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 March 31, 2001
_____ 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
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(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, par value $1.00 per
share, outstanding as of May 4, 2001 the latest practicable date, was
296,185,755 shares.
BAXTER INTERNATIONAL INC.
FORM 10-Q
For the quarterly period ended March 31, 2001
TABLE OF CONTENTS
Page Number
-----------
Part I. FINANCIAL INFORMATION
- ----------------------------------
Item 1. Financial Statements
Condensed Consolidated Statements of Income...................... 2
Condensed Consolidated Balance Sheets............................ 3
Condensed Consolidated Statements of Cash Flows.................. 4
Notes to Condensed Consolidated Financial Statements............. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 19
Review by Independent Accountants............................................... 19
Report of Independent Accountants............................................... 20
Part II. OTHER INFORMATION
- ------------------------------
Item 1. Legal Proceedings.................................................. 21
Item 6. Exhibits and Reports on Form 8-K................................... 24
Signature....................................................................... 25
Exhibits........................................................................ 26
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
March 31,
2001 2000
--------------------------
Net sales $1,757 $1,583
Costs and expenses
Cost of goods sold 986 896
Marketing and administrative expenses 343 315
Research and development expenses 103 83
Goodwill amortization 12 5
- -----------------------------------------------------------------------------------------------------
Operating income 313 284
Interest, net 19 15
Other expense 7 12
- -----------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
and cumulative effect of accounting change 287 257
Income tax expense 73 66
- -----------------------------------------------------------------------------------------------------
Income from continuing operations before cumulative
effect of accounting change 214 191
Discontinued operation
Income from discontinued operation, net of applicable
income tax expense of $4 -- 12
Costs associated with effecting the business distribution -- (12)
- -----------------------------------------------------------------------------------------------------
Total discontinued operation -- --
- -----------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting
change 214 191
Cumulative effect of accounting change, net of
income tax benefit of $32 (52) --
- -----------------------------------------------------------------------------------------------------
Net income $ 162 $ 191
=====================================================================================================
Earnings per basic common share
Continuing operations, before cumulative effect of
accounting change $ .73 $ .66
Cumulative effect of accounting change (.18) --
- -----------------------------------------------------------------------------------------------------
Net income $ .55 $ .66
=====================================================================================================
Earnings per diluted common share
Continuing operations, before cumulative effect of
accounting change $ .71 $ .65
Cumulative effect of accounting change (.17) --
- -----------------------------------------------------------------------------------------------------
Net income $ .54 $ .65
=====================================================================================================
Weighted average number of common shares outstanding
Basic 295 290
=====================================================================================================
Diluted 303 296
=====================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
Baxter International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions, except shares)
- -------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2001 2000
(unaudited)
--------------------------------------
Current assets Cash and equivalents $ 723 $ 579
Accounts receivable 1,424 1,387
Notes and other current receivables 135 155
Inventories 1,257 1,159
Short-term deferred income taxes 119 159
Prepaid expenses 351 212
------------------------------------------------------------------------------------------------------
Total current assets 4,009 3,651
- -------------------------------------------------------------------------------------------------------------------------
Property, At cost 5,157 4,978
plant and Accumulated depreciation and amortization (2,269) (2,171)
equipment ------------------------------------------------------------------------------------------------------
Net property, plant and equipment 2,888 2,807
- -------------------------------------------------------------------------------------------------------------------------
Other assets Goodwill and other intangibles 1,370 1,239
Insurance receivables 147 160
Other 868 876
------------------------------------------------------------------------------------------------------
Total other assets 2,385 2,275
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 9,282 $ 8,733
=========================================================================================================================
Current Short-term debt $ 619 $ 576
liabilities Current maturities of long-term debt and lease obligations 51 58
Accounts payable and accrued liabilities 1,445 1,990
Income taxes payable 655 748
------------------------------------------------------------------------------------------------------
Total current liabilities 2,770 3,372
- -------------------------------------------------------------------------------------------------------------------------
Long-term debt and lease obligations 2,179 1,726
- -------------------------------------------------------------------------------------------------------------------------
Long-term deferred income taxes 214 160
- -------------------------------------------------------------------------------------------------------------------------
Long-term litigation liabilities 167 184
- -------------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 695 632
- -------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' Common stock, $1 par value, authorized 350,000,000
Equity shares, issued 299,580,606 shares in 2001 and
298,133,251 shares in 2000 300 298
Common stock in treasury, at cost, 3,771,246 shares
in 2001 and 4,953,062 shares in 2000 (255) (349)
Additional contributed capital 2,602 2,506
Retained earnings 992 853
Accumulated other comprehensive loss (382) (649)
------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,257 2,659
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 9,282 $ 8,733
=========================================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
(in millions)
- -----------------------------------------------------------------------------------------------------------------------
Three months ended March 31,
(brackets denote cash outflows) 2001 2000
------------------------------
Cash flows Income from continuing operations before cumulative
from effect of accounting change $ 214 $ 191
operations Adjustments
Depreciation and amortization 108 97
Deferred income taxes 80 49
Other 15 7
Changes in balance sheet items
Accounts receivable (11) 55
Inventories (100) (131)
Accounts payable and other accrued liabilities (256) (284)
Net litigation payments and other (83) (48)
----------------------------------------------------------------------------------------------------
Cash flows from continuing operations (33) (64)
Cash flows relating to discontinued operation -- (11)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from operations (33) (75)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows Capital expenditures (131) (115)
from investing Acquisitions (net of cash received)
activities and investments in affiliates (49) (108)
Divestitures and other asset dispositions 19 1
----------------------------------------------------------------------------------------------------
Cash flows from investing activities (161) (222)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows Issuances of debt and lease obligations 767 247
from financing Redemptions of debt and lease obligations (168) (739)
activities Increase in debt with maturities
of three months or less, net 32 935
Common stock cash dividends (340) (84)
Stock issued under employee benefit plans 64 74
Purchases of treasury stock -- (49)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities 355 384
- -----------------------------------------------------------------------------------------------------------------------
Effect of currency exchange rate changes on cash and equivalents (17) 1
- -----------------------------------------------------------------------------------------------------------------------
Increase in cash and equivalents 144 88
Cash and equivalents at beginning of period 579 606
- -----------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 723 $ 694
=======================================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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 (GAAP) 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 2000
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.
