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 September 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.
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-0781620
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Baxter Parkway, Deerfield, Illinois 60015-4633
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(847) 948-2000
-------------------------------
(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 October 31, 1996, the latest practicable date, was 272,932,348 shares.
2
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)
- --------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
Operations
Net sales $1,310 $1,261 $3,944 $3,695
Costs and expenses
Cost of goods sold 720 695 2,182 2,049
Marketing and administrative expenses 272 280 830 801
Research and development expenses 84 98 250 256
Special charge for litigation, net - 159 - 199
Allocated interest, net 26 23 76 70
Goodwill amortization 8 7 25 21
Other 10 7 6 (22)
- --------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,120 1,269 3,369 3,374
- --------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 190 (8) 575 321
Income tax expense (benefit) 53 (19) 158 98
- --------------------------------------------------------------------------------------------------------------------
Income from continuing operations 137 11 417 223
Discontinued operations
Income from discontinued operations, net of
income taxes of $7 and $25 in 1996
and $87 and $89 in 1995 40 152 94 250
- --------------------------------------------------------------------------------------------------------------------
Net income $177 $163 $511 $473
- --------------------------------------------------------------------------------------------------------------------
Earnings per common share
Continuing operations $0.50 $0.04 $1.53 $0.80
Discontinued operations 0.15 0.55 0.35 0.90
- --------------------------------------------------------------------------------------------------------------------
Net Income $0.65 $0.59 $1.88 $1.70
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Average number of common shares outstanding 273 275 272 278
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
Baxter International Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions, except shares)
- --------------------------------------------------------------------------------
September 30, December 31,
1996 1995
(Unaudited)
Current assets Cash and equivalents $833 $476
Accounts receivable 1,013 973
Notes and other current
receivables 273 236
Inventories 954 906
Short-term deferred income taxes 219 189
Prepaid expenses 168 131
-------------------------------------------------------------
Total current assets 3,460 2,911
- -------------------------------------------------------------------------------
Property, At cost 3,615 3,427
plant and Accumulated depreciation
equipment and amortization (1,844) (1,678)
-------------------------------------------------------------
Net property, plant and equipment 1,771 1,749
- -------------------------------------------------------------------------------
Other assets Net assets of discontinued
operations - 2,619
Goodwill and other intangibles 1,216 1,098
Insurance receivables 735 805
Other 364 255
-------------------------------------------------------------
Total other assets 2,315 4,777
- -------------------------------------------------------------------------------
Total assets $7,546 $9,437
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Current Notes payable to banks $106 $59
liabilities Current maturities of long-term
debt and lease obligations 225 160
Accounts payable and accrued
liabilities 1,436 1,548
Income taxes payable 414 387
-------------------------------------------------------------
Total current liabilities 2,181 2,154
- -------------------------------------------------------------------------------
Long-term debt and lease obligations 1,692 2,372
- -------------------------------------------------------------------------------
Long-term deferred income taxes 217 173
- -------------------------------------------------------------------------------
Long-term litigation liability 554 678
- -------------------------------------------------------------------------------
Other non-current liabilities 325 356
- -------------------------------------------------------------------------------
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 1,864 1,837
Retained earnings 948 2,105
Common stock in treasury, at cost,
13,608,765 shares in 1996 and
15,801,580 shares in 1995 (519) (550)
Foreign currency adjustment (4) 24
-------------------------------------------------------------
Total stockholders' equity 2,577 3,704
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $7,546 $9,437
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in millions)
- --------------------------------------------------------------------------------
Nine months ended September 30,
1996 1995
(Brackets denote cash outflows)
Cash flow
provided Income from continuing operations $417 $223
by continuing Adjustments
operations Depreciation and amortization 255 272
Deferred income taxes 37 (111)
Asset dispositions, net (12) (62)
Special charge for litigation and
restructuring, net - 199
Other 11 7
Changes in balance sheet items
Accounts receivable (23) (16)
Inventories (42) (71)
Accounts payable and other
current liabilities (258) 129
Restructuring program payments (30) (28)
Other (15) (52)
--------------------------------------------------------------
Cash flow provided by continuing
operations 340 490
- -------------------------------------------------------------------------------
Cash flow provided by discontinued operations 100 610
- -------------------------------------------------------------------------------
Investment Capital expenditures (255) (243)
transactions Acquisitions and investments
in affiliates (229) (32)
Proceeds from asset dispositions 4 84
-------------------------------------------------------------
Investment transactions, net (480) (191)
- -------------------------------------------------------------------------------
Financing Issuances of debt and lease
obligations 1,834 933
Increase (decrease) in debt with
maturities of three months or
less, net 426 (586)
Redemption of debt and lease
obligations (1,666) (623)
Common stock dividends (243) (228)
Stock issued under employee
benefit plans 149 83
Purchase of treasury stock (92) (500)
--------------------------------------------------------------
Financing transactions, net 408 (921)
- -------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash
and equivalents (11) 7
- -------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 357 (5)
Cash and equivalents at beginning of period 476 468
- -------------------------------------------------------------------------------
Cash and equivalents at end of period $833 $463
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
Baxter International Inc. and Subsidiaries
Notes to Condensed 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 September 30, 1996, Baxter stockholders of record on September 26, 1996
received all of the outstanding stock of Allegiance Corporation ("Allegiance"),
its health-care cost management business, in a tax-free spin-off. As of that
date, Allegiance began operating as an independent publicly-owned company.
