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, 2003
[ ] 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 ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No ___
The number of shares of the registrant's Common Stock, par value $1.00 per
share, outstanding as of April 30, 2003 was 597,506,191 shares.
BAXTER INTERNATIONAL INC.
FORM 10-Q
For the quarterly period ended March 31, 2003
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page Number
- -------------------------------- -----------
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.........................................................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................21
Item 4. Controls and Procedures............................................................................22
Review by Independent Accountants.............................................................................23
Report of Independent Accountants.............................................................................24
Part II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings..................................................................................25
Item 6. Exhibits and Reports on Form 8-K...................................................................29
Signature.....................................................................................................30
Certifications................................................................................................31
Exhibits......................................................................................................35
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,
2003 2002
-------------------
Net sales $1,997 $1,875
Costs and expenses
Cost of goods sold 1,117 995
Marketing and administrative expenses 413 393
Research and development expenses 136 115
Interest, net 19 16
Other expense 26 12
- ------------------------------------------------------------------------------------------
Total costs and expenses 1,711 1,531
- ------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 286 344
Income tax expense 69 91
- ------------------------------------------------------------------------------------------
Income from continuing operations 217 253
Discontinued operations (1) --
- ------------------------------------------------------------------------------------------
Net income $ 216 $ 253
==========================================================================================
Earnings per basic common share
Continuing operations $ 0.36 $ 0.42
Discontinued operations -- --
- ------------------------------------------------------------------------------------------
Net income $ 0.36 $ 0.42
==========================================================================================
Earnings per diluted common share
Continuing operations $ 0.36 $ 0.41
Discontinued operations (0.01) --
- ------------------------------------------------------------------------------------------
Net income $ 0.35 $ 0.41
==========================================================================================
Weighted average number of common shares outstanding
Basic 598 600
==========================================================================================
Diluted 611 622
==========================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
Baxter International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
(in millions, except shares)
March 31, December 31,
2003 2002
----------------------------
Current assets Cash and equivalents $ 1,408 $ 1,169
Accounts and other current receivables 1,918 1,838
Inventories 1,917 1,745
Short-term deferred income taxes 87 125
Prepaid expenses and other 353 283
------------------------------------------------------------------------------------------
Total current assets 5,683 5,160
- ------------------------------------------------------------------------------------------------------------
Property, At cost 6,907 6,679
plant and Accumulated depreciation and amortization (2,882) (2,772)
equipment ------------------------------------------------------------------------------------------
Net property, plant and equipment 4,025 3,907
- ------------------------------------------------------------------------------------------------------------
Other assets Goodwill 1,551 1,494
Other intangible assets 530 526
Other 1,537 1,391
------------------------------------------------------------------------------------------
Total other assets 3,618 3,411
- ------------------------------------------------------------------------------------------------------------
Total assets $13,326 $12,478
============================================================================================================
Current Short-term debt $ 112 $ 112
liabilities Current maturities of long-term debt and lease obligations 4 108
Accounts payable and accrued liabilities 2,732 3,043
Income taxes payable 686 588
------------------------------------------------------------------------------------------
Total current liabilities 3,534 3,851
- ------------------------------------------------------------------------------------------------------------
Long-term debt and lease obligations 5,570 4,398
- ------------------------------------------------------------------------------------------------------------
Long-term deferred income taxes -- 29
- ------------------------------------------------------------------------------------------------------------
Other long-term liabilities 1,249 1,261
- ------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- ------------------------------------------------------------------------------------------------------------
Stockholders' Common stock, $1 par value, authorized 2,000,000,000
equity shares, issued 626,574,109 shares 627 627
Common stock in treasury, at cost, 29,365,801 shares
in 2003 and 27,069,808 shares in 2002 (1,453) (1,326)
Additional contributed capital 3,213 3,223
Retained earnings 1,891 1,689
Accumulated other comprehensive loss (1,305) (1,274)
------------------------------------------------------------------------------------------
Total stockholders' equity 2,973 2,939
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $13,326 $12,478
============================================================================================================
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) 2003 2002
-----------------------------
Cash flows Income from continuing operations $ 217 $ 253
from Adjustments
operations Depreciation and amortization 128 103
Deferred income taxes (70) 37
Other 8 (16)
Changes in balance sheet items
Accounts receivable (56) (174)
Inventories (135) (127)
Accounts payable and other accrued liabilities (85) (129)
Net litigation payable and other (30) (42)
-------------------------------------------------------------------------------------------
Cash flows from continuing operations (23) (95)
-------------------------------------------------------------------------------------------
Cash flows from discontinued operations (6) (12)
-------------------------------------------------------------------------------------------
Cash flows from operations (29) (107)
- -------------------------------------------------------------------------------------------------------------
Cash flows Capital expenditures (174) (132)
from investing Acquisitions (net of cash received)
activities and investments in affiliates (71) (49)
-------------------------------------------------------------------------------------------
Cash flows from investing activities (245) (181)
- -------------------------------------------------------------------------------------------------------------
Cash flows Issuances of debt and lease obligations 610 53
from financing Redemptions of debt and lease obligations (119) (285)
activities Increase in debt with maturities
of three months or less, net 527 749
Common stock cash dividends (346) (348)
Proceeds from stock issued under employee benefit plans 16 91
Purchases of treasury stock (153) (35)
-------------------------------------------------------------------------------------------
Cash flows from financing activities 535 225
- -------------------------------------------------------------------------------------------------------------
Effect of currency exchange rate changes on cash and equivalents (22) 3
- -------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 239 (60)
Cash and equivalents at beginning of period 1,169 582
- -------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $1,408 $ 522
=============================================================================================================
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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 2002
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, unless otherwise noted herein, 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 reclassifications have been made to conform the 2002 financial
statements and notes to the 2003 presentation.
Stock compensation plans
The company has a number of stock-based employee compensation plans, including
stock option, stock purchase and restricted stock plans. The company applies the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for these plans. In accordance with this intrinsic value method,
no compensation expense is recognized for the company's fixed stock option plans
and employee stock purchase plans. The following table illustrates the effect on
net income and earnings per share (EPS) if the company had applied the fair
value recognition provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," to all stock-based
employee compensation.
Three months ended
March 31,
2003 2002
------------------
Net income, as reported $ 216 $ 253
Add: Stock-based employee compensation expense
included in reported net income, net of tax - 1
Deduct: Total stock-based employee
compensation expense determined under the fair
value method, net of tax 37 43
- --------------------------------------------------------------------------
Pro forma net income $ 179 $ 211
==========================================================================
Earnings per basic common share
As reported $0.36 $0.42
Pro forma $0.30 $0.35
- --------------------------------------------------------------------------
Earnings per diluted common share
As reported $0.35 $0.41
Pro forma $0.29 $0.34
- --------------------------------------------------------------------------
Pro forma compensation expense for stock options and employee stock purchase
subscriptions was calculated using the Black-Scholes model. The pro forma
expense for stock option grants
5
was calculated with the following weighted-average assumptions for grants in the
first quarter of 2003 and 2002, respectively: dividend yield of 2.1% and 2.0%;
expected life of six years for both periods; expected volatility of 37% and 35%;
and risk-free interest rates of 3.4% and 4.5%. The weighted-average fair value
of stock options granted during the first quarter were $9.22 in 2003 and $18.67
in 2002.
