activities

The primary focus of our acquisition strategy has been to broaden our product offerings. The following table lists our recent acquisitions:

On October 31, 1997, we acquired all of the outstanding capital stock of Coulter for $850.2 million, net of Coulter’s cash on hand of $24.8 million at the acquisition date. Coulter is the leading manufacturer of in vitro diagnostic systems for blood cell analysis. We discussed the details of this transaction and the accounting effects in our annual report for 1997. This acquisition and the related financing caused a substantial increase in interest expense, amortization of intangible assets and goodwill and various other adjustments resulting from purchase accounting. A complete discussion of our acquisition activities related to Coulter is provided in Note 3 “Acquisitions” of the Notes to Consolidated Financial Statements. In April 1998, our stockholders approved the change of our name to Beckman Coulter, Inc.

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2. Events Impacting Comparability

Operating Periods Reported Our financial statements include the assets and liabilities and the operating results of subsidiaries operating outside the U.S. and Canada. Balance sheet amounts for these subsidiaries are as of November 30. The operating results for these subsidiaries are for twelve-month periods ending on November 30, except as follows: Coulter was acquired October 31, 1997 and its results are included subsequent to that date. However, in order to be consistent with the way we have historically reported our international results, the reporting of Coulter’s international results of operations were lagged by one month in 1998. Therefore, the results for the year 1998 include only January through November sales and expenses for Coulter subsidiaries outside the United States and Canada. The exclusion of one month’s results in 1998 for Coulter international subsidiaries was not significant.

Acquired Research and Development In 1997, the results of operations included a $282.0 million charge for purchased in-process research and development. This charge was a direct result of the acquisition of Coulter and was related to projects which have economic value but could not be capitalized under Generally Accepted Accounting Principles (“GAAP”).

Goodwill and Intangible Assets As a result of the Coulter acquisition in 1997, we recorded $404.0 million as the fair market value of patents, trademarks and other intangibles (“Intangible assets”) and $374.4 million as the excess of purchase price and purchase and assumed liabilities over the fair market value of identifiable net assets and in-process research and development projects acquired (“Goodwill”). Upon finalization of pur-chase accounting in the fourth quarter of 1998, certain adjustments were made to the values of assets and liabilities recorded, which resulted in a reduction of recorded Goodwill in the amount of $35.7 million. Intangible assets are amortized using the straight-line method over their expected useful lives, ranging from 15 to 30 years. Goodwill is amortized on a straight-line basis over 40 years. See further discussion in Note 3 “Acquisitions” of the Notes to Consolidated Financial Statements.

Restructure Charges As a result of further additions to the plans initiated in 1997 for company reorganization, in the fourth quarter of 1998, we recorded a restructure charge of $19.1 million. This charge was in addition to the $59.4 million restructure charge recorded in 1997.

In the fourth quarter of 1999, we recorded a restructure charge of $4.3 million related to additional reorganization activities. This charge was offset by the reversal of $4.5 million of excess restructure reserves from the 1998 and 1997 charges, resulting in a net restructure credit of $(0.2) million. On an after-tax basis, the restructure (credits) charges were $(0.1) million with no impact on earnings per share in 1999, $11.2 million or $0.38 per share in 1998, and $36.4 million or $1.32 per share in 1997. A more detailed discussion of the restructure charges is provided in Note 4 “Provision for Restructuring Operations” of the Notes to Consolidated Financial Statements.

Sale-leaseback of Real Estate During the second quarter of 1998, we sold our interest in properties located in Brea, California; Palo Alto, California; Chaska, Minnesota; and Miami, Florida and leased them back from the buyers. The aggregate proceeds from the sale of the four properties totaled $242.8 million before closing costs and transaction expenses. We used the cash from this sale primarily to reduce the debt incurred in financing the acquisition of Coulter. Refer to the detailed discussion of these transactions under Note 6 “Sale-leaseback of Real Estate” of the Notes to Consolidated Financial Statements.