Basis of consolidation
- ----------------------
Prior to fiscal 2001, certain operations outside the United States and its
territories were included in the consolidated financial statements on the basis
of fiscal years ending November 30. In conjunction with the implementation of
new financial systems, this one-month lag was eliminated as of the beginning of
fiscal 2001. The December 2000 net loss from operations of $23 million for
these operations was recorded directly to retained earnings.
Comprehensive income
- --------------------
Total comprehensive income was $340 million and $217 million for the three
months ended March 31, 2001 and 2000, respectively. The increase in 2001 as
compared to 2000 principally related to currency translation adjustments and
foreign currency hedging instruments.
Derivatives and Hedging Activities
- ----------------------------------
All derivatives are recognized on the consolidated balance sheet at fair value.
When the company enters into a derivative contract, it designates and documents
the derivative as (1) a hedge of a forecasted transaction, including a hedge of
foreign currency denominated transaction (a cash flow hedge); (2) a hedge of the
fair value of a recognized asset or liability (a fair value hedge); (3) a hedge
of a net investment in a foreign operation; or (4) an instrument that is not
formally being designated as a hedge. The company also uses and designates
certain nonderivative financial instruments as hedges of net investments in
foreign operations. Changes in the fair value of a derivative that is highly
effective and is designated and qualifies as a cash flow hedge, are recorded in
other comprehensive income (OCI), with such changes in fair value reclassified
to earnings when the hedged transaction affects earnings. Changes in the fair
value of a derivative that is highly effective and is designated and qualifies
as a fair value hedge, along with changes in the fair value of the hedged asset
or liability, which are attributable to the hedged risk, are recorded directly
to earnings. Changes in the fair value of a derivative or nonderivative
instrument that is highly effective and is designated and qualifies as a hedge
of a net investment in a foreign operation, are recorded in the cumulative
translation adjustment (CTA) account within OCI. Any hedge ineffectiveness is
recorded in earnings. If it is determined that a derivative or nonderivative
hedging instrument is not or ceases to be highly effective as a hedge, the
company discontinues hedge accounting prospectively. In certain circumstances,
the company enters into derivative contracts and does not formally designate
5
them as fair value, cash flow or net investment hedges. Changes in the fair
value of undesignated instruments are reported directly to earnings. The
company does not hold any instruments for trading purposes.
New Accounting Standards
- ------------------------
The company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and its
amendments at the beginning of fiscal year 2001. In accordance with the
transition provisions of SFAS No. 133, upon adoption the company recorded a
cumulative effect reduction to earnings of approximately $52 million (net of
income tax benefit of approximately $32 million), and a cumulative effect
increase to OCI of approximately $8 million (net of income tax of approximately
$5 million).
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS No. 140) was issued in September 2000 and
is effective for transfers, servicings and extinguishments occurring after March
31, 2001. SFAS No. 140 replaces SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No.
125). Although SFAS No. 140 clarifies or amends various aspects of SFAS No.
125, most of the fundamental concepts from SFAS No. 125 have been brought
forward without modification. SFAS No. 140 is not expected to have a material
impact on the company's consolidated financial statements.
2. INVENTORIES
- --------------
Inventories consisted of the following:
- -------------------------------------------------------------------------------
March 31, December 31,
(in millions) 2001 2000
- -------------------------------------------------------------------------------
Raw materials $ 332 $ 261
Work in process 180 174
Finished products 745 724
- -------------------------------------------------------------------------------
Total inventories $1,257 $1,159
===============================================================================
3. INTEREST, NET
- ----------------
Net interest expense consisted of the following:
- -------------------------------------------------------------------------------
Three months ended
March 31,
(in millions) 2001 2000
- -------------------------------------------------------------------------------
Interest expense $ 28 $ 32
Interest income (9) (10)
- -------------------------------------------------------------------------------
Interest expense, net $ 19 $ 22
===============================================================================
Allocated to continuing operations $ 19 $ 15
===============================================================================
Allocated to discontinued operation $ -- $ 7
===============================================================================
The allocation of interest to continuing operations and the discontinued
operation was based on estimated relative net assets of these operations.
6
4. STOCK SPLIT
- --------------
On February 27, 2001, Baxter's board of directors approved a 2 for 1 stock split
of the company's common shares. This approval was subject to shareholder
approval of the authorization of additional shares, which was received at the
company's annual meeting on May 1, 2001. On May 30, 2001, shareholders of
record on May 9, 2001 will receive one additional share of Baxter common stock
for each share held on May 9, 2001.
Baxter's historical earnings per share for the quarters ended March 31, on a
pro-forma basis assuming the stock split had occurred as of January 1, 2000,
would be as follows:
- ----------------------------------------------------------------------------------------------------------
Three months ended
March 31,
2001 2000
- ----------------------------------------------------------------------------------------------------------
Pro forma earnings per basic common share:
Continuing operations, before cumulative effect of
accounting change $ .36 $ .33
Cumulative effect of accounting change (.09) --
- ----------------------------------------------------------------------------------------------------------
Net income $ .27 $ .33
==========================================================================================================
Pro forma earnings per diluted common share:
Continuing operations, before cumulative effect of
accounting change $ .35 $ .32
Cumulative effect of accounting change (.08) --
- ----------------------------------------------------------------------------------------------------------
Net income $ .27 $ .32
==========================================================================================================
5. EARNINGS PER SHARE
- ---------------------
The numerator for both basic and diluted earnings per share (EPS) is net
earnings available to common shareholders. The denominator for basic EPS is the
weighted-average number of common shares outstanding during the period. The
following is a reconciliation of the shares (denominator) of the basic and
diluted per-share computations.