The pro forma expense for employee stock purchase subscriptions was calculated
with the following weighted-average assumptions for the first quarter of 2003
and 2002, respectively: dividend yield of 2.0% for both periods; expected term
of one year for both periods; expected volatility of 50% and 33%; and risk-free
interest rates of 1.2% and 2.2%. The weighted-average fair value of the purchase
rights granted during the first quarter were $10.31 in 2003 and $17.51 in 2002.
New accounting and disclosure standards
The Financial Accounting Standards Board's (FASB) proposed SFAS, "Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity," which is expected to be issued as a final standard in 2003, will
require that certain financial instruments, which previously had been classified
as equity, be classified as liabilities in the company's balance sheet. The
pending new rules are expected to be effective immediately for all contracts
created or modified after the date the pronouncement is issued, and are expected
to be otherwise effective for Baxter at the beginning of the third quarter of
2003. Under the pending new rules, the balance sheet classification of the
company's equity forward agreements, which are discussed in Note 6, are expected
to change from equity to liabilities. The company is in the process of exiting
these agreements and expects to complete the exit strategy during 2003.
Management is in the process of analyzing this pending accounting pronouncement.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities"
(Interpretation No. 46) was issued in January 2003. Interpretation No. 46
defines variable interest entities (VIE) and requires that a VIE be consolidated
if certain conditions are met. For VIEs created on or after January 31, 2003,
the guidance will be applied immediately. For VIEs created before that date, the
guidance will be applied at the beginning of the third quarter of 2003. The new
rules may be applied prospectively with a cumulative-effect adjustment as of the
beginning of the period in which it is first applied or by restating previously
issued financial statements for one or more years with a cumulative-effect
adjustment as of the beginning of the first year restated. Interpretation No. 46
did not impact the company's consolidated financial statements for the three
months ended March 31, 2003. Management is in the process of analyzing the
impact of Interpretation No. 46 on the company's future consolidated financial
statements. Based on analyses to date, management has preliminarily concluded
that the company will consolidate certain VIEs as of July 1, 2003. The total
assets and liabilities expected to be consolidated as of July 1, 2003 total less
than $200 million.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" (SFAS No. 148) was issued in December 2002. The new standard
provides alternative methods for transitioning, if a company elects to do so,
from the intrinsic method to the fair value-based method of accounting for
stock-based employee compensation. SFAS No. 148 also requires additional
quarterly and annual disclosures about stock-based compensation. The annual
disclosure requirements were effective for 2002, and the new interim disclosure
requirements are effective for these financial statements. The company has
implemented the required disclosure provisions. Management does not have
immediate plans for the company to voluntarily elect to adopt the fair
value-based method of accounting for stock-based employee compensation.
6
2. SUPPLEMENTAL FINANCIAL INFORMATION
Net interest expense
Net interest expense consisted of the following.
Three months ended
March 31,
(in millions) 2003 2002
- ------------------------------------------------------------------------------
Interest expense $ 30 $18
Interest income (10) (2)
- ------------------------------------------------------------------------------
Interest expense, net $ 20 $16
==============================================================================
Continuing operations $ 19 $16
Discontinued operations $ 1 $--
==============================================================================
Comprehensive income
Total comprehensive income was $185 million and $128 million for the three
months ended March 31, 2003 and 2002, respectively. The increase in
comprehensive income in 2003 was principally related to changes in value of the
company's net investment hedges, partially offset by unfavorable currency
translation adjustments and lower net income.
Earnings per share
The numerator for both basic and diluted 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) 2003 2002
- ------------------------------------------------------------------------------
Basic shares 598 600
- ------------------------------------------------------------------------------
Effect of dilutive securities
Employee stock options 1 21
Equity forward agreements 10 --
Employee stock purchase plans 2 1
- ------------------------------------------------------------------------------
Diluted shares 611 622
==============================================================================
Inventories
Inventories consisted of the following.
March 31, December 31,
(in millions) 2003 2002
- ------------------------------------------------------------------------------
Raw materials $ 477 $ 439
Work in process 613 511
Finished products 827 795
- ------------------------------------------------------------------------------
Total inventories $1,917 $1,745
==============================================================================
7
Product warranties
The following is a summary of activity in the product warranty liability.
As of and for the
three months ended
March 31,
(in millions) 2003 2002
- --------------------------------------------------------------------------
Beginning of period $53 $45
New warranties and adjustments to existing warranties 8 8
Payments in cash or in kind (8) (6)
- --------------------------------------------------------------------------
End of period $53 $47
==========================================================================
3. DISCONTINUED OPERATIONS
During the fourth quarter of 2002, the company recorded a $294 million pre-tax
charge ($229 million on an after-tax basis) principally associated with
management's decision to divest the majority of the services businesses included
in the Renal segment. The Renal segment's services portfolio consists of Renal
Therapy Services (RTS), which operates dialysis clinics in partnership with
local physicians in international markets, RMS Disease Management, Inc., which
is a renal-disease management organization, and RMS Lifeline, Inc., which
provides management services to renal access care centers.
Included in the total pre-tax charge was $269 million for non-cash costs,
principally to write down certain property and equipment, goodwill and other
intangible assets due to impairment. Also included in the pre-tax charge was $25
million for cash costs, principally relating to severance and other
employee-related costs associated with the elimination of approximately 75
positions, as well as legal and contractual commitment costs. During the first
quarter of 2003, $1 million of the reserve for cash costs was utilized,
principally related to transaction costs. The majority of the remaining reserve
for cash costs is expected to be utilized in 2003, and the divestiture plan is
expected to be completed in 2003.
The company's consolidated statements of income and cash flows have been
restated to reflect the results of operations and cash flows of the businesses
to be divested as discontinued operations. The consolidated balance sheets at
March 31, 2003 and December 31, 2002 have not been restated as the assets and
liabilities of the businesses to be divested are immaterial to the company's
consolidated balance sheets. Net revenues relating to the discontinued
businesses were $48 million and $75 million for the periods ended March 31, 2003
and 2002, respectively.
4. ACQUISITIONS AND INTANGIBLE ASSETS
Pending acquisition
In December 2002, the company signed a definitive agreement to acquire certain
assets from Alpha Therapeutic Corporation. The assets to be acquired include
Aralast, a plasma-derived Alpha-1 Antitrypsin (A1P1) product, plasma collection
centers in the United States, and a central testing laboratory. Aralast will
expand the BioScience segment's product portfolio of biopharmaceuticals, as well
as broaden its therapeutic focus in the pulmonology area. The transaction is
expected to enhance the economics of the segment's plasma business by increasing
the number of products Baxter obtains from a liter of plasma. Closing of the
transaction is expected to occur during 2003.
