UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-4448
BAXTER INTERNATIONAL INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-0781620
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Baxter Parkway, Deerfield, Illinois 60015-4633
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(Address of principal executive offices) (Zip Code)
(847) 948-2000
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(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
The number of shares of the registrant's Common Stock, $1 par value, outstanding
as of July 31, 1996, the latest practicable date, was 272,520,911 shares.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(in millions, except per share data)
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Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
Operations
Net sales $1,335 $1,276 $2,634 $2,434
Costs and expenses
Cost of goods sold 741 702 1,462 1,354
Marketing and administrative
expenses 282 278 558 521
Research and development
expenses 84 82 166 158
Special charge for
litigation, net - - - 40
Allocated interest, net 26 24 50 47
Goodwill amortization 9 7 17 14
Other (4) 5 (4) (29)
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Total costs and expenses 1,138 1,098 2,249 2,105
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Income from continuing operations
before income taxes 197 178 385 329
Income tax expense 55 64 105 117
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Income from continuing operations 142 114 280 212
Discontinued operations
Income from discontinued operations, net of
income taxes of $10 and $18 in 1996
and $0 and $2 in 1995 34 51 54 98
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Net income $176 $165 $334 $310
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Earnings per common share
Continuing operations $0.52 $0.41 $1.03 $0.76
Discontinued operations 0.13 0.18 0.20 0.35
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Net Income $0.65 $0.59 $1.23 $1.11
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Average number of common shares
outstanding 272 278 272 280
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
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Baxter International Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions, except shares)
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June 30, December 31,
1996 1995
(Unaudited)
Current Cash and equivalents $670 $476
assets Accounts receivable 956 973
Notes and other current
receivables 240 236
Inventories 942 906
Short-term deferred income taxes 151 189
Prepaid expenses 157 131
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Total current assets 3,116 2,911
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Property, At cost 3,532 3,427
plant and Accumulated depreciation
equipment and amortization (1,792) (1,678)
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Net property, plant and equipment 1,740 1,749
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Other assets Net assets of discontinued operations 2,602 2,619
Goodwill and other intangibles 1,182 1,098
Insurance receivables 765 805
Other 298 255
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Total other assets 4,847 4,777
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Total assets $9,703 $9,437
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Current Notes payable to banks $158 $59
liabilities Current maturities of long-term debt and
lease obligations 388 160
Accounts payable and accrued liabilities 1,366 1,548
Income taxes payable 420 387
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Total current liabilities 2,332 2,154
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Long-term debt and lease obligations 2,449 2,372
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Long-term deferred income taxes 169 173
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Long-term litigation liability 648 678
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Other non-current liabilities 315 356
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Stockholders' Common stock, $1 par value,
equity authorized 350,000,000 shares,
issued 287,701,247 shares in
1996 and 1995 288 288
Additional contributed capital 1,852 1,837
Retained earnings 2,279 2,105
Common stock in treasury, at cost,
15,339,480 shares in 1996 and
15,801,580 shares in 1995 (577) (550)
Foreign currency adjustment (52) 24
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Total stockholders' equity 3,790 3,704
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Total liabilities and stockholders' equity $9,703 $9,437
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
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Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in millions)
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Six months ended June 30,
1996 1995
(Brackets denote cash outflows)
Cash flow provided Income from continuing operations $280 $212
by continuing Adjustments
operations Depreciation and amortization 171 172
Deferred income taxes 18 23
Asset dispositions, net (10) (62)
Special charge for litigation, net - 40
Other 12 10
Changes in balance sheet items
Accounts receivable (5) (46)
Inventories (42) (53)
Accounts payable and other
current liabilities (196) (40)
Restructuring program payments (24) (18)
Other (12) (51)
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Cash flow provided by continuing
operations 192 187
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Cash flow provided by discontinued operations 55 268
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Investment Capital expenditures (162) (153)
transactions Acquisitions and investments in
affiliates (143) (13)
Proceeds from asset dispositions 17 82
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Investment transactions, net (288) (84)
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Financing Issuances of debt and lease
obligations 619 803
Increase (decrease) in debt with
maturities of three months or less, net 1,141 (559)
Redemption of debt and lease
obligations (1,341) (345)
Common stock dividends (160) (154)
Stock issued under employee
benefit plans 83 50
Purchase of treasury stock (87) (255)
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Financing transactions, net 255 (460)
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Effect of foreign exchange rate changes on cash
and equivalents (20) 2
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Increase (decrease) in cash and equivalents 194 (87)
Cash and equivalents at beginning of period 476 468
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Cash and equivalents at end of period $670 $381
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
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Baxter International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. FINANCIAL INFORMATION
The unaudited interim condensed consolidated financial statements of Baxter
International Inc. and its subsidiaries (the "Company" or "Baxter") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These interim condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes included in the Company's 1995
Annual Report to Stockholders.
In the opinion of management, the interim condensed consolidated financial
statements reflect all adjustments necessary for a fair presentation of the
interim periods. All such adjustments are of a normal, recurring nature. The
results of operations for the interim period are not necessarily indicative of
the results of operations to be expected for the full year.
Certain amounts in the prior year condensed consolidated financial statements
and the related notes thereto have been reclassified to conform to the current
year presentation.
2. DISCONTINUED OPERATIONS
On November 27, 1995, the board of directors of Baxter International Inc.
approved in principle a plan to distribute to Baxter stockholders all of the
outstanding stock of Allegiance Corporation ("Allegiance"), its health-care cost
management business, in a spin-off transaction which is expected to be free from
taxation in the United States (the "Distribution"). The creation of two
independent companies will enable Baxter and Allegiance to devote management
time, attention and investments directly to the core strategies of each
business. Allegiance will consist of Baxter's health-care cost management
services, distribution, surgical and respiratory-therapy products operations.
The Distribution is expected to occur in late 1996 and will result in Allegiance
operating as an independent publicly-owned company.
The following selected financial information for Allegiance (including
previously divested businesses) is presented for informational purposes only and
does not reflect what the results of operations and financial position would
have been had it operated as a stand-alone entity. Income statement data for
Allegiance is as follows (unaudited):
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Three months ended Six months ended
June 30, June 30,
(in millions) 1996 1995 1996 1995
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Net sales $1,017 $1,189 $2,064 $2,349
Net income $34 $51 $54 $98
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Net sales and net income in 1996 reflect the loss of revenues and income related
to the Company's divestiture of its Industrial and Life Sciences division to VWR
Corporation in September 1995. Net income for the three and six months ended
June 30, 1996 includes a $21 million after-tax curtailment gain since Allegiance
employees will not participate in Baxter's pension and other post-employment
benefit plans, and $10 million in after-tax expenses associated with the spin-
off.
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Information regarding the composition of the net assets of Allegiance at June
30, 1996 and December 31, 1995 is provided below:
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June 30, December 31,
1996 1995
(in millions) (unaudited)
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Net current assets $765 $722
Net noncurrent assets 1,837 1,897
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Net assets of Allegiance $2,602 $2,619
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The Company has determined that, through an issuance of new third-party debt,
approximately $1.2 billion of Baxter's existing debt will be indirectly assumed
by Allegiance upon spin-off.
PRO FORMA INFORMATION
The following unaudited pro forma information present the results of Allegiance
prepared utilizing the results of operations shown above, adjusted to (1)
exclude non-recurring items, (2) reflect the estimated incremental costs
associated with being an independent public company and (3) include the impact
of changes in various business arrangements between Allegiance and Baxter
effective on the spin-off date and other pro forma adjustments :
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Three months ended Six months ended
June 30, June 30,
(in millions) 1996 1995 1996 1995
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Net sales $1,092 $1,133 $2,204 $2,237
Net income $12 $18 $27 $33
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The pro forma financial data does not purport to be indicative of the results of
Allegiance in the future or what the results of operations would have been had
Allegiance been a separate, stand-alone entity during the periods shown.