The following selected financial information for Allegiance (including
previously divested businesses), as included in the Baxter financial statements
as a discontinued operation, 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):
- --------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(in millions) 1996 1995 1996 1995
- --------------------------------------------------------------------
Net sales $1,026 $1,195 $3,090 $3,544
Net income $40 $152 $94 $250
- --------------------------------------------------------------------
Net sales and net income in 1996 reflect the loss of revenues and income related
to the Company's Industrial and Life Sciences division which was sold to VWR
Corporation in September 1995. Net income for the three months ended September
30, 1996 includes a $4.5 million after-tax gain associated with the early
termination of certain interest rate swap agreements resulting from Allegiance's
indirect assumption of Baxter's debt. Net income for the nine months ended
September 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.
6
Through an issuance of new third party debt, $1.15 billion of Baxter's existing
debt was indirectly assumed by Allegiance upon spin-off. Approximately $1.5
billion of net assets were transferred to Allegiance upon spin-off. The spin-
off of Allegiance is subject to a final working capital adjustment pursuant to
the reorganization agreement between the two companies. Baxter remains
contingently liable with respect to certain legal exposures relating to products
and properties manufactured and owned by Allegiance. Refer to Note 7 for
further discussion.
3. ACQUISITIONS AND DIVESTITURES
At the end of January 1996, Baxter Healthcare Corporation ("BHC"), a subsidiary
of Baxter International Inc., completed its acquisition of PSICOR, Inc. (a
perfusion services business) for $17.50 per share, or approximately $80 million.
This acquisition, along with other smaller acquisitions during 1996, coupled
with the purchase of SETA, Inc. during 1995, is consistent with the
cardiovascular businesses' strategy to offer both products and services related
to late-stage heart and cardiovascular disease.
On May 9, 1996, Nestle S.A. ("Nestle") and BHC agreed to enter into negotiations
for the purpose of dissolving Clintec Nutrition Company ("Clintec"). The
dissolution was completed on October 1, 1996. Clintec was a 50-50 joint venture
between Baxter and Nestle that developed, marketed and distributed parenteral
and enteral nutrition products internationally. Under the dissolution agreement,
Baxter received the assets and liabilities associated with Clintec's parenteral
nutrition worldwide businesses for a total consideration of Baxter's 50 percent
share of the Clintec enteral worldwide businesses and a cash payment of
approximately $50 million.
On August 29, 1996, Baxter announced its intention to form a strategic alliance
with Immuno International AG (Immuno), a European manufacturer of
biopharmaceutical products and services for transfusion medicine. The
acquisition is valued at approximately $715 million. The transaction has
cleared review by the Commission of the European Communities and is awaiting the
approval of anti-trust authorities in the United States. This transaction is
expected to close in the first quarter of 1997.
4. INVENTORIES
Inventories consisted of the following:
September 30, December 31,
1996 1995
(in millions) (unaudited)
- -------------------------------------------------------
Raw materials $210 $165
Work in process 153 164
Finished products 591 577
- -------------------------------------------------------
Total inventories $954 $906
- -------------------------------------------------------
- -------------------------------------------------------
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 September
30, 1996, the Company had repurchased approximately $92 million (approximately 2
million shares) of its common stock, including $11 million (approximately
200,000 shares) purchased in an odd lot buyback program approved by the board of
directors in May 1996.