- ----------------------------------------------------------------------------------------------------------
Three months ended
March 31,
(in millions) 2001 2000
- ----------------------------------------------------------------------------------------------------------
Basic EPS shares 295 290
- ----------------------------------------------------------------------------------------------------------
Effect of dilutive securities
Employee stock options 8 4
Employee stock purchase plans and equity
forward agreements -- 2
- ----------------------------------------------------------------------------------------------------------
Diluted EPS shares 303 296
==========================================================================================================
7
6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
- ------------------------------------------------
The company operates on a global basis, and is exposed to the risk that its
earnings, cash flows and equity could be adversely impacted by fluctuations in
currency exchange rates and interest rates. The company's hedging policy
attempts to manage these risks to an acceptable level based on management's
judgment of the appropriate trade-off between risk, opportunity and costs. The
company does not hold financial instruments for trading or speculative purposes.
The company is primarily exposed to currency exchange-rate risk with respect to
firm commitments, forecasted transactions and net assets denominated in Japanese
Yen, the Euro, British Pound and Swiss Franc. The company manages its foreign
currency exposures on a consolidated basis, which allows the company to net
exposures and take advantage of any natural offsets. In addition, the company
utilizes derivative and nonderivative financial instruments to further reduce
the net exposure to currency fluctuations. Gains and losses on the hedging
instruments are intended to offset losses and gains on the hedged transactions
with the goal of reducing the earnings volatility resulting from fluctuations in
currency exchange rates.
The company is also exposed to the risk that its earnings and cash flows could
be adversely impacted by fluctuations in interest rates. The company's policy
is to manage interest costs using a mix of fixed and floating rate debt that
management believes is appropriate. To manage this mix in a cost efficient
manner, the company enters into interest rate swaps, in which the company agrees
to exchange, at specified intervals, the difference between fixed and floating
interest amounts calculated by reference to an agreed-upon notional amount.
Cash Flow Hedges
- ----------------
The company principally uses option and forward contracts to hedge the risk to
earnings associated with fluctuations in currency exchange rates relating to the
company's firm commitments and forecasted transactions expected to be
denominated in foreign currencies. The company also uses forward-starting
interest rate swaps to hedge the risk to earnings associated with fluctuations
in interest rates relating to anticipated issuances of term debt.
For the quarter ended March 31, 2001, the net amount recorded in other income
and expense relating to hedge ineffectiveness and the component of the
derivative instruments' gain or loss excluded from the assessment of hedge
effectiveness, was immaterial to the company's condensed consolidated financial
statements.
As of March 31, 2001, approximately $33 million of deferred net after-tax gains
on derivative instruments accumulated in OCI are expected to be reclassified to
earnings during the next twelve months, coinciding with when the hedged items
are expected to impact earnings. The hedged items principally include
intercompany sales and interest payments on third-party debt. The maximum term
over which the company has hedged exposures to the variability of cash flows,
excluding interest payments on term debt, is four years.
The net after-tax gain on derivative instruments included in accumulated OCI
(AOCI) at the beginning of 2001 was approximately $8 million. The net after-tax
gain associated with hedging transactions added to AOCI during the three months
ended March 31, 2001 was approximately $72 million, and the net after-tax gain
reclassified from AOCI to earnings during the same period was approximately $2
million. The net after-tax gain on derivative instruments included in AOCI at
March 31, 2001 was approximately $78 million.
8
Fair Value Hedges
- -----------------
The company uses interest rate swaps to convert a portion of its fixed-rate debt
into variable-rate debt. These instruments serve to hedge the company's
earnings from fluctuations in interest rates. For the quarter ended March 31,
2001, no portion of the change in fair value of the company's fair value hedges
was ineffective or excluded from the assessment of hedge effectiveness.
Hedges of Net Investments in Foreign Operations
- -----------------------------------------------
The company uses cross currency interest rate swaps and foreign currency
denominated debt to hedge its stockholders' equity balance from the effects of
fluctuations in currency exchange rates. The company measures ineffectiveness
on the swaps based upon changes in spot foreign exchange rates. For the quarter
ended March 31, 2001, approximately $153 million of net after-tax gains related
to the derivative and nonderivative instruments were included in the company's
CTA account.
Other
- -----
The company uses forward contracts to hedge earnings from the effects of
fluctuations in currency exchange rates relating to certain of the company's
intercompany and third-party receivables and payables denominated in a foreign
currency. These derivative instruments are not formally designated as hedges,
and the change in fair value of the instruments, which substantially offsets the
change in book value of the hedged items, is recorded directly to other income
or expense.
In November 1999, the company and Nexell Therapeutics Inc. (Nexell) entered into
an agreement whereby Baxter agreed to issue put rights in connection with a $63
million private placement by Nexell of preferred stock. The put rights were
issued in conjunction with Nexell's repayment of amounts owed to the company.
The preferred stock is convertible at the option of the holders into common
stock of Nexell at $11 per share at any time until November 2006. The put
rights provide the holders of the preferred stock with the ability to cause
Baxter to purchase the preferred stock from November 2002 until November 2004.
The purchase price to be paid by Baxter would reflect a per annum compounded
return to the holders of the preferred stock of 5.91%. The changes in fair value
of the put rights are recorded directly to other income or expense. Such changes
were not significant for the three months ended March 31, 2001.
7. ACQUISITIONS
- ---------------
Acquisitions during the three months ended March 31, 2001 and 2000 were
accounted for under the purchase method. Results of operations of acquired
companies are included in the company's results of operations as of the
respective acquisition dates. The purchase price of each acquisition was
allocated to the net assets acquired based on preliminary estimates of their
fair values at the date of the acquisition. The excess of the purchase price
over the fair values of the net tangible assets, identifiable intangible assets
and liabilities acquired was allocated to goodwill. The allocation of purchase
price is subject to revision based on the final determination of fair values.
9
Sera-Tec Biologicals, L.P.
- --------------------------
In February 2001, the company acquired Sera-Tec Biologicals, L.P. (Sera-Tec) for
approximately $127 million, which was paid in approximately 1.4 million shares
of Baxter International Inc. common stock. Sera-Tec owns and operates 80 plasma
centers in 28 states, and a central testing laboratory. Approximately $117
million of the purchase price was allocated to goodwill. Goodwill is being
amortized on a straight-line basis over 15 years.