8
Pro forma information
The following pro forma information presents a summary of the company's
consolidated results of operations as if acquisitions during 2002 had taken
place as of the beginning of 2002, giving effect to purchase accounting
adjustments.
Three months ended
March 31,
(in millions, except per share data) 2003 2002
- --------------------------------------------------------------------------
Net sales $1,997 $1,934
Income from continuing operations $ 217 $ 261
Net income $ 216 $ 261
Net income per diluted common share $ 0.35 $ 0.42
- --------------------------------------------------------------------------
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.
Goodwill
The carrying amounts of goodwill at March 31, 2003 were $838 million, $555
million and $158 million for the Medication Delivery, BioScience and Renal
segments, respectively. The change in goodwill during the three-month period
ended March 31, 2003 was not significant, and was principally due to an
additional purchase price payment related to the 2002 acquisition of ESI
Lederle, a division of Wyeth, which is included in the Medication Delivery
segment. There was no impairment of goodwill during the quarter.
Other intangible assets
Intangible assets with finite useful lives are amortized on a straight-line
basis over their estimated useful lives. Intangible assets with indefinite
useful lives are not material to the company. The following is a summary of the
company's intangible assets subject to amortization at March 31, 2003 and
December 31, 2002.
Developed Manufacturing,
(in millions, except amortization technology, distribution and
period data) including patents other contracts Other Total
- --------------------------------------------------------------------------------------------------------------
March 31, 2003
- --------------
Gross intangible assets $695 $30 $60 $785
Accumulated amortization 242 10 10 262
- --------------------------------------------------------------------------------------------------------------
Net intangible assets $453 $20 $50 $523
==============================================================================================================
Weighted-average amortization
period (in years) 15 7 20 15
==============================================================================================================
December 31, 2002
- -----------------
Gross intangible assets $691 $30 $50 $771
Accumulated amortization 235 9 9 252
- --------------------------------------------------------------------------------------------------------------
Net intangible assets $457 $21 $41 $519
==============================================================================================================
Weighted-average amortization
period (in years) 15 7 19 15
==============================================================================================================
The amortization expense for these intangible assets was $12 million and $8
million for the three months ended March 31, 2003 and 2002, respectively. At
March 31, 2003, the anticipated annual amortization expense for these intangible
assets is $47 million, $49 million,
9
$45 million, $44 million, $39 million and $37 million in 2003, 2004, 2005, 2006,
2007 and 2008, respectively.
5. SPECIAL CHARGES
A, AF and AX series dialyzers
As further discussed in the 2002 Annual Report to Stockholders, in the fourth
quarter of 2001 the company recorded a pretax charge of $189 million ($156
million on an after-tax basis) to cover the costs of discontinuing the A, AF and
AX series Renal segment dialyzer product line and other related costs. Included
in the total pretax charge was $116 million for non-cash costs, principally for
the write-down of goodwill and other intangible assets, inventories and
property, plant and equipment. Also included in the charge was $73 million for
cash costs, principally pertaining to legal costs, recall costs, contractual
commitments, and severance and other employee-related costs associated with the
elimination of approximately 360 positions. The majority of the positions were
located in the Ronneby, Sweden and Miami Lakes, Florida manufacturing
facilities, which have been closed. Approximately $2 million in legal costs were
paid during the first quarter of 2003, leaving a remaining balance in the
reserve for cash costs of $36 million at March 31, 2003. Except for legal costs,
the remaining balance in the reserve at March 31, 2003 is expected to be
substantially utilized by the end of the year. Certain legal payments and
related insurance recoveries are expected to occur in 2004. Refer to Note 7 for
a discussion of legal proceedings and investigations relating to this matter.
Research and development prioritization
The company recorded a charge of $26 million in the fourth quarter of 2002 to
prioritize the company's investments in certain of the company's research and
development (R&D) programs across the three operating segments. The charge was a
result of management's comprehensive assessment of the company's R&D pipeline
with the goal of having a focused and balanced strategic portfolio, which
maximizes the company's resources and generates the most significant return on
the company's investment. The charge included $14 million of cash costs,
primarily relating to employee severance associated with the elimination of
approximately 160 R&D positions, and $12 million of non-cash costs to write down
certain property, plant and equipment and other assets due to impairment.
Approximately $2 million of cash costs were paid during the fourth quarter of
2002, and approximately $7 million of cash costs were paid during the first
quarter of 2003. Approximately 142 positions have been eliminated through March
31, 2003. The majority of the remaining employee severance and other cash costs
are expected to be paid in 2003.
6. FINANCIAL INSTRUMENTS
Securitizations
As further discussed in the 2002 Annual Report to Stockholders, the company has
entered into agreements with various financial institutions whereby it
periodically securitizes an undivided interest in certain pools of trade
accounts receivable (including lease receivables). The company continues to
service the receivables. Net operating cash outflows relating to the
securitization arrangements were $73 million and $27 million for the periods
ended March 31, 2003 and 2002, respectively. The $73 million net cash outflows
for the first quarter of 2003 was comprised of $460 million of proceeds from
sales of receivables, net of $533 million of cash collections relating to
previously sold receivables, which were remitted to the financial institutions
that own the receivables.
10
Equity forward agreements
As further discussed in the 2002 Annual Report to Stockholders, in order to
partially offset the potentially dilutive effect of employee stock options, the
company had periodically entered into forward agreements with independent third
parties related to the company's common stock. The forward agreements, which
have a fair value of zero at inception, require the company to purchase its
common stock from the counterparties on specified future dates and at specified
prices. The company may, at its option, terminate and settle these agreements at
any time before maturity. The agreements include certain Baxter stock price
thresholds, below which the counterparty has the right to terminate the
agreements. If the thresholds were met in the future, the number of shares that
could potentially be issued by the company under all of the agreements is
subject to contractual maximums, and the maximum at March 31, 2003 was 81
million shares. The contracts give the company the choice of net-share, net-cash
or physical settlement upon maturity or upon any earlier settlement date. In
accordance with current GAAP, these contracts are not recorded in the financial
statements until they are settled, and are recorded directly to stockholders'
equity upon settlement.
At March 31, 2003, the company had outstanding forward agreements related to
11.9 million shares, which all mature in 2003 and have exercise prices ranging
from $33 to $53 per share, with a weighted-average exercise price of $48 per
share. During the quarter ended March 31, 2003, the company repurchased 3.1
million shares of its common stock for $153 million from counterparty financial
institutions in conjunction with the settlement of equity forward agreements.
Management intends to exit all of its outstanding agreements, and expects to
complete the exit strategy during 2003. The settlement of the equity forward
agreements has not had and is not expected to have a material impact on the
company's earnings per diluted share.
With respect to the agreements outstanding at March 31, 2003, for each one
dollar decrease in the price of a share of Baxter common stock, the fair value
of these agreements, which were in a negative position of $349 million as of
March 31, 2003 (based on a common stock price of $18.64 at March 31, 2003),
would further decline by approximately $12 million.
7. LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES
Refer to "Part II - Item 1. Legal Proceedings" below.