7
6. RESTRUCTURING CHARGES
In November 1993, the Company recorded a $230 million pretax restructuring
charge to cover costs associated with strategic actions 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 Company has implemented, or is in the process of implementing, all
of the major restructuring projects. The restructuring program is expected to
be substantially completed in 1997.
The following table summarizes the Company's 1993 restructuring reserves as of
December 31, 1995 and September 30, 1996 (unaudited):
- -------------------------------------------------------------------------
Divestitures
Employee- and asset Other
(in millions) related costs write-downs costs Total
- -------------------------------------------------------------------------
December 31, 1995 balance $48 $22 $23 $93
- -------------------------------------------------------------------------
Utilization:
Cash 12 - 20 32
Non-cash - 10 - 10
- -------------------------------------------------------------------------
September 30, 1996 balance $36 $12 $3 $51
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
In September 1995, the Company recorded a restructuring charge of $103 million
primarily to eliminate excess plant capacity and reduce manufacturing costs, as
well as to initiate certain organizational structure changes. The charge
predominantly relates to the closure of the intravenous solutions plant and
warehouse in Carolina, Puerto Rico. Production and warehousing will be
transferred and consolidated into other facilities.
8
The following table summarizes the Company's 1995 restructuring reserves as of
December 31, 1995 and September 30, 1996 (unaudited):
Employee- Asset Other
(in millions) related costs write-downs costs Total
- -----------------------------------------------------------------------
December 31, 1995 balance $26 $19 $9 $54
- -----------------------------------------------------------------------
Utilization:
Cash 6 - 1 7
Non-cash - 6 - 6
- -----------------------------------------------------------------------
September 30, 1996 balance $20 $13 $8 $41
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
7. LEGAL PROCEEDINGS
In the first three quarters 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 agreed to
participate in 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
qualifying claimant of 45 million yen, or approximately $395,000, and continuing
monthly payments during the recipients' lifetime. Based on the courts'
allocation of responsibility for the settlement, 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 proposed class action settlement which would provide
payments of $100,000 per person to U.S. people with hemophilia who were 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 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.
9
8. ALLOCATED INTEREST
Net interest expense consisted of the following (unaudited):
- ---------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(in millions) 1996 1995 1996 1995
- ---------------------------------------------------------------------
Interest expense $60 $55 $177 $159
Interest income (11) (8) (34) (24)
- ---------------------------------------------------------------------
Interest, net $49 $47 $143 $135
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Allocated to
continuing
operations $26 $23 $76 $70
Allocated to
discontinued
operations $23 $24 $67 $65
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
9. CREDIT FACILITIES
On September 3, 1996, the Company replaced its $1.5 billion revolving credit
facility due to expire in July 2000 with a new $1.5 billion facility with
substantially similar covenants. This revolving credit facility, which will
expire in September 2001, 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 September 30, 1996 are summarized as follows:
FULL YEAR 1996 OBJECTIVES NINE MONTH RESULTS
------------------------- ------------------
- Generate $500 million in - The Company generated
"operational cash flow" in "operational cash flow" of
1996. $457 million during the nine
months ended September 30,
1996.
- Achieve net income growth in - The Company's net income
the high single digits. growth was 8% for the first
nine months of 1996.
- Continue to reduce marketing - Marketing and administrative
and administrative expenses expenses were 21.0% of sales
as a percent of sales. for the nine months ended
September 30, 1996, compared
to 21.7% of sales for the
same period in 1995.
- Maintain a net-debt-to-net- - The Company's net-debt-to-
capital ratio between 35% to net-capital ratio was 36.6%
40%. at September 30, 1996 just
prior to the spin-off of
Allegiance Corporation
("Allegiance"). After the
distribution, the Company's
net-debt-to-capital ratio
was 31.6%, which is below
the targeted range. As
noted below, the ratio will
increase as a result of the
planned alliance with Immuno
International AG and then
gradually return to the
targeted 35% to 40% range.
- Repurchase $500 million of - The Company repurchased $92
Baxter stock over the next million of its common stock
several years as authorized during the first nine months
by the Board of Directors. of 1996.