Pro forma information
- ---------------------
The following unaudited pro forma information presents a summary of the
company's consolidated results of operations for the first quarter as if
acquisitions during 2001 and 2000 had taken place as of the beginning of the
current and preceding fiscal year.
- ----------------------------------------------------------------------------------------------------------
Three months ended
March 31,
(in millions, except per share data) 2001 2000
- ----------------------------------------------------------------------------------------------------------
Net sales $1,777 $1,672
Income from continuing operations before cumulative effect of accounting change $ 216 $ 179
Net income $ 164 $ 179
Net income per diluted common share $ .55 $ .59
- ----------------------------------------------------------------------------------------------------------
These pro forma results of operations have been presented for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisitions occurred on the date
indicated, or which may result in the future. The diluted pro forma earnings
and per-share earnings included in the table above for 2000 primarily reflect
the historical pre-acquisition net losses reported by North American Vaccine,
Inc., which was acquired in June 2000. The pro forma information above also
includes certain other recent significant acquisitions.
Acquisition reserves
- --------------------
Based on plans formulated at acquisition date, as part of the allocation of
purchase price, reserves have been established related to certain acquisitions.
Actions executed to date and anticipated in the future with respect to these
acquisitions are substantially consistent with the original plans. Management
believes remaining reserves are adequate to complete the actions contemplated by
the plans.
8. LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES
- ---------------------------------------------------
Refer to "Part II - Item 1. Legal Proceedings" below.
9. SEGMENT INFORMATION
- ----------------------
The company operates in three segments, each of which are strategic businesses
that are managed separately because each business develops, manufactures and
sells distinct products and services. The segments and a description of their
businesses are as follows: Medication Delivery: medication delivery products
and services, including intravenous infusion pumps and solutions, anesthesia-
delivery devices and pharmaceutical agents; BioScience: biopharmaceuticals and
blood-collection, separation and storage products and technologies; and Renal:
products and services to treat end-stage kidney disease.
Certain items are maintained at corporate headquarters (Corporate) and are not
allocated to the segments. They primarily include most of the company's debt
and cash and equivalents
10
and related net interest expense, corporate headquarters costs, certain non-
strategic investments, deferred income taxes, hedging activities, and certain
litigation liabilities and related insurance receivables.
Financial information for the company's segments for the three months ended
March 31 is as follows:
Medication
Delivery BioScience Renal Other Total
- ---------------------------------------------------------------------------
For the three months ended
- --------------------------
March 31,
- ---------
2001
- ----
Net sales $669 $631 $457 -- $1,757
Pretax income 102 113 66 $ 6 287
2000
- ----
Net sales $620 $542 $421 -- $1,583
Pretax income 82 108 76 ($9) 257
- ---------------------------------------------------------------------------
The following are reconciliations of total segment amounts to amounts per the
condensed consolidated financial statements:
Three months
ended March 31,
--------------------
2001 2000
- ------------------------------------------------------------------------------
Pretax income
- -------------
Total pretax income from segments $ 281 $ 266
Unallocated amounts
Interest expense, net (19) (15)
Other Corporate items 25 6
----------------------------------------------------------------------------
Income from continuing operations before income
taxes $ 287 $ 257
- ------------------------------------------------------------------------------
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Baxter International Inc.'s (the company or Baxter) 2000 Annual Report to
Stockholders (Annual Report) contains management's discussion and analysis of
financial condition and results of operations for the year ended December 31,
2000. In the Annual Report, management outlined its key financial objectives
for 2001. The table below reflects these objectives and the company's results
through March 31, 2001.
- --------------------------------------------------------------------------------
RESULTS THROUGH
FULL YEAR 2001 OBJECTIVES MARCH 31, 2001
- --------------------------------------------------------------------------------
. Increase net sales in the low double . Net sales during the three months
digits. ended March 31, 2001 increased 11
percent. Excluding the effects of
changes in currency exchange rates,
net sales increased 16 percent.
- --------------------------------------------------------------------------------
. Increase net earnings in the mid- . Excluding the cumulative effect of
teens. a change in accounting principle,
net earnings from continuing
operations increased 12 percent for
the first three months of the year.
- --------------------------------------------------------------------------------
. Generate $500 million in operational . The company had operational cash
cash flow, after investing more than outflow of $111 million during the
$1 billion in capital improvements three months ended March 31, 2001.
and research and development. A net operational cash outflow is
typical during the first quarter of
the year based on the timing of
receipts and disbursements. The
total of capital improvements and
research and development expenses
for the three months ended March 31,
2001 was $234 million.
- --------------------------------------------------------------------------------
12
RESULTS OF OPERATIONS
- ---------------------
The following management discussion and analysis pertains to continuing
operations, unless otherwise noted.
NET SALES TRENDS
- --------------------------------------------------------------------------------
Three months ended
March 31, Percent
(in millions) 2001 2000 increase
- --------------------------------------------------------------------------------
International $ 902 $ 859 5%
United States 855 724 18%
- --------------------------------------------------------------------------------
Total net sales $1,757 $1,583 11%
================================================================================
Excluding the effect of fluctuations in currency exchange rates, which impacted
sales growth unfavorably for all three segments, total net sales growth was 16
percent for the three months ended March 31, 2001. The United States dollar
strengthened principally relative to the Euro and the Japanese Yen. Refer to
Note 9 to the Condensed Consolidated Financial Statements for a summary of net
sales by segment.
Medication Delivery
The Medication Delivery segment generated eight percent sales growth during the
three months ended March 31, 2001. Excluding the impact of fluctuations in
currency exchange rates, sales growth was 12 percent for the quarter, with sales
in both the domestic and international markets contributing strongly to the
growth rate. Of the constant-currency sales growth, approximately four points
of growth in the quarter were generated from the anesthesia business, with a
portion of such growth driven by the segment's sales of the first generic
formulation of Propofol approved by the United States Food and Drug
Administration. Propofol is an intravenous drug used for the induction or
maintenance of anesthesia in surgery, and as a sedative in monitored anesthesia
care. The majority of the remaining sales growth was due to increased sales of
Colleague(R) electronic infusion pumps and intravenous fluids and administration
sets used with electronic infusion pumps. In addition, sales of the segment's
specialty therapies generated growth during the quarter.