Sale of Assets During 1999, we sold certain financial assets (consisting of customer lease receivables) as part of our plan to reduce debt and provide funds for integration purposes. The net book value of financial assets sold was $72.4 million for which we received approximately $74.0 million in cash proceeds. In 1998, we sold similar assets with a net book value of $67.7 million for cash proceeds of $68.9 million.

In 1999 and 1998, as a result of our Coulter integration activities, we made progress in reducing excess facilities outside the United States, which added $3.9 million and $3.0 million, respectively, to non-operating income.

In December 1997, we entered into an agreement for the sale and leaseback of certain instruments, which are subject to three to five year cancelable operating-type leases to customers. These instruments had a net book value of $37.0 million and were sold for cash proceeds of $39.6 million. The gain is being deferred and credited to income as an adjustment to rent expense over the lease term. Obligations under operating lease agreements are included in Note 14 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements.

Tax Aspects We do not expect that we will have to pay federal income taxes for our consolidated U.S. federal income tax group for 1999 primarily as a result of the tax loss carry forwards attributable mainly to expenses related to the acquisition of Coulter. These expenses include the Coulter bonus sharing plan payments, interest on indebtedness and certain other expenses incurred in connection with the Coulter acquisition. The balance of the deferred income tax liability of $129.6 million, which is related to the Coulter intangible assets acquired, will continue to be reduced as the intangible assets are amortized, since such amortization is not deductible for income tax purposes.

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1999 Compared with 1998 Sales in 1999 were $1,808.7 million, an increase of 5.3% (5.0% excluding the effect of foreign currency rate changes) compared to $1,718.2 million reported in 1998. In 1999, clinical diagnostics sales were $1,418.2 million and life science research sales were $390.5 million, an increase of 5.6% and 3.9%, respectively, compared to $1,342.5 million and $375.7 million, respectively, in 1998. Sales (in millions) in the various geographical segments of our market were as follows:

In North America, sales increased due to synergies from the integration of the Beckman and Coulter organizations, as a result of our global strategy. In addition to giving the Company the scale for profitability, the Coulter acquisition has allowed Beckman Coulter to offer a broad spectrum of product offerings to clinical diagnostics laboratories, covering nearly all routine blood tests. Placements of the combined Beckman Coulter clinical chemistry, immunodiagnostics and cellular analysis instrument systems contributed to the increase in clinical diagnostics sales. In the life science research business, our robotic automation and genetic analysis products were the primary contributors to our sales growth over the prior year, driven by biotechnology and pharmaceutical company purchases of SAGIAN™ Core Systems for high-throughput screening of candidate drug compounds and the newly introduced sequencing and fragment analysis on the CEQ™ 2000 DNA Analysis Systems.

European sales growth was dampened by continued softness in the German market. The increase in sales in Asia and Rest of World markets was the result of a stronger economy in the Asia Pacific region, led primarily by Japan during the second half of 1999, where placements of cellular analysis systems and life science research products increased compared to 1998.

Gross profit as a percentage of sales in 1999 was 47.9%, 1.5 percentage points higher than the prior year. The increase in gross profit percentage was due to synergies from the integration of the Beckman and Coulter organizations, partially offset by increased service costs related to Year 2000 issues during the second half of 1999.

Selling, general and administrative (“SG&A”) expenses declined $15.4 million to $476.9 million or 26.4% of sales in 1999 from $492.3 million or 28.7% of sales in the prior year. The decline in SG&A expenses both in absolute dollars and as a percentage of sales in 1999 compared to the prior year was due to continued progress with our integration activities.

In accordance with our integration plans, we continue to move the manufacturing of certain products from our manufacturing operations in Germany and the United States to Ireland. We expect the additional expenses associated with these moves to be offset by tax savings, which will result from manufacturing in a lower tax rate jurisdiction, and future consolidation savings. In addition to the tax savings, the move will expand our manufacturing and technical knowledge base for these products in Ireland, as well as accommodate future Far East volume requirements for the same products with minimal incremental expenditure. As part of our integration efforts, we intend to continue to look for and implement further opportunistic changes in 2000 and beyond.