The above objectives were established based on total company results and have
not been adjusted for the spin-off of Allegiance.
SPIN-OFF OF ALLEGIANCE
On September 30, 1996, the Company completed the spin-off of Allegiance. See
Note 2 to the Condensed Consolidated Financial Statements for further
discussion.
11
POTENTIAL ACQUISITION OF IMMUNO INTERNATIONAL AG
On August 29, 1996, Baxter announced its intention to form a strategic alliance
with Immuno International AG ("Immuno"), a European manufacturer of
biopharmaceutical products and services for transfusion medicine. Immuno's
products include immune globulins, plasma-derived inhibitors and inactivators,
coagulation therapies, fibrin sealants and vaccines. The transaction is valued
at approximately $715 million. The Commission of the European Communities
cleared the transaction on October 10, 1996. The U.S. Federal Trade Commission
("FTC") is conducting its review of the transaction under the Hart-Scott-Rodino
Antitrust Improvement Act of 1976. The transaction is expected to close in
the first quarter of 1997.
The Company intends to finance this transaction with debt, raising the net-debt-
to-capital ratio into the high 40% range, with the ratio declining to the
targeted 35% to 40% range over time as a result of ongoing operations.
RESULTS OF CONTINUING OPERATIONS
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.
The following table shows net sales growth by major geographic region:
Three months ended Nine months ended
September 30, Percent September 30, Percent
(in millions) 1996 1995 Increase 1996 1995 Increase
- --------------------------------------------------------------------------------
Geographic regions
International $679 $664 2% $2,018 $1,869 8%
United States 631 597 6% 1,926 1,826 5%
- --------------------------------------------------------------------------------
Total net sales $1,310 $1,261 4% $3,944 $3,695 7%
- --------------------------------------------------------------------------------
International sales growth was primarily the result of strong worldwide demand
for therapeutic blood products(particularly Recombinate-TM- and
Gammagard-Registered Trademark- S/D), 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 nine months ended September 30, 1996 would have been 11% and
13%, respectively.
Domestic sales growth was primarily the result of acquisitions related to the
cardiovascular-services business and strong demand for the Company's
Recombinate-TM- therapeutic blood products and tissue heart valves. The nine-
month period was also favorably affected by the settlement of patent litigation
which resulted in proceeds received by Baxter for past royalties. 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 merger with a Baxter
competitor, Fresenius AG.
12
The following gives key ratios of certain income statement items as a percent of
sales:
- --------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, Increase September 30, Increase
1996 1995 (Decrease) 1996 1995 (Decrease)
- --------------------------------------------------------------------------------
Gross profit margin 45.0% 44.9% 0.1 pts 44.7% 44.5% 0.2pts
Marketing and
administrative
expenses 20.8% 22.2% (1.4 pts) 21.0% 21.7% (0.7 pts)
- --------------------------------------------------------------------------------
The gross profit margin for the three- and nine-month periods ended September
30, 1996 increased slightly primarily due to a heavier mix of higher margin
sales, particularly in the renal, heart valve and catheter monitoring
businesses, partially offset by increased sales in the lower margin
cardiovascular-services business (as a result of recent perfusion services
business acquisitions). The gross profit margin for the nine months ended
September 30, 1996 was also favorably affected by the royalties received in the
patent litigation settlement.
For the three and nine months ended September 30, 1996, marketing and
administrative expenses decreased as a percent of sales primarily as a result of
increased sales in the cardiovascular-services business, which has a lower cost
structure, coupled with a continued focus on cost control in all business units.
These cost reductions were partially offset by investments in the renal
division's international business, primarily in the renal therapy services area.
The following table analyzes research and development expenses:
- --------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, Percent September 30, Percent
(in millions) 1996 1995 Decrease 1996 1995 Decrease
- --------------------------------------------------------------------------------
Research and
development
expenses $84 $98 (14.3%) $250 $256 (2.3%)
- --------------------------------------------------------------------------------
As a percent
of sales 6.4% 7.8% 6.3% 6.9%
- --------------------------------------------------------------------------------
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. Expenditures for the third quarter of 1995
include $18 million of purchased research and development relating to the
acquisition of the remaining 30 percent of the Nextran venture. Without this
purchase, the growth in research and development expenditures for both the
three- and nine-month periods ended September 30, 1996 would have been 5%.