BioScience
Sales in the BioScience segment increased 16 percent for the three months ended
March 31, 2001. Excluding the impact of fluctuations in currency exchange
rates, sales growth was 22 percent for the quarter, with strong sales growth in
both the domestic and international markets. Of the constant-currency sales
growth, approximately seven points of growth in the quarter was due to the
increased sales of plasma-derived products, which was due to improved pricing
and the acquisition during the quarter of Sera-Tec Biologicals, L.P. (Sera-Tec),
which owns and operates 80 plasma centers in 28 states. Sales of recombinant
products increased the segment's constant-currency growth rate by approximately
seven points during the quarter, due principally to the increase in
manufacturing capacity that occurred early in the fourth quarter of 2000. Sales
in the blood-collection and processing businesses also grew modestly during the
quarter, principally due to an increase in sales of products that provide for
leukoreduction, which is the removal of white blood cells from blood products
used for transfusion. A portion of the remaining constant-currency sales growth
was due to additional royalties received during the first quarter of 2001.
Management expects the full year constant-currency percentage sales growth for
the BioScience segment to be consistent with the percentage growth reported for
the first quarter of 2001.
13
Renal
The Renal segment generated sales growth of nine percent during the three months
ended March 31, 2001. Excluding the impact of fluctuations in currency exchange
rates, sales growth was 16 percent for the quarter. The March 2000 acquisition
of Althin Medical A.B. (Althin), a manufacturer of hemodialysis products,
continues to be integrated into the segment's operations. Sales of Althin
products contributed approximately two points to the segment's growth rate for
the quarter ended March 31, 2001. Strong growth was generated by the segment's
Renal Therapy Services business, which operates dialysis clinics in partnership
with local physicians in international markets, and the Renal Management
Strategies business, which is a renal-disease management organization, with
revenues from these businesses increasing over $20 million during the quarter.
The remaining sales growth in the Renal segment was driven principally by
continued penetration of products for peritoneal dialysis, particularly in Latin
America, Europe and Asia.
The following table shows key ratios of certain income statement items as a
percent of sales:
GROSS MARGIN AND EXPENSE RATIOS
- --------------------------------------------------------------------------------
Three months ended
March 31, Increase
2001 2000 (decrease)
- --------------------------------------------------------------------------------
Gross profit margin 43.9% 43.4% .5pts
Marketing and
administrative expenses 19.5% 19.9% (.4pts)
- --------------------------------------------------------------------------------
The increase in the gross profit margin for the quarter was due principally to a
more favorable products and services mix, with the higher-margin BioScience
segment generating strong sales for the quarter. The gross profit margin is
expected to continue to increase during the remainder of the year.
Marketing and administrative expenses as a percent of sales continue to decrease
as the company offsets significant investments in attracting and retaining a
talented workforce, by aggressively managing expenses and leveraging
acquisitions. Management expects the expense ratio to continue to decline
during the remainder of the year.
RESEARCH AND DEVELOPMENT
- --------------------------------------------------------------------------------
Three months ended
March 31, Percent
(in millions) 2001 2000 increase
- --------------------------------------------------------------------------------
Research and
development expenses $103 $ 83 24%
As a percent of sales 6% 5%
- --------------------------------------------------------------------------------
Research and development (R&D) expenses increased in all three segments during
the first quarter of 2001. The overall increase was primarily due to spending
in the BioScience segment, principally relating to the next-generation
recombinant product, vaccines, the next-generation oxygen-therapeutics program,
and other R&D projects. Management expects R&D expenses to be incurred at
approximately the same level for each quarter of 2001.
14
GOODWILL AMORTIZATION
Goodwill amortization increased for the three months ended March 31, 2001 as
compared to the prior year quarter primarily due to the acquisitions of North
American Vaccine, Inc. in June 2000 and Sera-Tec in February 2001. For the
quarter ended March 31, 2001, goodwill amortization on a net-of-tax basis was
approximately $10 million, or approximately $.03 per diluted common share.
OTHER INCOME AND EXPENSE
Net interest expense increased for the three months ended March 31, 2001 as
compared to the prior year period principally due to increased interest rates
relating to foreign currency denominated debt, partially offset by lower overall
average debt levels. The decrease in other expense for the quarter was
primarily due to fluctuations in currency exchange rates.
PRETAX INCOME
Refer to Note 9 to the Condensed Consolidated Financial Statements for a summary
of financial results by segment. Certain items are maintained at the company's
corporate headquarters and are not allocated to the segments. They primarily
include hedging activities, certain foreign currency fluctuations, net interest
expense, and corporate headquarters cost. The following is a summary of the
significant factors impacting the segments' financial results.
Medication Delivery
Growth in pretax income of 24 percent for the three months ended March 31, 2001,
was primarily a result of strong sales, the close management of costs, and the
leveraging of expenses in conjunction with recent acquisitions, partially offset
by the unfavorable impact of fluctuations in currency exchange rates and
increased pump service costs.
BioScience
Pretax income growth for the BioScience segment was five percent for the three
months ended March 31, 2001. The effect of an improved gross margin, which was
primarily due a change in product mix, was partially offset by significantly
increased R&D spending and the unfavorable impact of fluctuations in currency
exchange rates.
Renal
Pretax income decreased 13 percent for the first quarter of 2001. The decrease
in pretax income was principally due to higher R&D costs, unfavorable
fluctuations in currency exchange rates, and sales and marketing investments in
the business.
INCOME TAXES FROM CONTINUING OPERATIONS
The effective income tax rate for the three months ended March 31, 2001 was
substantially unchanged as compared to the prior year quarter. Management
expects the effective tax rate to remain at approximately the same level for the
rest of the year.