8. 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
therapies, including intravenous infusion pumps and solutions,
anesthesia-delivery devices and pharmaceutical agents, and oncology therapies;
BioScience: biopharmaceutical 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 and related net interest expense, corporate headquarters
costs, certain non-strategic investments and related income and expense, certain
nonrecurring gains and losses, deferred income taxes, certain foreign currency
fluctuations, the majority of foreign currency and interest rate hedging
activities, and certain litigation liabilities and related insurance
receivables.
11
Financial information for the company's segments for the quarter ended March 31
is as follows.
Medication
(in millions) Delivery BioScience Renal Other Total
- ---------------------------------------------------------------------------------------------------
For the three months ended
- --------------------------
March 31,
- ---------
2003
Net sales $850 $740 $407 $ -- $1,997
Pretax income 135 125 66 (40) 286
2002
Net sales $728 $746 $401 $ -- $1,875
Pretax income 119 171 59 (5) 344
- ---------------------------------------------------------------------------------------------------
The following are reconciliations of total segment amounts to amounts per the
condensed consolidated income statements.
Three months
ended March 31,
-----------------
(in millions) 2003 2002
- -------------------------------------------------------------------------------------------
Pretax income
- -------------
Total pretax income from segments $326 $349
Unallocated amounts
Interest expense, net (19) (16)
Other Corporate items (21) 11
- -------------------------------------------------------------------------------------------
Income from continuing operations before income taxes $286 $344
===========================================================================================
9. SHARED INVESTMENT PLAN
As further discussed in the 2002 Annual Report to Stockholders, in order to
align management and shareholder interests, in 1999 the company sold shares of
the company's stock to 142 of Baxter's senior managers. The participants used
five-year full-recourse personal bank loans to purchase the stock at the May 3,
1999 closing price (adjusted for the company's stock split) of $31.81. Baxter
has guaranteed repayment to the banks in the event a participant in the plan
defaults on his or her obligations. The plan also includes certain risk-sharing
provisions whereby, after May 3, 2002, the company shares 50% in any loss
incurred by the participants relating to a stock price decline.
In May 2003, management announced that, in order to continue to align management
and shareholder interests and to balance both the short- and long-term needs of
Baxter, the board of directors authorized the company to provide a new
three-year guarantee at the May 6, 2004 loan due date for approximately 70
non-officer employees who remain in the plan, should they so elect to extend
their loans. As of May 6, 2004, the 50% risk-sharing provision included in the
current plan will terminate. The company's maximum loan guarantee as of May 6,
2004 relating to these employees, assuming all eligible employees elect to
extend their loans, would be $79 million. As with the current guarantee, with
respect to any new guarantees provided to eligible participants, the company may
take actions relating to participants and their assets to obtain full
reimbursement for any amounts paid by the company to the bank pursuant to the
loan guarantee. The new three-year guarantee is not expected to have a material
impact on the company's results of operations.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Baxter International Inc.'s (the company or Baxter) 2002 Annual Report to
Stockholders (2002 Annual Report) contains management's discussion and analysis
of financial condition and results of operations for the year ended December 31,
2002. In the 2002 Annual Report, management outlined its key financial
objectives for 2003. The table below reflects these objectives, as well as
management's revised expectations, and the company's results through March 31,
2003.
- --------------------------------------------------------------------------------
FULL YEAR 2003 OBJECTIVES RESULTS THROUGH
PER 2002 ANNUAL REPORT MARCH 31, 2003
- --------------------------------------------------------------------------------
.. Grow sales in the 10-12% range . Management now expects sales growth
for full-year 2003 to be in the 8-12%
range. Net sales for the quarter
ended March 31, 2003 increased 6%.
- --------------------------------------------------------------------------------
.. Grow earnings per diluted . Management now expects to grow
share (from continuing earnings per diluted share from
operations) to the $2.22-$2.29 continuing operations to the
range, or growth of 11-15%. $2.10-$2.20 range. For the quarter
ended March 31, 2003, earnings per
diluted share from continuing
operations were $0.36, declining 12%
from the prior year.
- --------------------------------------------------------------------------------
.. Generate $1.3-$1.5 billion in . The company generated a net cash
cash flows from operations. outflow from operations of $29
million during the quarter ended
March 31, 2003, with a $23 million
outflow from continuing operations
and a $6 million outflow from
discontinued operations.
- --------------------------------------------------------------------------------
RESULTS OF CONTINUING OPERATIONS
- --------------------------------
NET SALES
Three months ended
March 31, Percent
(in millions) 2003 2002 increase
- --------------------------------------------------------------------------------
International $1,041 $ 958 9%
United States 956 917 4%
- --------------------------------------------------------------------------------
Total net sales $1,997 $1,875 6%
================================================================================
Fluctuations in currency exchange rates favorably impacted sales growth in 2003
by approximately 4 points, and affected all three segments. During the quarter,
the United States Dollar weakened principally relative to the Euro and Japanese
Yen, partially offset by a strengthening principally relative to certain Latin
American currencies. Refer to Note 8 to the condensed consolidated financial
statements for a summary of net sales by segment.
Medication Delivery
The Medication Delivery segment generated 17% sales growth during the three
months ended March 31, 2003. Approximately 7 points of growth was generated by
recent acquisitions, net of divestitures, which principally related to the
December 2002 acquisition of ESI Lederle (ESI), a
13
division of Wyeth, a leading manufacturer and distributor of injectable drugs
used in the U.S. hospital market. Sales of anesthesia and critical care
products, excluding ESI, contributed 3 points of sales growth, primarily due to
increased sales of inhaled anesthetics and certain proprietary and generic
drugs, as well as geographic expansion in this business. Sales of certain
generic and branded pre-mixed drugs and drug delivery products contributed 4
points of sales growth in the quarter. The remaining growth was fueled by
increased sales of intravenous therapies, which principally include intravenous
solutions and nutritional products.
BioScience
Sales in the BioScience segment decreased 1% for the three months
ended March 31, 2003. One point of the decline was related to plasma-derived
products, primarily due to the re-entry of certain competitors who were out of
the market in the prior year, increased pricing pressures, and a continuing
shift in the market from plasma to recombinant hemophilia products. These
factors may unfavorably impact sales beyond the first quarter of 2003. Another 2
points of the decline was related to vaccines, with increased sales of NeisVac-C
vaccine for the prevention of meningitis C and other vaccines offset by the
impact of a prior year sale of crude bulk vaccine to Acambis, Inc. (Acambis) in
conjunction with its smallpox vaccine contract with the U.S. Government.
Partially offsetting these declines were increased sales of recombinant
products, as well as increased sales of products that provide for
leukoreduction, which is the removal of white blood cells from blood products
used for transfusion. The growth rate for Recombinate Antihemophilic Factor
(rAHF) (Recombinate) was lower than in recent periods primarily due to
reductions in inventory by some providers resulting from increased confidence in
the availability of Recombinate. Sales of the segment's advanced recombinant
therapy, ADVATE, Antihemophilic Factor (Recombinant), Plasma/Albumin-Free Method
(rAHF-PFM), which is subject to approval by regulatory authorities, is expected
to contribute to the segment's growth rate in 2003. Refer to Note 4 regarding a
pending acquisition relating to the BioScience segment.