3. ACQUISITIONS AND DIVESTITURES
At the end of January 1996, Baxter Healthcare Corporation ("BHC"), a subsidiary
of Baxter International Inc., completed the acquisition of PSICOR, Inc. (a
perfusion services business) for $17.50 per share, or approximately $80 million.
This acquisition, coupled with the purchase of SETA, Inc. during 1995, is
consistent with the cardiovascular businesses' strategy to offer both products
and services related to open-heart surgery.
On May 9, 1996, Nestle S.A. ("Nestle") and BHC agreed to enter into negotiations
for the purpose of dissolving Clintec Nutrition Company ("Clintec"). Clintec is
a 50-50 joint venture between Baxter and Nestle that develops, markets and
distributes parenteral and enteral nutrition products internationally. A final
dissolution agreement was signed in July 1996 and closing is expected to occur
before the end of 1996. Under the dissolution agreement, Baxter will receive
the parenteral nutrition worldwide businesses including its related assets and
liabilities for a total consideration of Baxter's 50 percent share of the
Clintec enteral worldwide business and a cash payment of $45 million.
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4. INVENTORIES
Inventories consisted of the following:
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June 30, December 31,
1996 1995
(in millions) (unaudited)
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Raw materials $180 $165
Work in process 158 164
Finished products 604 577
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Total inventories $942 $906
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5. STOCK REPURCHASE PROGRAM
In November 1995, the Company's board of directors authorized the repurchase of
$500 million of the Company's common stock over several years. As of June 30,
1996, the Company had repurchased approximately $87 million (approximately 2
million shares) of its common stock, including $7 million (approximately 200,000
shares) purchased in an odd lot buyback program approved by the board of
directors in May 1996.
6. RESTRUCTURING CHARGES
In November 1993, the Company announced that its board of directors approved a
series of strategic actions to improve shareholder value, to extend positions of
leadership in high-growth health-care markets and to reduce costs. These
actions were designed to accelerate growth and reduce costs in the Company's
businesses worldwide, including reorganizations and consolidations in the United
States, Europe, Japan and Canada. In November 1993, the Company recorded a $230
million pretax provision to cover costs associated with these restructuring
initiatives. Since the announcement of the 1993 restructuring program, the
Company has implemented, or is in the process of implementing, all of the major
strategic actions associated with the restructuring program, which is expected
to be completed in 1997.
The following table summarizes the Company's 1993 restructuring reserves as of
December 31, 1995 and June 30, 1996 (unaudited):
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Divestitures
Employee- and asset Other
(in millions) related costs write-downs costs Total
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December 31, 1995 balance $48 $22 $23 $93
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Utilization:
Cash 10 - 12 22
Non-cash - 8 - 8
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June 30, 1996 balance $38 $14 $11 $63
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In September 1995, the Company completed a global study of its manufacturing
capacity. As a result of the study, management approved a plan to consolidate
the Company's manufacturing operations in Puerto Rico in order to eliminate
excess capacity and reduce manufacturing costs. To effect this plan, management
recorded a restructuring charge of $93 million in the third quarter of 1995.
The charge is predominantly comprised of the estimated costs to close the
Company's intravenous solutions plant and warehouse in Carolina, Puerto Rico.
Production and warehousing will be transferred and consolidated into other
facilities in Puerto Rico and the United States. Implementation of the plan is
underway and completion is anticipated by the end
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of 1998. Employee-related costs consist primarily of severance for the
approximately 1,450 positions that will be eliminated in connection with the
approved plan.
In addition to the consolidation of the Company's manufacturing operations in
Puerto Rico, the Company initiated plans for other organizational structure
changes which resulted in a $10 million provision for employee severance.
The following table summarizes the Company's 1995 restructuring reserves as of
December 31, 1995 and June 30, 1996 (unaudited):
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Employee- Asset Other
(in millions) related costs write-downs costs Total
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December 31, 1995 balance $26 $19 $9 $54
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Utilization:
Cash 5 - - 5
Non-cash - 6 1 7
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June 30, 1996 balance $21 $13 $8 $42
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7. LEGAL PROCEEDINGS
In the first half of 1996, significant developments occurred, primarily in Japan
and the United States, relative to claims and litigation pertaining to the
Company's plasma-based therapies. On March 13, 1996, Baxter Ltd., the Japanese
subsidiary of the Company, announced that it had accepted the basic terms of a
court-imposed settlement of lawsuits filed by 400 Japanese with hemophilia who
are infected with the AIDS virus and who used blood-clotting factor
concentrates. The settlement anticipates a one-time payment by the Japanese
government and all members of the factor concentrate industry to each claimant
of 45 million yen, or approximately $420,000, and continuing monthly payments
during the recipients' lifetime. Based on the courts' established definition of
responsibility, the Company would be responsible for approximately 15 percent of
the producers' share. The Company has previously established accruals that are
adequate to fund the proposed settlement in Japan.
On April 19, 1996, the Company announced that it is participating with Bayer
Corporation, Armour Pharmaceutical Company/Rhone-Poulenc Rorer Inc. and Alpha
Therapeutic Corporation in a joint settlement proposal pertaining to U.S.
hemophilia claims and litigation. Subsequent negotiations with plaintiffs'
counsel have resulted in a settlement proposal which essentially provides
payments of $100,000 per person to U.S. people with hemophilia who are infected
with the AIDS virus and who used non heat-treated blood-clotting therapies, and
an additional $40 million for legal fees and administration costs. The
Company's agreed contribution to the proposed settlement is 20 percent, which is
within its previously established accruals for all plasma-based therapy claims
and litigation.
Please refer to "Part II - Item 1. Legal Proceedings" of this document for the
status of cases and claims from individuals seeking damages for injuries
allegedly caused by silicone mammary implants manufactured by a division of
American Hospital Supply Corporation. That section also discusses the status of
lawsuits and claims involving the Company's plasma-based therapies and updates
the status of other legal proceedings involving the Company.
8. ALLOCATED INTEREST
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Net interest expense consisted of the following (unaudited):
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Three months ended Six months ended
June 30, June 30,
(in millions) 1996 1995 1996 1995
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Interest expense $59 $52 $116 $104
Interest income (11) (7) (22) (16)
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Interest, net $48 $45 $94 $88
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Allocated to continuing
operations $26 $24 $50 $47
Allocated to discontinued
operations $22 $21 $44 $41
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9. CREDIT FACILITIES
On July 11, 1995, the Company replaced its current $1.4 billion revolving credit
facility with a new $1.5 billion facility with substantially similar covenants.
This revolving credit facility, which will expire in July 2000, is principally
used to support commercial paper and short-term note borrowings.
-10-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Company's 1995 Annual Report to Stockholders includes management's key
financial objectives for 1996. These objectives and the results achieved
through June 30, 1996 are summarized as follows:
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FULL YEAR 1996 OBJECTIVES MID-YEAR RESULTS
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- - - Generate $500 million in - The Company generated "operational
"operational cash flow" in 1996. cash flow" of $284 million during
the six months ended June 30, 1996.
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- - - Achieve net income growth in the - The Company's net income growth was
high single digits. 8% for the first half of 1996.
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- - - Continue to reduce marketing and - The Company's marketing and
administrative expenses as a administrative expenses were 18.5%
percent of sales. of sales for the six months ended
June 30, 1996, compared to 18.2 %
of sales for the same period in
1995. The Company will continue to
focus on reducing this ratio.
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- - - Maintain a net-debt-to-net-capital - The Company's net-debt-to-net-
ratio between 35% to 40%. capital ratio was 38% at June 30,
1996.
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- - - Repurchase $500 million of Baxter - The Company repurchased $87 million
stock over the next several years of its common stock during the
as authorized by the Board of first six months of 1996.
Directors.
- - --------------------------------------------------------------------------------
The above objectives were established based on total company results and have
not been adjusted for the planned spin-off of Allegiance. Accordingly, the
above reflect the combined results of both continuing and discontinued
operations. See further discussion of the spin-off of Allegiance in Note 2 to
the Condensed Consolidated Financial Statements.