Net earnings for 1999 were $106.0 million or $3.57 per diluted share compared to $33.5 million or $1.14 per diluted share ($44.7 million or $1.52 per diluted share before restructure charge) in 1998. The increase in net earnings was primarily due to the various reasons discussed previously. A decrease in interest expense of $14.0 million or 16.0% from 1998 to 1999, primarily due to a lower average debt balance, also contributed to the increase in net earnings. Interest income declined $5.6 million or 41.8% from 1998 to 1999 as a result of the sale of customer lease receivables (see “Sale of Assets” discussed previously).

1998 Compared with 1997 Sales for 1998 were $1,718.2 million, an increase of 43.4% over the $1,198.0 million reported in 1997. The increase in sales was primarily attributable to the inclusion in 1998 of a full year of sales from the Coulter operations compared to two months in 1997. In 1998 as in 1997, international sales accounted for approximately half of total sales. Foreign exchange rates negatively impacted sales growth by about 3.0 percentage points. Despite continued market-driven pricing pressures and adverse currency fluctuations, our core businesses remained strong.

Gross profit in 1998 was 46.4% of sales, 2.7 percentage points lower than the 1997 level of 49.1%. Unfavorable foreign currency fluctuations, lower margins for Coulter products and competitive pricing pressures contributed to the decline in gross profit percentage. Additionally, both the 1998 and 1997 gross profit included increased cost of sales for inventory recorded at fair value as part of the Coulter acquisition. Although gross profit for 1998 declined in comparison to 1997, gross profit in each quarter of 1998 showed a positive trend increasing from 42.5% in the first quarter to 48.8% in the fourth quarter.

SG&A expenses at 28.7% of sales were 1.4 per-centage points lower than the 1997 level of 30.1%. Research and development (“R&D”) expenses were 10.0% as compared to 10.3% of sales in 1997. SG&A and R&D expenses were lower in 1998 compared to 1997 as a percentage of sales, primarily due to the implementation of integration activities. SG&A expenses included goodwill and intangible amortization expenses arising out of the Coulter acquisition of $24.7 million or 1.4% of sales in 1998 compared to $4.3 million or 0.3% of sales in 1997.

As a result, operating income before pretax special charges was $133.9 million or 7.8% of sales in 1998, compared with $104.4 million and 8.7% in 1997. Both 1998 and 1997 operating income before pre- tax special charges included increased cost of sales for inventory recorded at fair value and on-going goodwill and intangible amortization expenses arising out of the Coulter acquisition. Without these items, the operating margin would have been 9.6% in 1998 compared to 10.0% in 1997.

As integration work progressed during 1998, acquisition-related costs were lower than anticipated at the end of 1997, while plans to restructure pre-acquisition Beckman operations were expanded. The final purchase accounting entries resulted in a one-time reduction of $35.7 million in goodwill while a $19.1 million charge was recorded in the fourth quarter to reflect the updated restructure plans. This charge reduced the reported operating income to $114.8 million for 1998. In 1997 one-time charges of $282.0 million for in-process research and development expenses and restructure charges of $59.4 million (discussed previously in item 2) resulted in the reported operating loss of $237.0 million.

Incremental interest expense associated with the debt incurred by the Company to fund the Coulter acquisition and lower foreign currency exchange gains increased net nonoperating expenses. These were partially offset by gains from increased interest income from leases (some of which was attributable to Coulter).

The net earnings for 1998 were $33.5 million compared with a net loss of $264.4 million in 1997. The net loss in 1997 excluded any tax benefit for the $282.0 million charge for in-process research and development since it was not deductible for income tax purposes.

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4. Financial Condition

Liquidity and Capital Resources Liquidity is our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments. In addition, liquidity includes the ability to obtain appropriate financing and to convert those assets that are no longer required to meet existing strategic and financing objectives into cash flows. Therefore, liquidity cannot be considered separately from capital resources that consist of current and potentially available funds for use in achieving long-range business objectives and meeting debt service commitments.