Renal
Sales from continuing operations in the Renal segment increased 2% during the
three months ended March 31, 2003. The sales growth was principally a result of
improved sales of hemodialysis products outside the United States. Sales of
peritoneal dialysis products were flat during the quarter, primarily due to
favorable pricing extended to customers who entered into long-term sales
agreements in the United States. As further discussed in Note 3, in the fourth
quarter of 2002, management decided to divest the majority of the Renal
segment's services businesses. The results of operations of the services
businesses are no longer reported as part of continuing operations, but are
restated as discontinued operations in the condensed consolidated statements of
income.
The following tables show key ratios of certain income statement items as a
percent of sales.
GROSS MARGIN AND EXPENSE RATIOS
- ---------------------------------------------------------------------------
Three months ended
March 31,
2003 2002 Change
- ---------------------------------------------------------------------------
Gross margin 44.1% 46.9% (2.8 pts)
Marketing and
administrative expenses 20.7% 21.0% (0.3 pts)
- ---------------------------------------------------------------------------
The decline in the gross margin during the quarter was primarily due to changes
in the products and services mix, competitive pricing pressures in the market
for plasma-based products, and currency exchange rate fluctuations and related
hedging activities.
14
Marketing and administrative expenses as a percentage of sales improved during
the quarter as management is leveraging recent acquisitions and aggressively
managing costs throughout the company. Partially offsetting these reductions are
increased investments in sales and marketing programs in conjunction with the
launch of new products, and to drive overall sales growth. As discussed in the
2002 Annual Report, the reduction in expenses in 2003 due to a change in the
employee vacation policy is substantially offset by increased expenses in 2003
related to certain of the company's other benefit plans.
RESEARCH AND DEVELOPMENT
- --------------------------------------------------------------------------
Three months ended
March 31, Percent
(in millions) 2003 2002 increase
- --------------------------------------------------------------------------
Research and
development expenses $136 $115 18%
As a percent of sales 6.8% 6.1%
- --------------------------------------------------------------------------
The increase in research and development (R&D) expenses for the quarter was
primarily due to increased investments in the Medication Delivery and BioScience
segments. Recent acquisitions, principally the Medication Delivery's late 2002
acquisitions of ESI and Epic Therapeutics, Inc. (Epic), contributed 5 points to
the growth rate for the quarter. Also contributing to the growth rate was
increased spending related to a number of projects across the three segments, as
management's strategy is to continue to make focused investments on R&D
initiatives which management believes will maximize the company's resources and
generate the most significant return on the company's investment.
INTEREST, NET AND OTHER EXPENSE
Net interest expense increased for the three months ended March 31, 2003 as
compared to the prior year period principally due to a higher level of debt
outstanding as well as the impact of recent issuances of debt bearing higher
fixed interest rates.
Other expense increased during 2003 principally due to a $13 million pre-tax
impairment charge relating to an investment in a publicly-traded company, with
the decline in value deemed to be other than temporary. Partially offsetting
this charge was increased income relating to minority interest investments.
Other expense in both years also included amounts relating to fluctuations in
currency exchange rates.
PRETAX INCOME
Refer to Note 8 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 the majority of the foreign currency and interest rate hedging
activities, certain foreign currency fluctuations, net interest expense, income
and expense related to certain non-strategic investments, corporate headquarters
costs, and certain nonrecurring gains and losses. The following is a summary of
the significant factors impacting the segments' financial results.
Medication Delivery
Pretax income increased 13% for the three months ended March 31, 2003. The
growth in pretax income was primarily the result of strong sales growth and a
favorable change in sales mix, which were partially related to the 2002
acquisition of ESI, the close management of costs, and the leveraging of
expenses in conjunction with recent acquisitions. These factors were
15
partially offset by increased R&D spending, which was primarily related to the
prior year acquisitions of ESI and Epic.
BioScience
Pretax income decreased 27% for the three months ended March 31, 2003. The
decline in pretax income was primarily due to a decline in sales which, as
discussed above, was principally due to competitive pricing pressures in the
market for plasma-based products, an unfavorable change in sales mix and
increased R&D investments, partially offset by the close management of costs.
Renal
Pretax income increased 12% for the three months ended March 31, 2003. The
increase in pretax income during the quarter was principally due to the close
management of expenses as well as reduced R&D spending as a result of the
company's recent R&D prioritization initiative, as described in Note 5.
INCOME TAXES
The effective income tax rate decreased from 26% in the prior year quarter to
24% in the current year quarter primarily because a larger portion of the
company's earnings were generated in lower tax jurisdictions.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations of $217 million for the three months ended
March 31, 2003 decreased 14% from the $253 million in the prior year quarter.
Income from continuing operations per diluted share decreased 12% to $0.36 from
the $0.41 reported in the prior year quarter.
LOSS FROM DISCONTINUED OPERATIONS
The loss from discontinued operations during the first quarter of 2003 was $1
million. Discontinued operations had no impact on the company's results of
operations in the prior year period.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH FLOWS
Cash flows from operations increased $78 million for the three months ended
March 31, 2003, with cash flows from continuing operations increasing $72
million. Cash flows relating to accounts receivable, accounts payable and
accrued liabilities improved over the prior year as a result of more aggressive
management of these working capital items. These improvements were partially
offset by the effect of lower earnings as well as higher inventories due to
lower sales of plasma-based products and the anticipation of the launch of new
products, such as ADVATE. Cash flows from discontinued operations increased $6
million for the three months ended March 31, 2003 primarily due to management's
2002 decision to reduce the level of acquisitions of RTS centers due to economic
and currency volatility in Latin America, where RTS primarily operates.
Cash flows from investing activities decreased $64 million for the three months
ended March 31, 2003. Capital expenditures increased during the three months
ended March 31, 2003 as compared to the prior year quarter as the company
increased its investments in
16
various capital projects across the three segments, including ongoing projects
to increase manufacturing capacity for vaccines, drug delivery, plasma-based,
recombinant and other products. Management currently expects to invest
approximately $750 to $800 million in capital expenditures in 2003. Management
expects to reduce its overall level of capital expenditures in 2004 as certain
significant long-term projects are completed. Net cash outflows relating to
acquisitions and investments in affiliates increased during the first three
months of 2003 as compared to the prior year period principally due to the
funding of a five-year $50 million loan to an affiliate. Also included in net
cash outflows relating to acquisitions and investments in affiliates in 2003 was
an $11 million common stock investment in Acambis, a minority investment holding
which is included in the BioScience segment. Approximately $24 million of the
2002 total related to the acquisition of Autros Healthcare Solutions Inc., a
developer of automated patient information and medication management systems,
which is included in the Medication Delivery segment. The remainder of the
outflows in both years pertained to individually insignificant acquisitions.