15
DISCONTINUED OPERATION
On March 31, 2000, Baxter stockholders of record on March 29, 2000 received all
of the outstanding stock of Edwards Lifesciences Corporation (Edwards), the
company's cardiovascular business, in a tax-free spin-off. The first quarter
2000 income related to the discontinued operation was offset by the costs
directly associated with effecting the business distribution.
CHANGE IN ACCOUNTING PRINCIPLE
As further discussed in Note 1 to the Condensed Consolidated Financial
Statements, the company adopted Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
and its amendments at the beginning of fiscal year 2001. In accordance with the
transition provisions of SFAS No. 133, upon adoption the company recorded a
cumulative effect reduction to earnings of approximately $52 million (net of tax
benefit of approximately $32 million), and a cumulative effect increase to OCI
of approximately $8 million (net of tax of approximately $5 million).
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash outflows from continuing operations per the company's Condensed
Consolidated Statements of Cash Flows decreased for the three months ended March
31, 2001. Cash flows from continuing operations improved as compared to the
prior-year period as a result of higher earnings, a lower increase in inventory
levels, and lower cash outflows relating to accounts payable and accrued
liabilities, partially offset by increased accounts receivables, and higher net
litigation payments.
Cash outflows from investing activities decreased for the three months ended
March 31, 2001. Capital expenditures, which increased during the quarter,
primarily related to expansions in manufacturing capacity in the BioScience
segment. Net cash outflows relating to acquisitions decreased during the first
three months of 2001 as compared to the prior year period. Approximately $11
million of the 2001 total related to acquisitions of dialysis centers in
international markets, with the remainder pertaining to individually
insignificant items. As further discussed in Note 7 to the Condensed
Consolidated Financial Statements, the purchase price of the March 2001 Sera-Tec
acquisition was paid with Baxter International Inc. common stock. In 2000, net
cash outflows relating to acquisitions included approximately $40 million
related to the Renal segment's acquisition of Althin Medical A.B, a manufacturer
of hemodialysis products. A portion of this purchase price was paid in Baxter
International Inc. common stock. Approximately $42 million of the 2000 total
related to the Medication Delivery's acquisition of certain assets of Sabratek
Corporation, a domestic ambulatory and infusion pump business.
Cash flows from financing activities decreased for the three months ended March
31, 2001. The change in cash flows from financing activities was impacted by
the change in net cash used in operations and investing activities, which both
decreased during the first three months of 2001 as compared to the prior year
quarter. Cash outflows relating to common stock dividends increased due to the
company's change from a quarterly to an annual dividend payout schedule. Cash
received for stock issued under employee benefit plans decreased principally due
to the first quarter 2000 required exercise of stock options by employees
transferring to Edwards as a result of the March 31, 2000 spin-off of that
business. Cash outflows relating to purchases of treasury stock decreased as
the company did not purchase
16
any shares during the first quarter of 2001. The company's net-debt-to-capital
ratio was 39.5 percent and 40.1 percent at March 31, 2001 and December 31, 2000,
respectively.
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.
Management uses an internal performance measure called operational cash flow
that evaluates each operating business and geographic region on all aspects of
cash flow under its direct control. Operational cash flow, as defined, reflects
all litigation payments and related insurance recoveries except for those
payments and recoveries relating to mammary implants, which the company never
manufactured or sold.
The following table reconciles cash flow provided by continuing operations, as
determined by generally accepted accounting principles, to operational cash flow
provided by continuing operations:
- ------------------------------------------------------------------------------------------------------------------------
Three months ended March 31,
(in millions) 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from continuing operations per the company's
Condensed Consolidated Statements of Cash Flows ($33) ($64)
Capital expenditures (131) (115)
Net interest after tax 11 9
Other, including mammary implant litigation 42 11
- ------------------------------------------------------------------------------------------------------------------------
Operational cash flow - continuing operations ($111) ($159)
========================================================================================================================
As authorized by the board of directors, the company repurchases its stock to
optimize its capital structure depending upon its operational cash flows, net
debt level and current market conditions. In November 1999, the board of
directors authorized the repurchase of $500 million of common stock. The
company began repurchasing under the new program in 2000, and approximately two-
thirds of the authorized amount has been repurchased as of March 31, 2001.
On February 27, 2001, Baxter's board of directors approved a 2 for 1 stock split
of the company's common shares. This approval was subject to shareholder
approval of an increase in the number of authorized shares of common stock,
which was received at the company's annual meeting on May 1, 2001. On May 30,
2001, shareholders of record on May 9, 2001 will receive one additional share of
Baxter common stock for each share held on May 9, 2001.
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
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 growth objectives.
See "Part II - Item 1. Legal Proceedings" for a discussion of the company's
legal contingencies and related insurance coverage with respect to cases and
claims relating to the company's plasma-based therapies and mammary implants
manufactured by the Heyer-Schulte division of American Hospital Supply
Corporation, as well as other matters. Upon resolution of any of these matters,
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 or cash flows in the period in which they are recorded or paid,
management believes that the outcomes of these actions, individually or in the
aggregate, will not have a material adverse effect on the company's consolidated
financial position.
17
FORWARD-LOOKING INFORMATION
- ---------------------------
The matters discussed above that are not historical facts include forward-
looking statements. These statements are based on the company's current
expectations and involve numerous risks and uncertainties. Some of these risks
and uncertainties are factors that affect all international businesses, while
some are specific to the company and the health-care arenas in which it
operates. The factors below in some cases have affected and could affect the
company's actual results, causing results to differ, and possibly differ
materially, from those expressed in any such forward-looking statements. These
factors include technological advances in the medical field, unforeseen
information technology issues related to the company or third parties, economic
conditions, demand and market acceptance risks for new and existing products,
technologies and health-care services, the impact of competitive products and
pricing, manufacturing capacity, new plant start-ups, global regulatory, trade
and tax policies, continued price competition, product development risks,
including technological difficulties, ability to enforce patents and unforeseen
commercialization and regulatory factors. In particular, the company, as well
as other companies in its industry, has experienced increased regulatory
activity by the U.S. Food and Drug Administration with respect to its plasma-
based biologicals.