The following table shows pretax income from continuing operations:
- --------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, Percent September 30, Percent
(in millions) 1996 1995 Increase 1996 1995 Increase
- --------------------------------------------------------------------------------
Pretax income (loss)
from continuing
operations $190 ($8) N/A $575 $321 79%
- --------------------------------------------------------------------------------
Included in the pretax loss from continuing operations for the three months
ended September 30, 1995 is a $103 million restructuring charge relating
primarily to plant consolidations in Puerto Rico and a $56 million net
litigation charge relating to the company's plasma-based therapies. Excluding
the $18 million Nextran acquisition and the restructuring and litigation
charges, pretax
13
income from continuing operations for the quarter ended September 30, 1995 would
have been $169 million, and the growth from 1995 to 1996 would have been 12.4%.
In addition, included in pretax income from continuing operations for the nine
months ended September 30, 1995 is a $40 million net charge relating to the
mammary-implant litigation and a $62 million gain related to the disposal of the
company's remaining investment in MediSense, Inc. Excluding these special
charges and gain, pretax income from continuing operations for the nine months
ended September 30, 1995 would have been $476 million, and the growth from 1995
to 1996 would have been 20.8%.
The effective income tax rate for the total company (continuing and discontinued
operations) was 25.3% and 29.4% for the third quarter of 1996 and 1995,
respectively, and 26.3% and 28.3% for the year-to-date periods ended September
30, 1996 and 1995, respectively. After adjusting for the income tax expense
(benefit) associated with the restructuring and litigation charges, the Nextran
acquisition, and the MediSense gain, the reduction in the effective 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 27.5% for the three- and nine month periods ended
September 30, 1996, respectively, compared to 237% (tax benefit) and 30.5% for
the corresponding periods in 1995, respectively. After adjusting for the taxes
on the unusual items recorded in 1995, the difference in the effective rates in
1996 and 1995 was primarily the result of the Company's decision to repatriate
certain foreign earnings. 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 income and earnings per share increased 9% and 10%, respectively, for the
three months ended September 30,1996 over the comparable period in 1995, and
increased 8% and 11%, respectively, for the nine months ended September 30, 1996
over the year-to-date period in 1995. These increases reflect the items related
to net income 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 as well
as expenses associated with the spin-off of Allegiance. These items were
partially offset by a curtailment gain related to certain employee benefit plans
and a gain associated with the termination of certain interest rate swaps as a
result of lower debt levels due to the spin-off of Allegiance. See Note 2 to
the Condensed Consolidated Financial Statements for additional information.
Excluding the 1995 restructuring and litigation charges, the Nextran acquisition
and the MediSense gain, earnings per share from continuing operations would have
been $.39 and $1.10 for the three- and nine-month periods ended September 30,
1995 and the growth from 1995 to 1996 would have been 28% and 39% for the
respective periods.
The weighted average shares outstanding for the three- and nine-month periods
ended September 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. See Note 6 to the
Condensed Consolidated Financial Statements for a discussion of the charges and
utilization of the reserves to date.
14
With respect to the 1993 program, the Company anticipates it will realize
approximately $110 million in pretax savings in 1996, which is consistent with
its original savings target. Management anticipates that these savings will be
partially invested in increased research and development and expansion into
growing international markets. The Company has eliminated 1,573 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.
With respect to the 1995 restructuring program, the Company has eliminated 322
positions of the approximately 1,450 positions affected by the program, with
most of the remaining reductions expected to be completed by the end of 1998.
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. Remaining restructuring reserves are believed to be adequate to
complete the actions contemplated by both restructuring programs.
ADOPTION OF NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilties", which is effective for fiscal years beginning
after December 31, 1996. Adoption of FASB No. 125 in 1997 is not expected to
have a material impact on the Company.
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 $340 million for the nine months
ended September 30, 1996 as compared to $490 million for the corresponding
period in 1995. The change in working capital in 1996 includes 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.