Cash flows from financing activities increased $310 million for the three months
ended March 31, 2003. Debt issuances, net of redemptions and the net increase in
debt with maturities of three months or less increased $501 million in the
current quarter as compared to the prior year quarter. In March 2003, the
company issued $600 million of term debt, maturing in March 2015, and bearing a
4.625% coupon rate. As further described in the 2002 Annual Report, in May 2001
the company issued $800 million of callable convertible debentures, whereby the
holders can require the company to repurchase the debt in May of 2003, 2006,
2011 and 2016. A portion of the net proceeds of the March 2003 debt issuance is
available to repurchase debt that may be put to the company in May 2003. Cash
outflows relating to common stock dividends decreased slightly for the
three-month period due to a decrease in the number of shares outstanding. Cash
received for stock issued under employee benefit plans decreased principally due
to a lower level of stock option exercises. In conjunction with the early
termination of equity forward agreements, the company purchased 3,081,522 shares
and 1,000,000 shares of common stock for $153 million and $35 million during the
first quarters of 2003 and 2002, respectively.
NET DEBT, CREDIT FACILITIES, ACCESS TO CAPITAL, COMMITMENTS AND CONTINGENCIES
Refer to the 2002 Annual Report for a complete discussion of the company's net
debt, credit facilities, access to capital, commitments and contingencies.
The company has $1.4 billion of cash and equivalents at March 31, 2003. The
company also maintains two revolving credit facilities, which totaled $1.6
billion at March 31, 2003. These credit facilities, which were renewed and
increased in October 2002, have funding expiration dates through November 2007.
The facilities enable the company to borrow funds on an unsecured basis at
variable interest rates. The company has never drawn on these facilities and
does not intend to do so in the foreseeable future. Management believes these
credit facilities are adequate to support ongoing operational requirements. The
credit facilities contain certain covenants, including a maximum
net-debt-to-capital ratio and a minimum interest coverage ratio. At March 31,
2003, as in prior periods, the company was in compliance with all covenants. The
company's net-debt-to-capital ratio of 46.9% at March 31, 2003 was well below
the credit facilities' net-debt-to-capital covenant. Similarly, the company's
actual interest coverage ratio of 14.7 to 1 in the first quarter of 2003 was
well in excess of the minimum interest coverage ratio covenant. The
net-debt-to-capital ratio, which is calculated in accordance with the company's
credit agreements, is calculated as net debt (short-term and long-term debt and
lease obligations, net of cash and equivalents) divided by capital (the total of
net debt and stockholders' equity). The net-debt-to-capital ratio at March 31,
2003 and the corresponding covenant in the company's credit agreements give 70%
equity credit to the
17
company's equity units. Refer to the 2002 Annual Report for a detailed
description of the equity units, which were issued in December 2002. The minimum
interest coverage ratio is a four-quarter rolling calculation of the total of
income from continuing operations before income taxes plus net interest expense,
divided by net interest expense.
The company intends to fund its short-term and long-term obligations as they
mature through cash on hand, future cash flows from operations, by issuing
additional debt, by entering into other financing arrangements or by issuing
common stock. As of March 31, 2003, the company can issue up to $70 million of
securities, including debt, preferred stock, common stock, warrants, purchase
contracts and other securities, under effective registration statements filed
with the Securities and Exchange Commission. Management intends to file a
registration statement in 2003 to increase the amount of the securities
available for issuance. The company's debt ratings, which were reaffirmed by all
three rating agencies during the first quarter of 2003, were A3 by Moody's, A by
Standard & Poor's and A by Fitch on senior debt, and P2 by Moody's, A1 by
Standard & Poor's and F1 by Fitch on short-term debt. Based on recent issuances,
including the March 2003 issuance of $600 million of 12-year term debt, the
December 2002 issuances of $1.25 billion of equity units and 14.95 million
shares of common stock, as well as other recent transactions, management
believes it has sufficient financial flexibility in the future to issue debt,
enter into other financing arrangements, and attract long-term capital on
acceptable terms as may be needed to support the company's growth objectives.
The company's ability to generate cash flows from operations, issue debt, enter
into other financing arrangements and attract long-term capital on acceptable
terms could be adversely affected in the event there is a material decline in
the demand for the company's products, deterioration in the company's key
financial ratios or credit ratings, or other significantly unfavorable changes
in conditions. While a deterioration in the company's credit ratings could
unfavorably impact the financing costs associated with its credit arrangements
and debt outstanding, such downgrades would not affect the company's ability to
draw on the credit facilities, and would not result in an acceleration of the
scheduled maturities of any of the company's outstanding debt.
As further discussed in Note 6, in order to partially offset the dilutive effect
of employee stock options, the company had periodically entered into forward
agreements with independent third parties related to the company's common stock.
The forward agreements, which have a fair value of zero at inception, require
the company to purchase its common stock from the counterparties on specified
future dates and at specified prices. The company may, at its option, terminate
and settle these agreements at any time before maturity. The agreements include
certain Baxter stock price thresholds, below which the counterparty has the
right to terminate the agreements. If the thresholds were met in the future, the
number of shares that could potentially be issued by the company under all of
the agreements is subject to contractual maximums, and the maximum at March 31,
2003 was 81 million shares. The contracts give the company the choice of
net-share, net-cash or physical settlement upon maturity or upon any earlier
settlement date. In accordance with current GAAP, these contracts are not
recorded in the financial statements until they are settled, and are recorded
directly to stockholders' equity upon settlement. At March 31, 2003, the company
had outstanding forward agreements related to 11.9 million shares, which all
mature in 2003 and have exercise prices ranging from $33 to $53 per share, with
a weighted-average exercise price of $48 per share. As noted above, during the
first quarter of 2003, the company repurchased 3.1 million shares of its common
stock for $153 million from counterparty financial institutions in conjunction
with the settlement of equity forward agreements. Management intends to exit all
of its outstanding agreements, and expects to complete the exit strategy during
2003.
18
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
uncertainties, 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 or cash flows in the period in which it is recorded or
paid, based on the advice of counsel, management believes that any outcome of
these actions, individually or in the aggregate, will not have a material
adverse effect on the company's consolidated financial position.