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The following management discussion and analysis pertains to continuing
operations, unless otherwise noted, and describes material changes in the
Company's financial condition since December 31, 1995. Trends of a material
nature are discussed to the extent known and considered relevant.
RESULTS OF OPERATIONS
The following table shows net sales growth by major geographic region:
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Three months ended Six months ended
June 30, Percent June 30, Percent
(in millions) 1996 1995 Increase 1996 1995 Increase
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Geographic regions
International $684 $640 7% $1,339 $1,205 11%
United States 651 636 2% 1,295 1,229 5%
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Total net sales $1,335 $1,276 5% $2,634 $2,434 8%
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International sales growth of 7% and 11% for the three- and six-month periods
ended June 30, 1996, respectively, was primarily the result of strong worldwide
demand for Recombinate-TM- therapeutic blood products, greater penetration of
renal products (particularly in Asia) and strong sales of various hospital
products outside of the United States (particularly in Latin America and the
Pacific Rim). Without the effect of unfavorable foreign exchange rates,
international sales growth for the three and six months ended June 30, 1996
would have been 13% and 14%, respectively.
Domestic sales growth of 2% and 5% for the three- and six-month periods ended
June 30, 1996, respectively, was primarily the result of acquisitions related to
the perfusion services businesses, the settlement of patent litigation which
resulted in proceeds received for past royalties and strong demand for the
Company's Recombinate-TM- therapeutic blood products and tissue heart valves.
This growth was partially offset by the decline in intravenous systems sales
from the unusually high level of sales in 1995 resulting from the Columbia/HCA
Healthcare Corporation contract signed late in 1994, and the loss of renal
products sales to National Medical Care, Inc. due to its planned merger with a
competitor, Fresenius AG.
The following gives key ratios of certain income statement items as a percent
of sales:
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Three months ended Six months ended
June 30, Increase June 30, Increase
1996 1995 (decrease) 1996 1995 (decrease)
- - ------------------------------------------------------------------------------------------------
Gross profit margin 44.5% 45.0% (0.5 pts) 44.5% 44.4% 0.1pts
Marketing and administrative
expenses 21.1% 21.8% (0.7 pts) 21.2% 21.4% (0.2 pts)
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-12-
The decrease in gross profit margin for the three months ended June 30, 1996 is
primarily a result of changes in the sales mix due to the Company's entry into
the lower margin perfusion services business. The gross profit margin for the
six months ended June 30, 1996 was also affected by the lower-margin perfusion
services business sales, offset by past royalties received in a patent
litigation settlement.
For the three and six months ended June 30, 1996, marketing and administrative
expenses decreased as a percent of sales as a result of the acquisition of the
perfusion services businesses, which have a lower cost structure, coupled with a
continued focus on cost control in all business units. The decline in marketing
and administrative expenses as a percent of sales for the quarter ended June 30,
1996 completely offsets the decline in gross profit margin for the period.
The following table shows research and development expenses:
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Three months ended Six months ended
June 30, Percent June 30, Percent
(in millions) 1996 1995 Increase 1996 1995 Increase
- - --------------------------------------------------------------------------------
Research and development
expenses $84 $82 2.4% $166 $158 5.0%
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As a percent of sales 6.3% 6.4% 6.3% 6.5%
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The Company's research and development expenditures are focused on
initiatives such as blood substitutes, renal therapy and transplantation,
immunotherapy, gene therapy and the Novacor-Registered Trademark-
left-ventricular assist system. During the second quarter of 1996,
HemAssist-TM-, the Company's blood substitute product, received clearance
from the U.S. Food and Drug Administration to enter Phase III clinical trials
in the United States.
The following table shows pretax income from continuing operations:
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Three months ended Six months ended
June 30, Percent June 30, Percent
(in millions) 1996 1995 Increase 1996 1995 Increase
- - --------------------------------------------------------------------------------
Pretax income from
continuing operations $197 $178 10.6% $385 32 17.0%
- - --------------------------------------------------------------------------------
Pretax income from continuing operations benefited from the items discussed
above. In addition, the decrease in other income and expense items for the
three months ended June 30, 1996 was primarily the result of a higher level of
net gains associated with the disposal or discontinuance of minor, non-strategic
businesses and investments, partially offset by increased goodwill amortization
as a result of the perfusion services business acquisitions. The decrease in
other income and expense items for the six months ended June 30, 1996 was
primarily the result of a $40 million mammary implant litigation charge, a lower
level of foreign exchange losses, and a higher level of net gains associated
with the disposal or discontinuance of minor, non-strategic businesses and
investments.
The effective income tax rate for the total company (continuing and discontinued
operations) was 26.9% and 27.9% for the second quarter of 1996 and 1995,
respectively, and 26.9% and 27.7% for the year-to-date periods ended June 30,
1996 and 1995, respectively. The slight reduction in the tax rate in 1996 is
primarily due to a larger portion of the Company's earnings generated in lower
tax jurisdictions. The effective income tax rate for continuing operations was
27.9% and 27.2% for the three- and six month periods ended June 30, 1996,
respectively, compared to 35.9% and 35.6% for the corresponding periods in 1995,
respectively. The difference in the effective tax rates in 1996 and 1995 was
primarily the result of the Company's
-13-
decision in early 1995 to repatriate certain foreign earnings. This had the
effect of increasing the effective rate for continuing operations, and
lowering the effective rate for discontinued operations. Management expects
that the effective tax rate for continuing operations, with its anticipated
domestic and international earnings mix, will be in the 28%-30% range in 1997.
Net earnings from continuing operations were $142 and $114 million in the second
quarter of 1996 and 1995, respectively, and $280 and $212 million for the six
months ended June 30, 1996 and 1995, respectively. Earnings per common share
from continuing operations was 52 and 41 cents in the second quarter of 1996 and
1995, respectively, and $1.03 and 76 cents for the six months ended June 30,
1996 and 1995, respectively. As discussed above, the increased earnings in 1996
primarily reflect international sales growth, the favorable impact of a patent
settlement, lower marketing and administrative expenses due to the acquisition
of the perfusion services businesses and better cost management, along with the
decrease in the effective tax rate.
Net income and earnings per share increased 7% and 10%, respectively, for the
three months ended June 30,1996 over the comparable period in 1995, and
increased 8% and 11%, respectively, for the six months ended June 30, 1996 over
the year-to-date period in 1995. These increases reflect the items related to
net earnings from continuing operations discussed above coupled with decreases
in income from discontinued operations. The decrease in income from
discontinued operations was due primarily to the loss of earnings resulting from
the Company's divestiture of the Industrial and Life Sciences division, expenses
associated with the spin-off, partially offset by the curtailment gains related
to certain employee benefit plans. See Note 2 to the Condensed Consolidated
Financial Statements for additional information.
The weighted average shares outstanding for the three- and six-month periods
ended June 30,1996 decreased compared to the corresponding periods in 1995
primarily as a result of the completion of the Company's first $500 million
stock repurchase program in September 1995 and 1996 repurchases under its second
$500 million repurchase program. This decrease in average shares outstanding
caused earnings per share to grow at a higher rate than the growth in net
income.
RESTRUCTURING PROGRAMS
Baxter currently has two restructuring programs in process. The 1993
restructuring program was designed to accelerate growth and reduce costs in the
Company's businesses worldwide, including reorganizations and consolidations in
the United States, Europe, Japan and Canada. The 1995 restructuring program was
initiated to consolidate the Company's manufacturing operations in Puerto Rico
in order to eliminate excess capacity and reduce manufacturing costs. See Note
6 to the Condensed Consolidated Financial Statements for discussions related to
the initial charges for the programs, components of the charges, and cash and
non-cash usage of the related liabilities.
Since the announcement of its 1993 restructuring program the Company has
implemented, or is in the process of implementing, all of the major strategic
actions associated therewith and is satisfied that such actions are generally
progressing on schedule and that the overall program will meet previously
established financial targets. In the first six months of 1996, the Company
utilized $30 million of restructuring reserves, including $22 million in cash
payments. Cash outflows pertain primarily to employee-related costs for
severance, outplacement assistance, relocation and retention. The Company has
eliminated 1,363 positions of the approximately 1,640 positions affected by the
program. The majority of the remaining reductions will occur throughout the
remainder of 1996 and 1997 as facility closures and consolidations are completed
as planned. The Company currently anticipates that it will achieve
approximately $110 million of savings in 1996, which is consistent with its
original savings target.