15
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":
Nine months ended
September 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 $340 $490
Capital expenditures (255) (243)
Net interest after tax 45 41
Mammary implant litigation, net 116 39
Other 5 (53)
- -----------------------------------------------------------------------------
"Operational cash flow" - continuing operations $251 $274
"Operational cash flow" - discontinued operations $206 $155
- -----------------------------------------------------------------------------
Total "operational cash flow" $457 $429
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Total "operational cash flow" of $457 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 $1.3 billion at
September 30, 1996 and $757 million at December 31, 1995. Current assets
include accounts and notes receivable of $1.3 billion and inventories of $954
million at September 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:
- -----------------------------------------------------------------------------
Nine months ended
September 30,
(in millions) (brackets denote cash outflows) 1996 1995
- -----------------------------------------------------------------------------
Capital expenditures ($255) ($243)
Acquisitions (229) (32)
Proceeds from asset dispositions 4 84
- -----------------------------------------------------------------------------
Total investment transactions, net ($480) ($191)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Capital expenditures include the expansion of manufacturing capacity for renal,
cardiovascular and biotech products and construction of a manufacturing facility
in Switzerland for commercial scale production of HemAssist-TM-, the Company's
blood substitute product, which is in clinical trials. 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 in the current year primarily relates to purchases
of cardiovascular-services businesses, the largest of which was approximately
$83 million relating to the acquisition of PSICOR, Inc. in the first quarter.
Also included in the third quarter is a $50 million loan to Clintec Nutrition
Company ("Clintec") to replace bank debt guaranteed by Baxter in order to
facilitate the dissolution of Clintec. See Note 3 to the Condensed Consolidated
Financial Statements for additional information.
16
At September 30, 1996, the Company's net-debt-to-net-capital ratio was 32% as
compared to 36% at December 31, 1995. See discussion above regarding 32% versus
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 "BBB+" by Duff & Phelps.
Through issuance of new third-party debt, $1.15 billion of Baxter's existing
debt was indirectly assumed by Allegiance as of the September 30, 1996 spin-off
date. 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.
During the nine months ended September 30, 1996, the Company has repurchased $92
million of its common stock.
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 spin-off of Allegiance, the Company is reviewing its
current dividend policy. It is management's present intent to maintain the
current annual dividend level, adjusted for the spin-off of Allegiance.
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 as well as other
significant legal matters affecting the Company.
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.
17
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 nine months ended
September 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
November 11, 1996
Board of Directors and Stockholders of
Baxter International Inc.
We have reviewed the accompanying consolidated balance sheet as of September 30,
1996 and the related condensed consolidated statements of income for the three-
and nine-month periods ended September 30, 1996 and 1995, and condensed
consolidated statements of cash flows for the nine-month period ended September
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
19
PART II. OTHER INFORMATION
Baxter International Inc. and Subsidiaries
Item 1. Legal Proceedings
As of September 30, 1996, the Company was a defendant or co-defendant in 6,864
lawsuits and had 1,778 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 8,590 as of June
30, 1996. In the third quarter of 1996, 14 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
20
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 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.), Mutual Reinsurance Company Ltd., and Westport Insurance Company
(formerly Puritan Insurance Company), 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. Four of the Company's claims-made insurers which
issued policies subsequent to 1985 have paid or committed the full amounts of
their policies to the Company, and, during the third quarter, a fifth claims-
made carrier has agreed to pay under its policy with respect to breast implant
claims. 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 $525 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 certain of 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 in
California 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 in Illinois 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. The parties entered
into a "stand-still" agreement while negotiations continue. The stay in effect
in the Illinois action expires on December 5, 1996, and litigation activity may
commence at that time. Baxter expects the California court to dismiss its
action without prejudice in favor of the litigation in Illinois.
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
21
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.
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. As of October 18, 1996,
over 120,000 claimants have sent in election forms, and approximately 6,200
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 42,000 "Notification of Status"
letters, and continues to send out these letters. Approximately 2,146 claimants
have opted out in response to receiving such a letter. Advance payments have
been made to over 29,000 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
22
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. On
July 30, 1996, the District Court decided to abstain (in essence, refuse to
transfer) from transferring these cases.
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 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 or net cash flows 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 September 30, 1996, the Company was a defendant, or co-defendant, in 521
lawsuits, and had 1,456 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 processed 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
23
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 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
prospective class action settlement which received preliminary approval from
the Court on August 14, 1996. The essential terms of the settlement would
provide 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 would 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
resolution of potential subrogation, reimbursement and other issues are required
by the terms of the settlement. 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 conditionally certify a settlement class subject to a
fairness hearing and final approval under the case, WALKER V. BAYER CORP., ET
AL., U.S.D.C., N. Dist., Ill. 96 C 5024. Additionally, Judge Grady approved
notice being sent to class members. Sending of the notices commenced on 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 25, 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.