NEW ACCOUNTING AND DISCLOSURE STANDARDS
- ---------------------------------------
The Financial Accounting Standards Board's (FASB) proposed Statement of
Financial Accounting Standards (SFAS), "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity," which is
expected to be issued as a final standard in 2003, will require that certain
financial instruments, which previously had been classified as equity, be
classified as liabilities in the company's balance sheet. The pending new rules
are expected to be effective immediately for all contracts created or modified
after the date the pronouncement is issued, and are expected to be otherwise
effective for Baxter at the beginning of the third quarter of 2003. Under the
pending new rules, the balance sheet classification of the company's equity
forward agreements, which are discussed in Note 6, are expected to change from
equity to liabilities. The company is in the process of exiting these agreements
and expects to complete the exit strategy during 2003. Management is in the
process of analyzing this pending accounting pronouncement.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities"
(Interpretation No. 46) was issued in January 2003. Interpretation No. 46
defines variable interest entities (VIE) and requires that a VIE be consolidated
if certain conditions are met. For VIEs created on or after January 31, 2003,
the guidance will be applied immediately. For VIEs created before that date, the
guidance will be applied at the beginning of the third quarter of 2003. The new
rules may be applied prospectively with a cumulative-effect adjustment as of the
beginning of the period in which it is first applied or by restating previously
issued financial statements for one or more years with a cumulative-effect
adjustment as of the beginning of the first year restated. Interpretation No. 46
did not impact the company's consolidated financial statements for the three
months ended March 31, 2003. Management is in the process of analyzing the
impact of Interpretation No. 46 on the company's future consolidated financial
statements. Based on analyses to date, management has preliminarily concluded
that the company will consolidate certain VIEs as of July 1, 2003. The total
assets and liabilities expected to be consolidated as of July 1, 2003 total less
than $200 million.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" (SFAS No. 148) was issued in December 2002. The new standard
provides alternative methods for transitioning, if a company elects to do so,
from the intrinsic method to the fair value-based method of accounting for
stock-based employee compensation. SFAS No. 148 also requires additional
quarterly and annual disclosures about stock-based compensation. The annual
disclosure requirements were effective for 2002, and the new interim disclosure
requirements are effective for these financial statements. The company has
implemented the required disclosure provisions. Management does not have
immediate plans for the company to voluntarily elect to adopt the fair
value-based method of accounting for stock-based employee compensation.
19
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. Many factors 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, but are not limited to
interest rates; technological advances in the medical field; 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; availability of acceptable raw materials and
component supply; new plant start-ups; global regulatory, trade and tax
policies; regulatory, legal or other developments relating to the company's
Series A, AF and AX dialyzers; the ability to obtain adequate insurance coverage
at reasonable costs; continued price competition; product development risks,
including technological difficulties; ability to enforce patents; patents of
third parties preventing or restricting the company's manufacture, sale or use
of affected products or technology; actions of regulatory bodies and other
government authorities; reimbursement policies of government agencies and
private payers; commercialization factors; results of product testing;
unexpected quality or safety concerns, whether or not justified, leading to
product launch delays, recalls, withdrawals, or declining sales; and other
factors described in this report or in the company's other filings with the
Securities and Exchange Commission. Additionally, as discussed in Part II - Item
1. Legal Proceedings below, upon the resolution of certain legal matters, the
company may incur charges in excess of presently established reserves. Any such
charge could have a material adverse effect on the company's results of
operations or cash flows in the period in which it is recorded.
Currency fluctuations are also a significant variable for global companies,
especially fluctuations in local currencies where hedging opportunities are
unreasonably expensive or unavailable. If the U.S. Dollar strengthens against
most foreign currencies, the company's growth rates in its sales and net
earnings could 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.
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Currency risk
For a complete discussion, refer to the caption "Financial Instrument Market
Risk" in the company's 2002 Annual Report on Form 10-K. As part of its
risk-management program, the company performs sensitivity analyses to assess
potential changes in the fair value of its foreign exchange financial
instruments relating to hypothetical and reasonably possible near-term movements
in currency exchange rates. A sensitivity analysis of changes in the fair value
of foreign exchange forward and option contracts outstanding at March 31, 2003,
while not predictive in nature, indicated that if the U.S. Dollar uniformly
fluctuated unfavorably by 10% against all currencies, the net liability balance
of $5 million (on an after-tax basis) with respect to those contracts would
increase by approximately $147 million (on an after-tax basis). With respect to
the company's cross-currency swap agreements used to hedge the net assets of
certain consolidated foreign affiliates, if the U.S. Dollar uniformly weakened
by 10%, the net liability balance of $413 million (on an after-tax basis) with
respect to those contracts would increase by approximately $258 million (on an
after-tax basis). Any increase or decrease in the fair value of cross-currency
swap agreements relating to changes in spot currency exchange rates is
completely offset by the change in the value of the hedged net assets.
Management intends to hedge the net assets of its consolidated foreign
affiliates on a long-term basis, and therefore intends to continue to extend the
terms of its hedging instruments past their current contractual maturity dates.
At May 7, 2003, the majority of the cross-currency contracts have maturity dates
in 2004 and beyond. The sensitivity analysis model recalculates the fair value
of the foreign currency forward, option and swap contracts outstanding at March
31, 2003 by replacing the actual exchange rates at March 31, 2003 with exchange
rates that are 10% unfavorable to the actual exchange rates for each applicable
currency. All other factors are held constant. 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. The analyses also disregard the offsetting change in
value of the underlying hedged transactions and balances.
Equity risk
As further discussed in the 2002 Annual Report on Form 10-K as well as in Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations of this Form 10-Q, in order to partially offset the dilutive effect
of employee stock options, the company had periodically entered into forward
agreements with independent third parties related to the company's common stock.
As part of its risk-management program, the company performs sensitivity
analyses to assess potential changes in the fair value of its forward agreements
relating to hypothetical and reasonably possible near-term movements in the
company's stock price. If the company's stock price as of March 31, 2003 were to
decline by 10%, the fair value of these contracts, which were in a negative
position of $349 million at March 31, 2003 (based on a common stock price of
$18.64 at March 31, 2003), would further decline by approximately $22 million.
Interest rate and other risks
For a complete discussion, refer to the caption "Financial Instrument Market
Risk" in the company's 2002 Annual Report on Form 10-K. There have been no
significant changes from the information discussed therein.
21
Item 4. Controls and Procedures
Within 90 days of the filing date of this report, the company carried out an
evaluation, under the supervision and with the participation of the company's
Disclosure Committee and the company's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the company's
disclosure controls and procedures (as such term is defined in Rules 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")). The company's disclosure controls and procedures are designed
to ensure that information required to be disclosed by the company in the
reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported on a timely basis. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the company's
disclosure controls and procedures are effective in alerting them in a timely
fashion to material information relating to Baxter required to be included in
the reports that the company files under the Exchange Act. There have been no
significant changes in Baxter's internal controls or in other factors that could
significantly affect internal controls subsequent to the date of their
evaluation.
22
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, 2003 and
2002 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.
23
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, 2003, and the related
condensed consolidated statements of income for the three-month periods ended
March 31, 2003 and 2002 and the condensed consolidated statements of cash flows
for the three-month periods ended March 31, 2003 and 2002. These interim
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 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, 2002 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, 2003 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, 2002,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
/s/ PricewaterhouseCoopersLLP
PricewaterhouseCoopers LLP
Chicago, Illinois
May 5, 2003
24
PART II. OTHER INFORMATION
Baxter International Inc. and Subsidiaries
Item 1. Legal Proceedings.