Currently, our liquidity needs arise primarily from:

• debt service on the substantial indebtedness we incurred in connection with the Coulter acquisition;
• funding the costs of integrating the operations of Beckman and Coulter;
• working capital requirements; and
• capital expenditures.

In 1999, cash provided by operations was $212.6 million compared to $1.8 million used by operations in 1998 and cash provided by operations of $137.8 million in 1997. The increase in 1999 is primarily due to a $63.8 million increase in net earnings, after adding back the effects of depreciation and amortization. Also contributing to the increase in cash provided by operations were the relatively low 1999 payments related to accounts payable and accrued expenses as compared to 1998. In 1998, a major portion of the payments were related to purchased and assumed liabilities recorded as part of the Coulter acquisition. The improvements were partially offset by increases in receivables and inventories due to increased sales. Additionally, the 1999 results included $74.0 million in cash proceeds from the sale of lease receivables compared to $68.9 million in 1998. See Note 5 “Sale of Assets” of the Notes to Consolidated Financial Statements.

Investing activities used $118.6 million of cash in 1999, compared to $123.4 million of cash provided in 1998, and $929.1 million used in 1997. In 1998, we received cash proceeds of $242.8 million from the sale-leaseback of four real estate properties. Excluding this, 1998 cash used in investing activities was $119.4 million, which primarily reflects capital expenditures, net of proceeds from disposals of property, plant and equipment. In 1997, investments and acquisitions used $893.9 million primarily relating to the acquisition of Coulter. An additional $39.6 million of cash proceeds were provided in 1997 through the sale and leaseback of instruments. See Note 5 “Sale of Assets” of the Notes to Consolidated Financial Statements.

Financing activities used $84.2 million of cash flows in 1999 as total debt (including notes payable) was reduced $86.6 million. In 1998, financing activities used $130.0 million of cash flows as total debt (including notes payable) was reduced $141.5 million. This reflects a substantial change from financing activity in 1997 when we reported a net increase of $827.8 million in debt. The increase in 1997 primarily reflected the $1.2 billion borrowed to finance the acquisition of Coulter, net of any repayments. Another significant change reflected in financing activities was the $43.7 million used in 1997 to purchase treasury stock. In 1998 and 1999, we did not re-purchase any treasury stock due to the level of outstanding debt and our efforts to reduce these obligations. Proceeds from sales of treasury stock decreased whereas dividends to stockholders increased slightly over 1998.

During the fourth quarter of 1997, we secured a new $1.3 billion credit facility to finance the acquisition of Coulter. See further discussion of the credit facility and borrowing availability thereunder and under the Company’s other borrowing facilities in Note 7 “Debt Financing” of the Notes to Consolidated Financial Statements. The interest expense associated with the debt outstanding under the credit facility creates an increased demand on future operating cash flows. Although we believe our consolidated operations will provide sufficient cash flow in excess of anticipated operating requirements to service the debt, we have implemented a plan to decrease the level of outstanding borrowings rapidly. This ultimately is expected to provide savings on the associated interest cost, partially offset by increased rental expense as a result of our sale-leaseback transactions.

Based upon current levels of operations, anticipated cost savings and future growth, we believe our cash flow from operations, together with available borrowings under the credit facility ($153.0 million as of December 31, 1999) and other sources of liquidity (including other credit facilities, leases and any other available financing sources) will be adequate to meet our anticipated requirements for interest payments and other debt service obligations, working capital, capital expenditures, lease payments and other operating needs, until the maturity of the credit facility in 2002. There can be no assurance, however, that our business will continue to generate cash flow at or above current levels or that estimated cost savings or growth can be achieved. Future operating performance and ability to service or refinance existing indebtedness, including the credit facility, will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.

Financial Risk Management Our risk management program, developed by senior management and approved by the board of directors, seeks to minimize the potentially negative effects of changes in foreign exchange rates and interest rates on the results of operations. Our primary exposures to fluctuations in the financial markets are to changes in foreign exchange risk and interest rates.