Currency fluctuations are also a significant variable for global companies,
especially fluctuations in local currencies where hedging opportunities are
unreasonably expensive, or altogether unavailable. If the United States dollar
continues to strengthen against most foreign currencies, the company's growth
rates in its sales and net earnings will be negatively impacted.
Management believes that its expectations with respect to forward-looking
statements are based upon reasonable assumptions within the bounds of its
knowledge of the company's business and operations, but there can be no
assurance that the actual results or performance of the company will conform to
any future results or performance expressed or implied by such forward-looking
statements.
NEW ACCOUNTING STANDARD
- -----------------------
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS No. 140) was issued in September 2000 and
is effective for transfers, servicings and extinguishments occurring after March
31, 2001. SFAS No. 140 replaces SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No.
125). Although SFAS No. 140 clarifies or amends various aspects of SFAS No.
125, most of the fundamental concepts from SFAS No. 125 have been brought
forward without modification. SFAS No. 140 is not expected to have a material
impact on the company's consolidated financial statements.
18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a complete discussion, refer to the caption "Financial Instrument Market
Risk" in the company's 2000 Annual Report to Stockholders on Form 10-K. Also,
refer to Note 6 in Item 1. Financial Statements in this Form 10-Q for a
discussion of the company's derivative instruments and hedging activities. As
part of its risk management program, the company performs sensitivity analyses
to assess potential changes in fair value relating to hypothetical movements in
currency exchange rates. A sensitivity analysis of changes in the fair value of
foreign exchange option and forward contracts outstanding at March 31, 2001
indicated that, if the U.S. Dollar uniformly fluctuated unfavorably by 10
percent against all currencies, the fair value of those contracts would decrease
by approximately $115 million. With respect to the company's cross-currency
swap agreements used to hedge net investments in foreign affiliates, if the U.S.
Dollar uniformly weakened by 10 percent, the fair value of the contracts would
decrease by approximately $225 million as of March 31, 2001. Any increase or
decrease in the fair value of the financial instruments is substantially offset
by a change in value of the hedged items. These sensitivity analyses disregard
the possibility that currency exchange rates can move in opposite directions and
that gains from one currency may or may not be offset by losses from another
currency.
Review by Independent Accountants
- ---------------------------------
Reviews of the interim condensed consolidated financial information included in
this Quarterly Report on Form 10-Q for the three months ended March 31, 2001 and
2000 have been performed by PricewaterhouseCoopers LLP, the company's
independent accountants. Their report on the interim condensed consolidated
financial information follows. This 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.
19
Report of Independent Accountants
---------------------------------
To the Board of Directors and Stockholders of
Baxter International Inc.
We have reviewed the accompanying condensed consolidated balance sheet of Baxter
International Inc. and its subsidiaries as of March 31, 2001, and the related
condensed consolidated statements of income for the three-month periods ended
March 31, 2001 and 2000 and the condensed consolidated statements of cash flows
for the three-month periods ended March 31, 2001 and 2000. These financial
statements are 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 condensed consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2000, 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 16, 2001 we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2000,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Chicago, Illinois
May 2, 2001
20
PART II. OTHER INFORMATION
Baxter International Inc. and Subsidiaries
Item 1. Legal Proceedings
Baxter International Inc. and certain of its subsidiaries are named as
defendants in a number of lawsuits, claims and proceedings, including product
liability claims involving products now or formerly manufactured or sold by the
company or by companies that were acquired by the company. The most significant
of these are reported in the company's Annual Report on Form 10-K for the year
ended December 31, 2000, and material developments in such matters for the
quarter ended March 31, 2001 are described below. Upon resolution of any such
matters, Baxter 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 or paid,
management believes that no such charge would have a material adverse effect on
Baxter's consolidated financial position.
Mammary implant litigation
- ---------------------------
As previously reported in the company's Annual Report on Form 10-K, the company,
together with certain of its subsidiaries, is currently a defendant in various
courts in a number of lawsuits brought by individuals, all seeking damages for
injuries of various types allegedly caused by silicone mammary implants formerly
manufactured by the Heyer-Schulte division of American Hospital Supply
Corporation (AHSC). AHSC, which was acquired by the company in 1985, divested
its Heyer-Schulte division in 1984. It is not known how many of these claims
and lawsuits involve products manufactured and sold by Heyer-Schulte, as opposed
to other manufacturers. In December 1998, a panel of independent medical
experts appointed by a federal judge announced its findings that reported
medical studies contained no clear evidence of a connection between silicone
mammary implants and traditional or atypical systemic diseases. In June 1999, a
similar conclusion was announced by a committee of independent medical experts
from the Institute of Medicine, an arm of the National Academy of Sciences.
As of March 31, 2001, Baxter, together with certain of its subsidiaries, had
been named as a defendant or co-defendant in 563 lawsuits and two claims
relating to mammary implants, brought by approximately 1,104 plaintiffs, of
which 691 are implant plaintiffs and the remainder are consortium or second
generation plaintiffs. Of those plaintiffs, 210 currently are included in the
Lindsey class action Revised Settlement described below, which accounts for
approximately 134 of the pending lawsuits against the company. Additionally,
793 plaintiffs have opted out of the Revised Settlement (representing
approximately 368 pending lawsuits), and the status of the remaining plaintiffs
with pending lawsuits is unknown. Some of the opt-out plaintiffs filed their
cases naming multiple defendants and without product identification; thus, not
all of the opt-out plaintiffs will have viable claims against the company. As
of March 31, 2001, 334 of the opt-out plaintiffs had confirmed Heyer-Schulte
mammary implant product identification. Furthermore, during the first quarter
of 2001, Baxter obtained dismissals, or agreements for dismissals, with respect
to 164 plaintiffs.
In addition to the individual suits against the company, a class action on
behalf of all women with silicone mammary implants is pending in the United
States District Court (U.S.D.C.) for the Northern District of Alabama involving
most manufacturers of such implants, including Baxter, as successor to AHSC
(Lindsey, et al., v. Dow Corning, et al., U.S.D.C., N. Dist. Ala., CV 94-P-
11558-S). The class action was certified for settlement purposes only by the
court on September 1, 1994, and the settlement terms were subsequently revised
and approved on December 22, 1995 (the Revised Settlement). All appeals
directly challenging the Revised Settlement have been dismissed.