-14-
Management anticipates that these savings will be partially invested in
increased research and development and expansion into growing international
markets.
Management is in the early stages of implementing its 1995 restructuring
program. In the first six months of 1996, the Company utilized $12 million of
restructuring reserves. Cash outflows were primarily for employee severance.
The Company has eliminated approximately 300 positions of the approximately
1,450 positions affected by the program. The plant closure and consolidations
in Puerto Rico will lower the Company's manufacturing costs. Management
believes these actions will help mitigate the Company's exposure to future gross
margin erosion arising from pricing pressure primarily in the United States.
Management anticipates that future cash expenditures related to both the 1993
and 1995 restructuring programs will be funded from cash generated from
operations. Management further believes that its remaining restructuring
reserves are adequate to complete the actions contemplated by both restructuring
programs.
LIQUIDITY AND CAPITAL RESOURCES
Management assesses the Company's liquidity in terms of its overall ability to
mobilize cash to support ongoing business levels and to fund its growth.
Cash flow provided by continuing operations was $192 million for the six months
ended June 30, 1996 as compared to $187 million for the corresponding period in
1995. The change in working capital included a payment of $125 million in
connection with the mammary implant global settlement. Refer to "Part II -
Item1. Legal Proceedings" for further information. Management believes that the
Company's cash flow is sufficient to support normal ongoing business
requirements.
As a result of the Company's continued emphasis on cash flow, management
monitors an internal performance measure called "operational cash flow" which
evaluates each operating business on all aspects of cash flow under its direct
control. The incentive compensation programs for the Company's senior
management in each business include significant emphasis on the attainment of
both "operational cash flow" as well as earnings objectives.
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The following table reconciles cash flow provided by continuing operations,
as determined by generally accepted accounting principles, to the Company's
internal measure of "operational cash flow":
- - ----------------------------------------------------------------------------
Six months ended
June 30,
(in millions) (brackets denote cash outflows) 1996 1995
- - ----------------------------------------------------------------------------
Cash flow provided by continuing operations
per the Company's condensed
consolidated statements of cash flows $ 192 $ 187
Capital expenditures (162) (153)
Net interest after tax 29 29
Mammary implant litigation, net 107 26
Other 4 24
- - ----------------------------------------------------------------------------
"Operational cash flow" - continuing operations $170 $113
"Operational cash flow" - discontinued operations $114 $126
- - ----------------------------------------------------------------------------
Total "operational cash flow" $284 $239
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
Total "operational cash flow" of $284 million is consistent with the Company's
objective to generate "operational cash flow" of $500 million in 1996.
The Company's current assets exceeded current liabilities by $784 million at
June 30, 1996 and $757 million at December 31, 1995. Current assets include
accounts and notes receivable of $1,196 million and inventories of $942 million
at June 30, 1996. These sources of liquidity are convertible into cash over a
relatively short period of time and, thus, will help the Company satisfy normal
operating cash requirements.
The following table shows the components of net investment transactions:
- - -----------------------------------------------------------------
Six months ended
June 30,
(in millions) (brackets denote cash outflows) 1996 1995
- - -----------------------------------------------------------------
Capital expenditures $(162) ($153)
Acquisitions (143) (13)
Proceeds from asset dispositions 17 82
- - -----------------------------------------------------------------
Total investment transactions, net $(288) ($84)
- - -----------------------------------------------------------------
- - -----------------------------------------------------------------
Capital expenditures include the expansion of manufacturing capacity for renal,
cardiovascular and biotech products and construction of a manufacturing facility
for blood substitutes in Switzerland. Consistent with Baxter's global expansion
strategy, during the second quarter of 1996, the Company's board of directors
approved $30 million in capital expenditures for two intravenous products
manufacturing facilities in China.
The increase in acquisitions primarily relates to the acquisition of PSICOR,
Inc. in January 1996. See Note 3 to the Condensed Consolidated Financial
Statements for additional information.
At June 30, 1996, the Company's net-debt-to-net-capital ratio was 38% as
compared to 36% at December 31, 1995. These results are consistent with the
Company's stated goal of maintaining a net-debt-to-net-capital ratio of between
35% to 40%.
During the second quarter of 1996, the Company's debt rating on senior debt was
reaffirmed as "A3" by Moody's, upgraded to "A" by Standard & Poor's and
downgraded to
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"A-" by Duff & Phelps. The Company has determined that, through issuance of
new third-party debt, approximately $1.2 billion of Baxter's existing debt
will be indirectly assumed by Allegiance upon spin-off. Management expects
that the debt of Allegiance will be investment grade. See further discussion
of the spin-off of Allegiance in Note 2 to the Condensed Consolidated
Financial Statements.
The Company intends to fund its short-term and long-term obligations as they
mature by issuing additional debt or through cash flow from operations. The
Company believes it has lines of credit adequate to support ongoing operational,
restructuring and litigation requirements. Beyond that, the Company believes it
has sufficient financial flexibility to attract long-term capital on acceptable
terms as may be needed to support its obligations and growth objectives.
In November 1995, the Company's board of directors authorized the repurchase of
$500 million of the Company's common stock over a period of several years. As
of June 30, 1996, the Company had repurchased $87 million (or approximately 2
million shares) of its common stock, including $7 million (approximately 200,000
shares) purchased in an odd lot buyback program approved by the board of
directors in May 1996.
On May 6, 1996, the board of directors declared a quarterly dividend on the
Company's common stock of 30.25 cents per share (annualized rate of $1.21 per
share). As a result of the planned spin-off of Allegiance, the Company is
reviewing its current dividend policy. However, it is management's present
intent that the current annual dividend be allocated between Baxter's continuing
operations and Allegiance subsequent to the spin-off.
LITIGATION
Refer to "Part II - Item 1. Legal Proceedings" in this document for the status
of cases and claims from individuals seeking damages for injuries allegedly
caused by silicone mammary implants manufactured by a division of American
Hospital Supply Corporation. That section also discusses the status of lawsuits
and claims involving the Company's plasma-based therapies.
Upon resolution of any of the uncertainties described in "Part II - Item 1.
Legal Proceedings" in this document, the Company may incur charges in excess of
presently established reserves. While such future charges could have a material
adverse impact on the Company's net income in the period in which it is
recorded, management believes that any outcome of these actions, individually or
in the aggregate, will not have a material adverse effect on the Company's cash
flow or consolidated financial position.
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REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
A review of the interim consolidated financial information included in this
Quarterly Report on Form 10-Q for the three months and six months ended June 30,
1996 has been performed by Price Waterhouse LLP, the Company's independent
public accountants. Their report on the interim consolidated financial
information follows. There have been no adjustments or disclosures proposed by
Price Waterhouse LLP which have not been reflected in the interim consolidated
financial information. Their report is not considered a report within the
meaning of Sections 7 and 11 of the Securities Act of 1933 and therefore, the
independent accountants' liability under Section 11 does not extend to it.
-18-
REPORT OF INDEPENDENT ACCOUNTANTS
August 13, 1996
Board of Directors and Stockholders of
Baxter International Inc.
We have reviewed the accompanying consolidated balance sheet as of June 30, 1996
and the related condensed consolidated statements of income for the three- and
six-month periods ended June 30, 1996 and 1995, and condensed consolidated
statements of cash flows for the six-month period ended June 30, 1996 and 1995
of Baxter International Inc. and its subsidiaries. This interim financial
information is the responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial information for it to be in
conformity with generally accepted accounting principles.