Foreign exchange risk arises because our reporting currency is the U.S. dollar and we generate approximately 45% of our sales in various foreign currencies. U.S. dollar-denominated costs and expenses as a percentage of total operating costs and expenses are much greater than U.S. dollar-denominated sales as a percentage of total net sales. As a result, appreciation of the U.S. dollar against our major trading currencies has a negative impact on our results of operations, and depreciation of the U.S. dollar against such currencies has a positive impact.

We seek to minimize our exposure to changes in exchange rates by denominating costs and expenses in foreign currencies. When these opportunities are exhausted, we use derivative financial instruments to function as “hedges”. We use forward contracts, purchased option contracts, and complex option contracts (consisting of purchased and sold options), to hedge transactions with our foreign customers. We do not use these instruments for speculative or trading purposes.

On January 1, 1999, the countries of the European Union adopted a single currency, the “euro”. The euro will, after January 1, 2002, be the only official currency in the European Union countries. Although the effect of this conversion on the results of our operations may be significant from a foreign currency or product pricing perspective, we are unable to measure such impact at this time. See details on the euro conversion under “Euro — the new European currency”.

Our exposure to interest rate risk arises out of our long-term debt obligations. We do not use derivative instruments to hedge our investment portfolio, which consists of short-term investments (maturity of less than a year). Under the guidance of our risk management policies, we use derivative contracts on certain borrowing transactions. With the aid of these contracts, we seek to reduce the negative effects of changes in interest rates by changing the character of the interest rate on our long-term debt, converting a variable rate to a fixed rate and vice versa.

The Securities and Exchange Commission requires that registrants include information about potential effects of changes in currency exchange and interest rates in their annual reports. Several alternatives, all with some limitations, have been offered. The following discussion is based on a sensitivity analysis, which models the effects of fluctuations in currency exchange rates and interest rates. This analysis is constrained by several factors, including the following:

• it is based on a single point in time; and
• it does not include the effects of other complex market reactions that would arise from the changes modeled.

Although the results of the analysis may be useful as a benchmark, they should not be viewed as forecasts.

We estimated the sensitivity of the fair value of all derivative foreign exchange contracts to a hypothetical 10% strengthening and 10% weakening of the spot exchange rates for the U.S. dollar against the foreign currencies at December 31, 1999. The analysis showed that a 10% strengthening of the U.S. dollar would result in a gain in fair value of $29.2 million and a 10% weakening of the U.S. dollar would result in a loss in fair value of $28.6 million in these instruments. Losses and gains on the underlying transactions being hedged would largely offset any gains and losses on the fair value of derivative contracts. These offsetting gains and losses are not reflected in the above analysis.

Similarly, we performed a sensitivity analysis on our variable rate debt instruments and derivatives. A one percentage point increase or decrease in interest rates was estimated to decrease or increase next year’s pre-tax earnings by $3.7 million based on the amount of debt outstanding at year-end.

For further discussion of this topic, see Note 7 “Debt Financing” and Note 9 “Derivatives” of the Notes to Consolidated Financial Statements.

Inflation We continually monitor inflation and the effects of changing prices. Inflation increases the cost of goods and services used. Competitive and regulatory conditions in many markets restrict our ability to fully recover the higher costs of acquired goods and services through price increases. We attempt to mitigate the impact of inflation by implementing continuous process improvement solutions to enhance productivity and efficiency and, as a result, lower costs and operating expenses. The effects of inflation have, in our opinion, been managed appropriately and as a result have not had a material impact on our operations and the resulting financial position.

Environmental Matters We are subject to federal, state, local and foreign environmental laws and regulations. Although we continue to make expenditures for environmental protection, we do not anticipate any significant expenditure to comply with such laws and regulations that would have a material impact on our results of operations, financial position or liquidity. We believe our operations comply in all material respects with applicable federal, state, and local environmental laws and regulations.

To address contingent environmental costs, we establish reserves when such costs are probable and can be reasonably estimated. Based on current information and regulatory compliance (taking third party indemnities into consideration), we believe we have established adequate reserves for environmental expenditures. We may incur additional costs that exceed the reserves. But based on current knowledge, we do not expect such amounts to have a material impact on our results of operations, financial position or liquidity, although we do not give any assurance in this regard. See further discussion in Note 14 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements.