In February 1994, the Company 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
24
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 and its
excess carriers, 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 Concentrate therapies 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 was initially 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 would 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 was temporarily stayed. On June 20, 1996,
the Illinois Supreme Court issued its decision that the stay in Illinois should
be vacated and that the Illinois case be allowed to proceed. The Company's
petition for rehearing was denied by the Court and the Supreme Court thereafter
issued its mandate to the Circuit Court to proceed in accordance with its
decision.
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.
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 would 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 Factor Concentrate cases in Osaka, Tokyo, Nagoya,
Tohoku, Fukuoka, Sapporo and Kumamoto. The cases currently involve 1,053
plaintiffs, at least 405 of whom allegedly used Baxter Factor Concentrates. The
Japanese Ministry of Health and Welfare ("MHW") estimates that there are
approximately 1,800 hemophiliacs who are HIV-positive or AIDS-manifested, and
approximately 400 who have died.
In October 1995, the Osaka and Tokyo courts 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 $395,000 per plaintiff, 40%
25
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 its respective market share
as it existed in 1983. Thus, the Company's share would have been 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. The courts also
revised the corporate defendants' defined market shares, resulting in a
contribution by the Company of approximately 15.36 percent.
The Company was notified in 1995 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 estimates that the 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 September 30, 1996, the Company had received reports of alleged Hepatitis
C transmission from 369 patients. The exact cause for these reported infections
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
26
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 September 30, 1996, the Company was a defendant in 134 lawsuits and had 90
pending claims in the 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, 99 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. The 9th Circuit
Court of Appeals heard oral argument on these matters on October 9, 1996, but
has not issued any decisions. Judge Real has scheduled a trial for January 14,
1997. The Company is vigorously defending these cases.
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 and net cash flows 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.
27
As of September 30, 1996, Allegiance Corporation and/or its affiliates assumed
the defense of litigation involving claims related to Allegiance's businesses,
including certain claims of alleged personal injuries as a result of exposure to
natural rubber latex gloves. Allegiance has not been named in most of this
litigation but will be defending and indemnifying the Company pursuant to
certain contractual obligations for all expenses and potential liabilities
associated with claims pertaining to latex gloves. 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
September 30, 1996, 49 additional lawsuits have been served on the Company
containing similar allegations of sensitization to natural rubber latex
products.
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 former 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 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, net cash flows 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 September 30, 1996, Baxter has been named as a potentially responsible
party for cleanup costs at 18 hazardous waste sites. Allegiance has assumed
responsibility for ten of these sites. Allegiance's largest assumed exposure is
at the Thermo-Chem site in Muskegon, Michigan. Allegiance expects that the
total cleanup costs for this site will be between $44 million and $65 million,
of which Allegiance's share will be approximately $5 million. This amount, net
of payments of approximately $1 million, has been accrued and is reflected in
Allegiance's financial statements. The estimated exposure for the additional
nine Allegiance sites is approximately $4 million, which has been accrued and
28
reflected in Allegiance's financial statements. The estimated exposure for
Baxter's eight sites is approximately $2 million, which has been accrued and
reflected in the Company's consolidated financial statements.
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.
29
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 October 7, 1996, was filed with the SEC
under Item 5, Other Events, to file a press release which announced
the completion of the spin-off of Allegiance Corporation.
A report on Form 8-K, dated August 29, 1996, was filed with the SEC
under Item 5, Other Events, to file a press release which announced
the approval of an agreement for a worldwide alliance between Baxter
International Inc. and Immuno International AG.
30
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: November 11, 1996 By: /s/Harry M. Jansen Kraemer, Jr
--------------------------------
Harry M. Jansen Kraemer, Jr.
Vice President and
Chief Financial Officer
31
Exhibits Filed with Securities and Exchange Commission
Number Description of Exhibit Page Number
- ------ ---------------------- -----------
11.1 Computation of Primary Earnings Per Common Share 32
11.2 Computation of Fully Diluted Earnings Per Common Share 33
12 Computation of Ratio of Earnings to Fixed Charges 34
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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