We previously audited, in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1995, and the related
consolidated statements of income, cash flows and stockholders' equity for the
year then ended (not presented herein), and in our report dated February 14,
1996 we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet information as of December 31, 1995, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
Yours very truly,
Price Waterhouse LLP
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PART II. OTHER INFORMATION
Baxter International Inc. and Subsidiaries
Item 1. Legal Proceedings
As of June 30, 1996, the Company was a defendant or co-defendant in 6,813
lawsuits and had 1,777 pending claims from individuals, all of which seek
damages for injuries allegedly caused by silicone mammary implants manufactured
by the American Heyer-Schulte division of American Hospital Supply Corporation
("American"). The comparable number of cases and claims was 8,747 as of March
31, 1996. In the second quarter of 1996, 224 cases and claims were disposed of.
The typical case or claim alleges that the individual's mammary implants caused
one or more of a wide range of ailments, including non-specific autoimmune
disease, scleroderma, lupus, rheumatoid arthritis, fibromyalgia, mixed
connective tissue disease, Sjogren's Syndrome, dermatomyositis, polymyositis,
and chronic fatigue.
In addition to the individual suits against the Company, a class action on
behalf of Louisiana women with mammary implants filed against all manufacturers
of such implants is pending in state court in Louisiana (SPITZFADDEN, ET AL., V.
DOW CORNING CORP., ET AL., Dist. Ct., Parish of Orleans, 92-2589). Baxter also
has been named in 10 other purported additional class actions, none of which is
currently certified. A suit seeking class certification on behalf of all
residents of the Province of Ontario, Canada, who received Heyer-Schulte
implants was dismissed as to Baxter (BURKE, V. AMERICAN HEYER-SCHULTE, ET AL.,
Ontario Prov. Court, Gen. Div., 15981/93). That case currently is on appeal.
Three other suits seeking class certification on behalf of all women in the
Provinces of Ontario, Quebec and British Columbia, respectively, who received
Heyer-Schulte mammary implants have been filed (BENNETT V. AMERICAN HEYER-
SCHULTE, ET AL., Ontario Prov. Court, Gen. Div., 18169/94; PELLETIER V. BAXTER
HEALTHCARE CORPORATION, ET AL., Quebec Prov. Court, Dist. of Montreal, 500-06-
000005-955; HARRINGTON V. DOW CORNING CORPORATION, ET AL., Supreme Court,
British Columbia, C954330). On April 11, 1996, the HARRINGTON court certified
the proceeding as a class action on one issue only: whether silicone gel breast
implants are reasonably fit for their intended purpose. The Company is
vigorously defending this action.
Additionally, the Company has been served with a purported class action brought
on behalf of children allegedly exposed to silicone in utero and through breast
milk. (FEUER, ET AL., V. MCGHAN, ET AL., U.S.D.C., E. Dist. NY, 93-0146.) The
suit names all mammary implant manufacturers as defendants and seeks to
establish a medical monitoring fund.
These implant cases and claims generally raise difficult and complex factual and
legal issues and are subject to many uncertainties and complexities, including,
but not limited to, the facts and circumstances of each particular case or
claim, the jurisdiction in which each suit is brought, and differences in
applicable law. Many of the cases and claims are at very preliminary stages,
and the Company has not been able to obtain information sufficient to evaluate
each case and claim.
There also are issues concerning which of the Company's insurers are responsible
for covering each matter and the extent of the Company's claims for contribution
against third parties. The Company believes that a substantial portion of the
liability and defense costs related to mammary implant cases and claims will be
covered by insurance, subject to self-insurance retentions, exclusions,
conditions, coverage gaps, policy limits and insurer solvency. The Company has
entered into a "coverage-in-place" agreement with certain London Market Insurers
which it believes collectively subscribed the majority of the Company's solvent
London occurrence coverage for the period 1974 to 1985. The
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Company has also reached similar agreements with Allstate Insurance Company
(as successor in interest to Northbrook Excess & Surplus Insurance Company),
Hartford Accident & Indemnity Company, First State Insurance Company, First
State Underwriters Agency of New England Reinsurance Corporation, Kingscroft
Insurance Company Ltd. (formerly Dart Insurance Company Ltd. and Dart & Kraft
Insurance Company Ltd.), Walbrook Insurance Company, Ltd., El Paso Insurance
Company Ltd., Lime Street Insurance Company Ltd. (formerly Louisville
Insurance Company Ltd.), and Mutual Reinsurance Company Ltd., each of which
issued or subscribed to policies of insurance during the 1974 to 1985 period.
These agreements resolve the signatory insurers' coverage defenses and
specify rules and procedures for allocation and payment of defense and
indemnity costs pursuant to which signatories will reimburse Baxter for
breast implant losses. The nature of coverage in place agreements is such
that the amounts that the signatory insurers individually and collectively
will pay the Company will depend upon how much loss the Company incurs in
connection with breast implant claims, subject to policy limits. In
addition, certain other insurers which issued occurrence insurance policies
during the same period have paid or committed contractually to pay their
policy limits. Three of the Company's claim-made insurers which issued
policies subsequent to 1985 have paid the full amounts of their policies to
the Company, and a fourth claims-made insurer has tendered the full amount of
its policy ratably as claims are paid. The combined total of the amount thus
far paid by insurers, committed for payment, and projected by the Company to
be paid under signed coverage agreements, is in excess of $350 million. The
insurers with which the Company has not reached coverage agreements have
generally reserved (i.e., neither admitted nor denied), and may attempt to
reserve in the future, the right to deny coverage, in whole or in part, due
to differing theories regarding, among other things, the applicability of
coverage and when coverage may attach. The Company is engaged in active
negotiations with these insurers concerning insurance coverage.
Some of the mammary implant cases pending against the Company seek punitive
damages and compensatory damages arising out of alleged intentional torts.
Depending on policy language, applicable law, and agreements with insurers, the
damages awarded pursuant to such claims may or may not be covered, in whole or
in part, by insurance. On February 7, 1994, the Company filed suit against all
of the insurance companies that issued product liability policies to American,
American Heyer-Schulte and Baxter for a declaratory judgment that: the policies
cover each year of injury or claim; the Company may choose among multiple
coverages; coverage begins with the date of implant; and legal fees and punitive
damages are covered. Subsequently, certain of the Company's product liability
insurance carriers filed suit against the Company and all of its other carriers
for a declaratory judgment to define various terms in the Company's insurance
policies, the extent of the Company's coverage, the date of the occurrences
giving rise to coverage, and the relative liabilities of the various insurance
carriers involved. In both cases, the parties have entered into a "stand-still"
agreement while negotiations continue.
In 1994, representatives of the plaintiffs and certain defendants in these cases
negotiated a global settlement of the issues under the jurisdiction of the Court
in LINDSEY, ET AL., V. DOW CORNING, ET AL., U.S.D.C. N. Dist. Ala., CV 94-P-
11558-S. The monetary provisions of the settlement, providing compensation for
all present and future plaintiffs and claimants through a series of specific
funds and a disease compensation program involving scheduled medical conditions,
were agreed upon by most of the significant defendants and representatives of
the plaintiffs. The total of all of the specific funds and the disease
compensation program, which would be paid-in and made available over
approximately 30 years following final approval of the settlement by the courts,
was $4.255 billion. The Company's share of this settlement was established by
the settlement negotiations at $556 million. Appeals have been filed
challenging the global settlement.
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The time to file current claims against the fund ended on September 16, 1994.
Since that date, the Court's claims administration office has been evaluating
the current claims filed against the scheduled medical conditions. If those
claims exceed the funds available, the settlement agreement provides for
reductions of the amounts payable for scheduled medical conditions (a
"ratchet"), and for negotiations among the representatives of the plaintiffs and
the settling defendants with respect to the shortfall in funding for current
claims. The Court indicated that it expected that there would be a substantial
ratchet downward in the amounts payable, and this expectation resulted in
further negotiations among the parties. As a result of the anticipated
substantial ratchet, on October 9, 1995, the Court in the LINDSEY case reopened
the right for individual plaintiffs and claimants to remove themselves from the
settlement ("opt-out"). On October 20, 1995, Baxter, Bristol-Myers Squibb
Company and Minnesota Mining and Manufacturing Company presented a draft
proposal to the Court modifying, among other things, the compensation program
under the current settlement. The settlement continues to provide compensation
for all present and future plaintiffs and claimants who have, or had at any
time, one or more mammary implants manufactured by any of the settling
defendants; however, current claims would be paid substantially through a
claims-made program and all compensation amounts have been substantially
reduced. On November 13, 1995, the Company's Board of Directors authorized the
Company to participate in the revised settlement. Subsequently, Union Carbide
Corporation and McGhan Medical Corporation joined the revised settlement. On
December 22, 1995, the Court approved the revised settlement program. On
January 16, 1996, the Company, Bristol-Myers Squibb Company and Minnesota Mining
and Manufacturing Company each paid $125 million into the Court-established fund
as an initial reserve to pay claims under the revised settlement.