Litigation We are currently, and are from time to time, subject to claims and lawsuits arising in the ordinary course of our business. Some examples of the types of claims are:

• intellectual property;
• contractual obligations;
• competition; and
• employment matters.

In certain such actions, the plaintiffs may request punitive or other damages or nonmonetary relief, which may not be covered by insurance. If granted, nonmonetary relief could materially affect the conduct of our business. We accrue for probable liabilities involved in these matters as they become known and can be reasonably estimated. In our opinion (taking third party indemnities into consideration), the various asserted claims and litigation in which we are currently involved are not reasonably likely to have a material adverse effect on our business, results of operations, financial position or liquidity. However, we do not give any assurance as to the ultimate outcome of such claims and litigation. The resolution of such claims and litigation could be material to our operating results for any particular period, depending on the level of income for such period. See further discussion of these matters in Note 14 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements.

Year 2000 Our Year 2000 program, implemented worldwide under the direction of our senior management, was completed on schedule. We did not experience any significant operational issues nor did our customers experience any major problems with our instrument systems. An insignificant number of instruments experienced minor issues in January 2000, which were evaluated and immediately corrected. The total cost of our Year 2000 program was approximately $7.1 million of which $3.3 million was spent in 1999. We are not aware of any obligations related to contractual damages resulting from Year 2000 issues. We do not believe that any such obligations that may arise in the future will have a material effect on our business, results of operations, financial position or liquidity.

Euro — The New European Currency The countries of the European Union have adopted a single currency, the “euro”. The euro came into existence on January 1, 1999, and can be used for transactions within and between countries of the Economic and Monetary Union (Austria, Belgium, Finland, France, Germany, Holland, Ireland, Italy, Luxembourg, Portugal and Spain), with national currencies expressed as a denomination (national currency units) of the euro. During the three-year transition period following its introduction, countries will be allowed to transact business both in the euro and in their own currencies at fixed exchange rates. On January 1, 2002, the euro will be the only currency in Economic and Monetary Union countries.

We conduct business in more than 130 countries, generating approximately 45% of revenues outside the United States. A significant portion of our business is conducted in Europe. The introduction of the euro requires that we make modifications to our internal operations as well as to our external business arrangements. For example, product pricing and sales proposals are now available in the euro. Similarly, our billing and disbursement functions have been modified to reflect the use of the euro.

Early in 1997, we established a six-member task force reporting to the chief financial officer to identify the issues related to the introduction of the euro and to develop and implement a plan to address those issues. The task force has developed a detailed plan for the euro implementation addressing all areas of operations, both internal and external. Major initiatives resulting from the recommendations of the task force are:

• create a “Beckman Coulter Euro Information Center” to facilitate worldwide communication related to the euro;
• accommodate our customers’ preferences for their national currency or the euro during the transition period;
• operate in a multi-currency environment (including the euro, national currency and the U.S. dollar), during the transition period, in all the European countries in which we do business; and
• adopt the euro for internal systems and reporting as of December 1, 2001.

We do not expect the cost of this effort to have a material effect on our business, results of operations, financial position or liquidity. However, we cannot guarantee that all problems will be foreseen and corrected, or that no material disruption of our business will occur. There is also likely to be competitive implications on our pricing and marketing strategies related to the conversion to the euro; however, we do not know the effects of any such impact at this time.

Recent Accounting Developments In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). The provisions of the statement require the recognition of all derivatives as either assets or liabilities in the consolidated balance sheet and the measurement of those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. This statement, as amended, is effective for the company in the first quarter of 2001. We are currently evaluating the impact of this pronouncement on our financial statements and results of operations. At this time, we are unable to assess the impact of adopting SFAS 133.