21
In addition to the Lindsey class action, the company also has been named in four
other purported class actions in various state and provincial courts, only one
of which is certified.
On March 31, 2000, the United States Department of Justice filed an action
against Baxter and other manufacturers of breast implants, as well as the escrow
agent for the revised settlement fund. The action is pending in the federal
district court in Birmingham, Alabama and seeks reimbursement under various
federal statutes for medical care provided to various women with mammary
implants. The company is defending this litigation.
Plasma-based therapies litigation
- ----------------------------------
As previously reported in the company's Annual Report on Form 10-K, Baxter
currently is a defendant in a number of claims and lawsuits brought by
individuals who have hemophilia, all seeking damages for injuries allegedly
caused by anti-hemophilic factor concentrates VIII or IX derived from human
blood plasma (factor concentrates) processed by the company from the late 1970s
to the mid-1980s. The typical case or claim alleges that the individual was
infected with the HIV virus by factor concentrates, which contained the HIV
virus. None of these cases involves factor concentrates currently processed by
the company.
As of March 31, 2001, Baxter had been named in 146 lawsuits and 93 claims in the
United States, Ireland, Italy, Taiwan, Japan, Spain, Sweden, France, and the
Netherlands. The U.S.D.C. for the Northern District of Illinois has approved a
settlement of all U.S. federal court factor concentrates cases. As of March 31,
2001, approximately 6,220 claimant groups had been found eligible to participate
in the settlement, and approximately 300 claimants had opted out of the
settlement. Approximately 6,202 of the claimant groups had received payments as
of March 31, 2001 and payments are expected to continue through the second
quarter of 2001 as releases are received from the remaining claimant groups.
The company also has been named in four purported class actions. None of these
class actions has been certified for trial.
In Japan, Baxter is a defendant, along with the Japanese government and four
other co-defendants, in factor concentrates cases in Osaka, Tokyo, Nagoya,
Tohoku, Fukuoka, Sapporo and Kumamoto. As of March 31, 2001, the cases involved
1,342 plaintiffs, of whom 1,333 have settled their claims.
In addition, Immuno International AG (Immuno), acquired by Baxter in 1996, has
unsettled claims for damages for injuries allegedly caused by its plasma-based
therapies. The typical claim alleges that the individual with hemophilia was
infected with HIV by factor concentrates containing the HIV virus.
Additionally, Immuno faces multiple claims stemming from its vaccines and other
biologically derived therapies. A portion of the liability and defense costs
related to these claims will be covered by insurance, subject to exclusions,
conditions, policy limits and other factors. Pursuant to the stock purchase
agreement between the company and Immuno, as revised in April 1999 in
consideration for a payment by the company of a 29 million Swiss Franc payment
to Immuno as additional purchase price, approximately 26 million Swiss Francs of
the purchase price is being withheld to cover these contingent liabilities.
As previously reported in the company's Annual Report on Form 10-K, Baxter is
currently a defendant in a number of claims and lawsuits brought by individuals
who infused the company's Gammagard(R) IVIG (intravenous immuno-globulin), all
of whom are seeking damages for Hepatitis C infections allegedly caused by
infusing Gammagard(R) IVIG. As of March 31, 2001, Baxter was a defendant in 27
lawsuits and 31 claims in the United States, Denmark, France, Germany, Italy,
Spain and the United Kingdom. Two suits currently pending in the United States
have been filed as purported class actions but only one has been certified. In
22
September 2000, the U.S.D.C. for the Central District of California approved a
settlement of the class action that would provide financial compensation for
U.S. individuals who used Gammagard(R) IVIG between January 1993 and February
1994.
Other
- -----
As of September 30, 1996, the date of the spin-off of Allegiance Corporation
(Allegiance) from Baxter, Allegiance 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 Baxter pursuant to certain contractual obligations for all
expenses and potential liabilities associated with claims pertaining to latex
gloves. As of March 31, 2001, the company had been named as a defendant in 592
lawsuits, including the following purported class action: Swartz v. Baxter
Healthcare Corporation, et al. Court of Common Pleas, Jefferson County, PA, 656-
1997 C.D.
In connection with the spin-off of its cardiovascular business, Baxter obtained
a ruling from the Internal Revenue Service to the effect that the distribution
should qualify as a tax-free spin-off in the United States. In many countries
throughout the world, Baxter has not sought similar rulings from the local tax
authorities and has taken the position that the spin-off was a tax-free event to
Baxter. In the event that this position was successfully challenged by one or
more countries' taxing authorities, Baxter would be liable for any resulting
liability. Baxter believes that it has established adequate reserves to cover
the expected tax liabilities. There can be no assurance, however, that Baxter
will not incur losses in excess of such reserves.
23
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) Reports on Form 8-K
A report on Form 8-K was filed on February 27, 2001, under "Item 5 - Other
Events," which reported that Baxter International Inc. announced a 2 for 1
stock split.
A report on Form 8-K was filed on May 1, 2001, under "Item 5 - Other
Events," which reported that the shareholders of Baxter International Inc.
approved an amendment to Baxter's Restated Certificate of Incorporation, as
amended, to increase the number of authorized shares of common stock.
24
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: May 10, 2001 By: /s/ Brian P. Anderson
------------------------------
Brian P. Anderson
Senior Vice President and Chief
Financial Officer
(Chief Accounting Officer)
25
EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
- --------------------------------------------------------------------------------
Number Description of Exhibit
- ------ ----------------------
3.1 Restated Certificate of Incorporation, as amended, including
Certificate of Designation of Series B Junior Participating Preferred
Stock and Certificate of Elimination of Series A Junior Participating
Preferred Stock
10.16 Baxter International Inc. Restricted Stock Plan for Non-Employee
Directors, as amended and restated effective May 1, 2001
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter Re Unaudited Interim Financial Information
(All other exhibits have been omitted because they are not applicable
or not required.)
26