Under the revised settlement, plaintiffs and claimants are required to submit
election forms to the claims administration office. Over 100,000 claimants have
sent in election forms, and 4,500 claimants elected to immediately opt-out.
Thereafter, the claimants will receive letters from the Court's claims
administration office notifying them of the status of their claim, at which time
they will have the option of accepting the settlement or opting out of the
settlement. Since May 1996, the claims administration office has sent out over
31,000 "Notification of Status" letters, and continues to send out these
letters. Approximately 890 claimants have opted out in response to receiving
such a letter. Advance payments have been made to over 15,000 eligible
claimants. The claims administration office is now in the process of
distributing full payment of eligible claims to current claimants which will
range between $10,000 to $100,000.
On May 15, 1995, Dow Corning Corporation, one of the defendants in the breast
implant cases declared bankruptcy and filed for protection under Chapter 11 IN
RE: DOW CORNING CORPORATION, U.S.D.C., E.D. Mich. 95-20512, 95CV72397-DT. ("Dow
Corning Bankruptcy"). The full impact of these proceedings on the global
settlement is unclear. As a result of the Dow Corning bankruptcy, Baxter was
able to remove a substantial number of opt-out claims from state to federal
courts. As of June 30, 1995, Baxter had removed the claims of 2,361
individuals and moved to transfer all of those cases to the federal district
court in Michigan in which the Dow Corning bankruptcy is pending. The Court
denied transfer of these cases. Baxter appealed the Court's denial, and on
April 9, 1996, the 6th Circuit Court of Appeals reversed the District Court's
ruling and remanded the cases back to the district court. The District Court
must now decide whether to grant transfer of these cases or abstain (in essence,
refuse to transfer).
In the fourth quarter of 1993, the Company accrued $556 million for its
estimated liability resulting from the global settlement of the mammary implant
class action and recorded a receivable for estimated insurance recovery of $426
million, resulting in a net charge of $130 million. Based on its continuing
evaluation of the remaining opt-outs, the Company accrued an additional $298
million for its estimated liability to litigate and/or settle cases
-22-
and claims involving opt-outs and recorded an additional receivable for
estimated insurance recovery of $258 million, resulting in an additional net
charge of $40 million in the first quarter of 1995.
At present, the Company is not able to estimate the nature and extent of its
further potential future liability with respect to mammary implants. The
Company believes that most of its potential future liability with respect to
mammary implant cases is covered by insurance. The Company intends to continue
to litigate pending mammary implant cases.
Upon resolution of any of the uncertainties concerning these cases, the Company
may ultimately incur charges in excess of presently established reserves. While
such a future charge could have a material adverse impact on the Company's net
income in the period in which it is recorded, management believes that any
outcome of this litigation will not have a material adverse effect on the
Company's consolidated financial position.
As of June 30, 1996, the Company was a defendant, or co-defendant, in 489
lawsuits, and had 906 pending claims in the United States, Canada, Ireland,
Italy, Spain, Japan and the Netherlands, involving individuals who have
hemophilia, or their representatives. Those cases and claims seek damages for
injuries allegedly caused by anti-hemophilic factor concentrates VIII and IX
derived from human blood plasma processed and sold by the Company. None of
these cases involves the Company's currently distributed anti-hemophilic factor
concentrates.
The typical case or claim alleges that the individual with hemophilia was
infected with HIV by infusing Factor VIII or Factor IX concentrates ("Factor
Concentrates") containing HIV.
All Federal Court Factor Concentrate cases have been transferred to the U.S.D.C.
for the Northern District of Illinois for case management under Multi District
Litigation (MDL) rules. In addition to the individual suits against the
company, a purported class action was filed on September 30, 1993, on behalf of
all U.S. residents with hemophilia (and their families) who were treated with
Factor Concentrates and who allegedly are infected with HIV as a result of the
use of such Factor Concentrates. This lawsuit was filed in the United States
District Court for the Northern District of Illinois (WADLEIGH, ET AL., V.
RHONE-POULENC RORER, ET AL., U.S.D.C., N. Dist., Ill. 93C 5969). On November 3,
1994, the court certified the class only for the purpose of determining whether
the defendants' actions were negligent. The defendants in this case filed a
petition for a Writ of Mandamus with the 7th Circuit Court of Appeals seeking an
order directing the district court judge to vacate that certification. On March
16, 1995, the Court of Appeals granted the petition and stated that it would
issue a Writ of Mandamus directing the District Court to vacate its
certification. On April 28, 1995, the Court of Appeals denied the plaintiffs
request for a rehearing EN BANC, but stayed enforcement of the writ pending a
petition for certiorari by the plaintiffs to the U.S. Supreme Court. On October
2, 1995, the U.S. Supreme Court denied the plaintiffs petition for certiorari.
On January 16, 1996, the District Court decertified the class. Baxter has also
been named in eight other purported class actions, none of which have been
certified and five of which have been transferred to the MDL for discovery
purposes.
Many of the cases and claims are at very preliminary stages, and the Company has
not been able to obtain information sufficient to evaluate each case and claim.
In most states, the Company's potential liability is limited by laws that
provide that the sale of blood or blood derivatives, including Factor
Concentrates, is not the sale of a "good," and thus is not covered by the
doctrine of strict liability. As a result, each claimant will have to prove
that his or her injuries were caused by the Company's negligence. The WADLEIGH
case alleges that the Company was negligent in failing: to use available
purification technology; to promote research and development for product safety;
to withdraw Factor
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Concentrates once it knew or should have known of viral-contamination of such
concentrates; to screen plasma donors properly; to recall contaminated Factor
Concentrates; and to warn of risks known at the time the Factor Concentrates
were used.
On April 19, 1996, Alpha Therapeutic Corporation, Armour Pharmaceutical
Company, Baxter Healthcare Corporation and Bayer Corporation sent a
settlement proposal to all plaintiffs' counsel of record in the U.S.
hemophilia Factor Concentrate litigation. Negotiations with plaintiffs'
counsel have resulted in a settlement proposal which the parties hope to
present to the Court for preliminary approval and handling as a settlement
class before the end of the summer. The essential terms of the settlement
proposal include payments of $100,000 per person to each HIV-positive person
with hemophilia in the U.S. who can demonstrate use of factor concentrates
produced by one of the Defendants between 1978 and 1985. Additionally, a $40
million fund will be established by the Defendants for payment of attorneys'
fees, costs and court administration expenses. Additionally, insurance
carrier approval, the signing of general and joint tortfeasor releases and
the entry of subrogation bar orders are required by the terms of the
settlement proposal. Baxter's agreed contribution to the proposed settlement
is 20%. On August 14, 1996, Judge John Grady, who oversees the MDL, indicated
that he would be conditionally certifying a settlement class subject to a
fairness hearing and final approval, which essentially encompasses the terms
discussed above. The settlement class will be conditionally certified under
the case, WALKER V. BAYER CORP., ET AL. U.S.D.C., N. Dist., ILL. 96 C 5024.
Additionally, Judge Grady indicated that he would approve notice being sent
to class members commencing August, 20, 1996 with a period to opt-out of the
settlement terminating October 15, 1996. A fairness hearing has been
tentatively set for November 15, 1996.