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5. Business Climate

The clinical diagnostics and life science research markets are highly competitive and we encounter significant competition in each market from many manufacturers, both domestic and outside the United States. These markets continue to be unfavorably impacted by the economic weakness in parts of Europe and Asia and government and healthcare cost containment initiatives in general. The life science research market also continues to be affected by consolidations of pharmaceutical companies and governmental constraints on research and development spending, especially outside the United States.

In the clinical diagnostics market, attempts to lower costs and to increase productivity have led to further consolidation among healthcare providers in the United States, resulting in more powerful provider groups that continue to leverage their purchasing power to contain costs. Preferred supplier arrangements and combined purchases are becoming more commonplace. Consequently, it has become essential for manufacturers to provide cost-effective diagnostic systems to remain competitive. Cost containment initiatives in the United States and in the European healthcare systems will continue to be factors, which may affect our ability to maintain or increase sales. Future profitability may also be adversely affected if the relative value of the U.S. dollar strengthens against certain currencies.

Our new products originate from four sources:

• internal research and development programs;
• external collaborative efforts with individuals in academic institutions and technology companies;
• devices and techniques that are generated in customers’ laboratories; and
• business and technology acquisitions.

The size and growth of our markets are influenced by a number of factors, including:

• technological innovation in bio-analytical practice;
• government funding for basic and disease-related research (for example, heart disease, AIDS and cancer);
• research and development spending by biotechnology and pharmaceutical companies;
• healthcare spending; and
• physician practice.

We expect worldwide healthcare expenditures and diagnostic testing to increase over the long-term, primarily as a result of the following:

• growing demand for services generated by the increasing size and aging of the world population;
• increasing expenditures on diseases requiring costly treatment (for example, AIDS and cancer); and
• expanding demand for improved healthcare services in developing countries.

With Coulter and two earlier acquisitions in immunochemistry-based diagnostics, Hybritech, and the Access® immunoassay product line, we completed a major strategic initiative intended to build on our leadership position in automated clinical chemistry and create a broad based capability in routine clinical chemistry. We are able to offer a broad range of automated systems that together can perform more than 75% of a hospital laboratory’s test volume and essentially all of the tests that are considered routine. We believe we are able to provide significant value-added benefits, enhanced through our expertise in simplifying and automating laboratory processes, to our customers.

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6. Taxes

We are subject to income taxation in many jurisdictions throughout the world. Our effective tax rate and income tax liabilities will be affected by a number of factors, such as:

• the amount of taxable income in particular jurisdictions;
• the tax rate in such jurisdictions;
• tax treaties between jurisdictions;
• the extent to which income is repatriated; and
• future changes in the law.

Generally, our income tax liability in a particular jurisdiction is determined either on an entity-by-entity (non-consolidated) basis or on a consolidated basis including only those entities incorporated in the same jurisdiction. In those jurisdictions where consolidated tax reporting is not permitted, we may pay income taxes even though, on an overall basis, we may have incurred a net loss for the tax year.

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7. Forward-Looking Statements

This annual report contains forward-looking statements, including statements regarding, among other items:

• our business strategy;
• anticipated trends in our business and plans to reduce indebtedness;
• our liquidity requirements and capital resources;
• anticipated proceeds from sales of assets;
• the impact of Year 2000 issues, the euro conversion and inflation on our operations; and
• earnings and sales growth.

These forward-looking statements are based on our expectations and are subject to a number of risks and uncertainties, some of which are beyond our control. These risks and uncertainties include, but are not limited to:

• complexity and uncertainty regarding development of new high-technology products;
• loss of market share through aggressive competition in the clinical diagnostics and life science research markets;
• our dependence on capital spending policies and government funding;
• the effect of potential healthcare reforms;
• fluctuations in foreign exchange rates and interest rates;
• reliance on patents and other intellectual property;
• unanticipated reductions in cash flows and difficulty in sales of assets;
• unanticipated Year 2000 or euro problems; and
• other factors that cannot be identified at this time.

Although we believe we have the product offerings and resources required to achieve our objectives, actual results could differ materially from those anticipated by these forward-looking statements. There can be no assurance that events anticipated by these forward-looking statements will in fact transpire as expected.