The Company believes that a substantial portion of the liability and defense
costs related to anti-hemophilic Factor Concentrate cases and claims will be
covered by insurance, subject to self-insurance retentions, exclusions,
conditions, coverage gaps, policy limits and insurer solvency. Most of the
Company's insurers have reserved their rights (i.e., neither admitted nor denied
coverage), and may attempt to reserve in the future, the right to deny coverage,
in whole or in part, due to differing theories regarding, among other things,
the applicability of coverage and when coverage may attach.
The Company has filed suit in California, against all of the insurance companies
that issued comprehensive general liability and excess liability policies to the
Company for a declaratory judgment that the policies of all of the carriers
provide coverage. In that suit, the Company also sued Zurich Insurance Co., one
of the Company's comprehensive general liability insurance carriers, for failure
to defend it. The Company subsequently dismissed without prejudice its claims
against all of the excess insurance carriers except Columbia Casualty Company
(one of the Company's excess insurers during part of the relevant time period).
The Company has filed an Amended Complaint in the California action seeking a
declaration that Zurich has a duty to defend the Company in connection with the
Factor Concentrate cases and claims.
Zurich Insurance Co. has filed a suit in Illinois against the Company, seeking a
declaratory judgment that the policies it had issued do not cover the losses
that the Company has notified it of for a number of reasons, including that
Factor Concentrates are products, not services, and are, therefore, excluded
from the policy coverage, and that the Company has failed to comply with various
obligations of notice, and the like under the policies. The suit had been
stayed pending resolution of the Company's California case. Zurich appealed
that stay and the Illinois Appellate Court reversed and issued a certificate of
importance ensuring the Illinois Supreme Court will hear the Company's appeal.
In January 1996, the Illinois Supreme Court issued an interim order precluding
the company from prosecuting the California action during the pendency of the
appeal before the Illinois Supreme Court. Thus, the California action is
currently stayed. On June 20, 1996, the Illinois Supreme Court affirmed the
Appellate Court, thereby lifting the stay and permitting the Illinois case to
proceed. The Company is seeking reconsideration of the Illinois Supreme Court's
ruling.
The Company's excess liability insurance carriers also brought suit in Illinois
for a declaratory judgment as to the parties' respective liabilities. That suit
has been dismissed without prejudice.
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The Company has notified its insurers concerning coverages and the status of the
cases. Also, some of the anti-hemophilic Factor Concentrates cases pending
against the Company seek punitive damages and compensatory damages arising out
of alleged intentional torts. Depending on policy language, applicable law and
agreements with insurers, the damages awarded pursuant to such claims may or may
not be covered, in whole or in part, by insurance. Accordingly, the Company is
not currently in a position to estimate the amount of its potential future
recoveries from its insurers, but has estimated its recovery with respect to the
reserves it has established.
On June 29, 1995, the German parliament approved the creation of an assistance
fund for approximately 1,900 individuals, and their families, who contracted HIV
from blood and blood products in the early 1980s. The fund of approximately
$180 million will be established by contributions from the German federal and
state governments, the German Red Cross and fractionators who sold Factor
Concentrate during the relevant period of time. The Company has agreed to
contribute approximately $12 million over a four-year period of time. Claims
against the German federal and state governments, the German Red Cross and
fractionators contributing to the fund are, by law, extinguished.
In Japan, the Company is a defendant, along with the Japanese government and
four other co-defendants, in multiple-plaintiff Factor Concentrate cases in
Osaka, Tokyo, Nagoya, Tohoku, Fukuoka, Sapporo and Kumamoto. The seven cases
currently involve 947 plaintiffs, at least 326 of whom allegedly used Baxter
Factor Concentrates. The Japanese Ministry of Health and Welfare ("MHW")
estimates that there are approximately 1,400 hemophiliacs who are HIV-positive
or AIDS-manifested, and approximately 400 who have died.
In October 1995, the Osaka and Tokyo court issued interim opinions setting forth
a first proposal for settlement. In general, the settlement recommendations
provided for payment of an up-front, lump sum amount of approximately $450,000
per plaintiff, 40% funded by the Japanese government and 60% funded by the
corporate defendants. The proposal foresees limited credits to be applied to
the corporate defendants' share of the settlement for prior payments made under
the "Yuai Zaidan" (a government-administered program, funded almost entirely by
the corporate defendants, which pays monthly amounts to HIV-infected and AIDS-
manifested hemophiliacs and their survivors). The courts also raised the
possibility of additional payments of unspecified amounts supplemental to the
lump-sum, which will be paid during the life of an infected hemophiliac. The
courts directed the parties to commence settlement negotiations under the
framework outlined above.
On February 9, 1996, the MHW announced that it had recently discovered several
files of documents which confirmed that the Ministry was aware, at the time the
heat-treated Factor Concentrates were available, the non heat-treated Factor
Concentrates could transmit the AIDS virus. On February 16, 1996, the MHW
admitted the responsibility on the part of the government as indicated in the
courts' interim opinions and presented a public apology.
On March 7, 1996, the Osaka and Tokyo courts issued their second interim
opinions concerning a proposal of settlement. The second proposal did not alter
the basic terms of the first proposal and included additional clarifications and
provisions concerning supplemental on-going payments, attorneys fees,
continuation of the Yuai Zaidan, contributions of the corporate defendants, and
additional burdens on the Japanese government. With respect to the corporate
defendants' contributions, the courts determined that each such defendant's
share of the settlement should be in accordance with it's respective market
share as it existed in 1983. Thus, the Company's share would
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be approximately 12.50% (of the 60% portion of the total settlement to be
funded by the corporate defendants). On March 29, 1996, the courts announced
that each party, including the Company, had accepted the court-directed
settlement. A number of issues and details remain to be resolved which may
alter some of the terms discussed above. Subsequently, the courts revised the
corporate defendants' defined market shares, resulting in a contribution by
the Company to be approximately 15.36 percent.
The Company has been notified that approximately 1,350 HIV-positive people with
hemophilia in Spain wish to explore settlement possibilities with Baxter in lieu
of filing suit in both Spain and the U.S. The claimants allege exposure to HIV
through the use of Baxter's clotting factor concentrates in the early 1980's.
The terms of a proposed settlement have been negotiated and the parties are
seeking to conclude the settlement which requires individual releases signed by
each HIV-positive person with hemophilia and his family. Also required is
insurance carrier approval. The Company's estimated cost for this proposed
settlement should not exceed $34 million.
On February 21, 1994, the Company began the voluntary withdrawal worldwide of
its Gammagard-Registered Trademark- IGIV (intravenous immune globulin)
because of indications that it might be implicated in Hepatitis C infections
occurring in users of Gammagard. Gammagard is a concentration of antibodies
derived from human plasma and is used to treat immune-suppressed patients. A
new immune globulin, Gammagard S/D-Registered Trademark-, produced with an
additional viral inactivation process was introduced by the Company after
licensure in the United States and certain other countries.
As of June 30, 1996, the Company had received reports of alleged Hepatitis C
transmission from 367 patients. The exact cause for these reports has not been
determined; however, many of the reports have been associated with Gammagard
injection produced from plasma which was screened for antibodies to the
Hepatitis C virus through second-generation testing. The number of patients
receiving Gammagard IGIV produced from the second-generation screened plasma is
not yet known, nor is the number of patients claiming exposure to Hepatitis C
known.
As of June 30, 1996, the Company was a defendant in 127 lawsuits and had 97
pending claims in United States, Denmark, France, Germany, Italy, Spain, Sweden
and the United Kingdom resulting from this incident. Eight suits in the United
States have been filed as purported class actions: (LOWE V. BAXTER, U.S.D.C.,
W.D. KY, C94-0125; MOCK V. BAXTER, ET AL., U.S.D.C., ID, CIV-94-0524-S-LMV;
FAYNE V. BAXTER, U.S.D.C., S.D., NY, 95CIV1129; GUTTERMAN V. BAXTER, U.S.D.C.,
S.D., IL, 95-198-WDS; GEARY V. BAXTER, U.S.D.C., W.D., PA, 95 0457; KELLEY V.
BAXTER, U.S.D.C., M.D., NC, 6:95CV00178; and LOGAN, ET AL. V. BAXTER, U.S.D.C.,
Central Dist., CA, 95-3584 and STEUTTGEN V. BAXTER, U.S.D.C., 4th Div, MN, 4-96-
CV-437). On December 18, 1995, the LOWE class action allegations were
voluntarily dismissed with prejudice by the plaintiffs. The suits allege
infection with the Hepatitis C virus from the use of Gammagard. On June 9,
1995, the judicial panel on multi-district litigation ordered all federal cases
involving Gammagard to be transferred to the Central District of California for
coordinated pretrial proceedings before Judge Manuel L. Real, MDL docket no. 95-
1060. Of the 119 pending suits in the United States, 90 are filed in federal
court (including the 7 class actions), and all are expected to be transferred to
Judge Real. On February 21, 1996, Judge Real certified a nationwide class of
all recipients and their spouses, representatives, etc., who had infused
Gammagard. The Company sought an immediate stay of the class notice from the
9th Circuit Court of Appeals and subsequently filed a Writ of Mandamus seeking
class decertification. The 9th Circuit Court of Appeals granted the stay of the
class notice on March 19, 1996 and on April 12, 1996, granted a stay of the
class certification pending final determination on the writ. Judge Real has
scheduled a trial for January 14, 1997. The Company is vigorously defending
these cases.
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In the fourth quarter of 1993, the Company accrued $131 million for its
estimated worldwide liability for litigation and settlement expenses involving
anti-hemophilic Factor Concentrate cases, and recorded a receivable for
insurance coverage of $83 million, resulting in a net charge of $48 million.
In the third quarter of 1995, significant developments occurred, primarily in
the United States, Europe and Japan relative to claims and litigation pertaining
to the Company's plasma-based therapies, including Factor Concentrates. After
analyzing circumstances in light of recent developments and considering various
factors and issues unique to each geography, the Company revised its estimated
exposure from the $131 million previously recorded for Factor Concentrates to
$378 million for all plasma based therapies. Related estimated insurance
recoveries were revised from $83 million for Factor Concentrates to $274 million
for all plasma based therapies. This resulted in a net charge of $56 million in
the third quarter of 1995.
Upon resolution of any of the uncertainties concerning these cases, or if the
Company, along with the other defendants, enters into comprehensive settlements
of the litigations described above, the Company may incur charges in excess of
presently established reserves. While such a future charge could have a
material adverse impact on the Company's net income in the period in which it is
recorded, management believes that any outcome of this litigation will not have
a material adverse effect on the Company's consolidated financial position.
Baxter Healthcare Corporation ("BHC") was one of 10 defendants named in a
purported class action filed in August 1993, on behalf of all medical and dental
personnel in the state of California who allegedly suffered allergic reactions
to natural rubber latex gloves and other protective equipment or who allegedly
have been exposed to natural rubber latex products. (KENNEDY, ET AL., V. BAXTER
HEALTHCARE CORPORATION, ET AL., Sup. Ct., Sacramento Co., Cal., #535632). The
case alleges that users of various natural rubber latex products, including
medical gloves made and sold by BHC and other manufacturers, suffered allergic
reactions to the products ranging from skin irritation to systemic anaphylaxis.
The Court granted defendants' demurrer to the class action allegations. On
February 29, 1996, the California Appellate Court upheld the trial court's
ruling. In April 1994, a similar purported class action, GREEN, ET AL. V.
BAXTER HEALTHCARE CORPORATION, ET AL., (Cir. Ct., Milwaukee Co., WI, 94CV004977)
was filed against Baxter and three other defendants. The class action
allegations have been withdrawn, but additional plaintiffs added individual
claims. On July 1, 1996, the Company was served with a similar purported class
action, WOLF V. BAXTER HEALTHCARE CORP., ET AL, Circuit Court, Wayne County, MI,
96-617844NP. As of June 30, 1996, 34 additional lawsuits have been served on
the Company containing similar allegations of sensitization to natural rubber
latex products. The Company will vigorously defend against these actions.
Management believes that the outcome of these matters will not have a material
adverse effect on the Company's results of operations or consolidated financial
position.
A purported class action has been filed against the Company, Caremark
International Inc. ("Caremark"), C.A. (Lance) Piccolo, James G. Connelly and
Thomas W. Hodson (all current officers of Caremark) alleging securities law
disclosure violations in connection with the November 30, 1992, spin-off of
Caremark in the Registration and Information Statement ("Registration
Statement") and subsequent SEC filings submitted by Caremark (ISQUITH V.
CAREMARK INTERNATIONAL, INC., ET AL., U.S.D.C., N. Dist. Ill., 94C 5534). The
plaintiffs allege, among other things, that the Registration Statement and
subsequent SEC filings contained false and misleading statements regarding the
scope of the Office of Inspector General for the Department of Health and Human
Services' investigation of Caremark's business and Medicare/Medicaid patient-
referral practices. The Company
-27-
has responded to the complaint and is vigorously defending this action.
Management believes that the outcome of this matter will not have a material
adverse effect on the Company's results of operations or consolidated
financial position.
Under the U.S. Superfund statute and many state laws, generators of hazardous
waste which is sent to a disposal or recycling site are liable for cleanup of
the site if contaminants from that property later leak into the environment.
The law provides that potentially responsible parties may be held jointly and
severally liable for the costs of investigating and remediating a site. This
liability applies to the generator even if the waste was handled by a contractor
in full compliance with the law.
As of June 30, 1996, Baxter has been named as a potentially responsible party
for cleanup costs at 18 hazardous waste sites. The Company's largest exposure
is at the Thermo-Chem site in Muskegon, Michigan. The Company expects that the
total cleanup costs for this site will be between $44 million and $65 million,
of which the Company's share will be approximately $5 million. This amount, net
of payments of approximately $1 million, has been accrued and is reflected in
the Company's financial statements. The estimated exposure for the remaining 17
sites is approximately $6 million, which has been accrued and reflected in the
Company's financial statements.
In May 1996, the Company received a complaint from the U.S. Environmental
Protection Agency alleging certain violations of air regulations in connection
with operation of a boiler at its Carolina, Puerto Rico facility. The Company
has preliminarily agreed to resolve the allegations with payment of $85,000 and
the performance of an environmental project. The project involves burning low-
sulfur fuel from May 1996 to May 1997 in two boilers not covered by the
regulations at an estimated cost to the Company of approximately $51,600.
The Company is a defendant in a number of other claims, investigations and
lawsuits. Based on the advice of counsel, management does not believe that the
other claims, investigations and lawsuits individually or in the aggregate, will
have a material adverse effect on the Company's operations or its consolidated
financial condition.
-28-
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit
Index hereto.
(b) Report on Form 8-K
A report on Form 8-K, dated April 19, 1996, was filed with the SEC under
Item 5, Other Events, to file a press release which announced the Company's
participationin a joint settlement proposal to put an end to the U.S.
hemophilia litigation.
-29-
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAXTER INTERNATIONAL INC.
-------------------------
(Registrant)
Date: August 12, 1996 By: /s/ Brian P. Anderson
-----------------------
Brian P. Anderson
Controller
(Chief Accounting Officer)
-30-
Exhibits Filed with Securities and Exchange Commission
NUMBER DESCRIPTION OF EXHIBIT PAGE NUMBER
- - ------- ---------------------- -----------
10.1 United States District Court, Birmingham,
Alabama, MDL 926 (the Silicone Gel Breast
Implant Products Litigation) Order No. 27,
Approving Revised Settlement Program,
with injunctions, originally entered
December 22, 1995 31
11.1 Computation of Primary
Earnings Per Common Share 48
11.2 Computation of Fully Diluted
Earnings Per Common Share 49
12 Computation of Ratio of
Earnings to Fixed Charges 50
15 Letter Re Unaudited Interim *
Financial Information
27 Financial Data Schedule *
(All other exhibits are inapplicable.)
* Shown only in the original filed with the Securities and Exchange Commission
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