Baxter International Inc. (Baxter International) 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, 2002 and below, and material
developments for the quarter ended March 31, 2003 are described below. These
cases and claims 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 and claim, the jurisdiction
in which each suit is brought, and differences in applicable law. Baxter has
established reserves in accordance with generally accepted accounting principles
for certain of the matters discussed below. For these matters, there is a
possibility that resolution of the matters could result in an additional loss in
excess of presently established reserves. Also, there is a possibility that
resolution of certain of the company's legal contingencies for which there is no
reserve could result in a loss. Management is not able to estimate the amount of
such loss or additional loss (or range of loss or additional loss). However,
management believes that, 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, 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, Baxter
International, 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 previously manufactured by the Heyer-Schulte division of
American Hospital Supply Corporation (AHSC). AHSC, which was acquired by Baxter
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, 2003, Baxter International, together with certain of its
subsidiaries, was named as a defendant or co-defendant in 125 lawsuits and four
claims relating to mammary implants, brought by approximately 278 plaintiffs, of
which 231 are implant plaintiffs and the remainder are consortium or second
generation plaintiffs. Of those plaintiffs, ten currently are included in the
Lindsey class action Revised Settlement described below, which accounts for
approximately nine of the pending lawsuits against the company. Additionally,
146 plaintiffs have opted out of the Revised Settlement (representing
approximately 84 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, 2003, 81 of the opt-out plaintiffs had confirmed Heyer-Schulte mammary
implant product identification. Furthermore, during the first quarter of 2003,
Baxter obtained dismissals, or agreements for dismissals, with respect to eight
plaintiffs.
25
In addition to the individual suits against the company, a class action on
behalf of all women with silicone mammary implants was filed on March 23, 1994
and 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.
In addition to the Lindsey class action, the company also has been named in
three 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 in
the federal district court in Birmingham, Alabama against Baxter and other
manufacturers of breast implants, as well as the escrow agent for the revised
settlement fund, seeking reimbursement under various federal statutes for
medical care provided to various women with mammary implants. On September 26,
2001 the district court granted the motion of all defendants, including Baxter,
to dismiss the action. The federal government has appealed the dismissal.
Plasma-Based Therapies Litigation
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, 2003, Baxter was named in sixteen lawsuits and 85 claims in the
United States, Ireland, Italy, Japan, France and Spain. The U.S.D.C. for the
Northern District of Illinois has approved a settlement of all U.S. federal
court factor concentrate cases. As of March 31, 2003, approximately 6,241
claimant groups had been found eligible to participate in the settlement.
Approximately 6,239 of the claimant groups had received payments as of March 31,
2003.
In Japan, Baxter is a defendant, along with the Japanese government and other
co-defendants, in factor concentrates cases in Osaka, Tokyo, Nagoya, Tohoku,
Fukuoka, Sapporo and Kumamoto. As of March 31, 2003, the cases involved 1,364
plaintiffs, of whom 1,353 have settled their claims.
In addition, Immuno International AG (Immuno), a company acquired by Baxter in
1997, 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, 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, 2003, Baxter was a defendant in
twelve lawsuits and 24 claims in the United States, Denmark, France, Germany,
Italy, Spain and the United Kingdom. One class action in the United States
26
has been certified. In 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
In April 2003, A. Nattermann & Cie GmbH and Aventis Behring L.L.C. filed a
patent infringement lawsuit in the U.S.D.C. for the District of Delaware naming
Baxter Healthcare Corporation as the defendant. The complaint, which seeks
injunctive relief, alleges that, after FDA approval, Baxter's planned
manufacture and sale of ADVATE, Baxter's new plasma and albumin-free recombinant
Factor VIII therapy, will infringe United States Patent No. 5,565,427. Baxter
believes that this lawsuit is without merit and intends to defend itself
vigorously.
In August 2002, six purported class action lawsuits were filed in the U.S.D.C.
for the Northern District of Illinois naming Baxter International and its Chief
Executive Officer and Chief Financial Officer as defendants. These lawsuits,
which have been consolidated and seek recovery of unspecified damages, allege
that the defendants violated the federal securities laws by making misleading
statements that allegedly caused Baxter International common stock to trade at
inflated levels. In December 2002, plaintiffs filed their consolidated amended
class action complaint which named nine additional Baxter officers as
defendants. On January 24, 2003 all defendants moved for dismissal of the
consolidated amended complaint. In October 2002, Baxter International and
members of its Board of Directors were named as defendants in a lawsuit filed in
the U.S.D.C. for the Northern District of Illinois by an alleged participant in
the Baxter Incentive Investment Plan (Plan), purportedly on behalf of the Plan
and a class of Plan participants who purchased shares of Baxter International
common stock. This lawsuit sets forth claims for unspecified damages under the
Employee Retirement Income Security Act of 1974, as amended, and is based on
allegations similar to those made in the securities lawsuits described above.
This action has been consolidated with the other actions described above. The
company believes that all of these lawsuits are without merit and intends to
defend itself vigorously against these claims.
As of March 31, 2003, Baxter International and certain of its subsidiaries were
defendants in eight civil lawsuits seeking damages on behalf of persons who
allegedly died or were injured as a result of exposure to Baxter's Althane
series dialyzers. The company has reached settlements with a number of the
families of patients who died in Spain, Croatia and the United States after
undergoing hemodialysis on Baxter Althane series dialyzers. The U.S. Government
is investigating the matter and Baxter has received a subpoena to provide
documents. A government criminal investigation concerning the patient deaths is
pending in Spain. The Croatian government has closed its criminal investigation
without initiating any criminal action against the company. Other lawsuits and
claims may be filed in the United States and elsewhere.
As of March 31, 2003, Baxter International and certain of its subsidiaries have
been named as defendants, along with others, in twelve lawsuits brought in
various state and U.S. federal courts on behalf of various classes of purchasers
of Medicare and Medicaid eligible drugs alleged to have been injured by Baxter
and other defendants as a result of pricing practices for such drugs, which are
alleged to be artificially inflated. All of these cases have been transferred to
the U.S.D.C. for the District of Massachusetts for consolidated pretrial case
management under Multi District Litigation rules. Claimants seek damages and
declaratory and injunctive relief under various state and/or federal statutes.
In addition, in January 2002, the Attorney General of Nevada filed a civil suit
in the Second Judicial District Court of Washoe County, Nevada. In February
2002, the Attorney General of Montana filed a civil suit in the First Judicial
District Court of Lewis and Clark County, Montana. These two lawsuits, which
each name a subsidiary of Baxter International as a defendant and seek damages,
injunctive relief, civil penalties, disgorgement, forfeiture and restitution,
allege that prices for Medicare and Medicaid eligible drugs were artificially
inflated in violation of various state laws. In October 2002, the Judicial Panel
on
27
Multi-District Litigation issued an order denying plaintiffs' motions to vacate
orders transferring the actions brought in Nevada and Montana to the U.S.D.C.
for the District of Massachusetts for consolidated pretrial case management
under the Multi District Litigation rules. Various state and federal agencies
are conducting civil investigations into the marketing and pricing practices of
Baxter and others with respect to Medicare and Medicaid reimbursement.
As of March 31, 2003, Baxter International and certain of its subsidiaries have
been served as defendants, along with others, in 97 lawsuits filed in various
state and U.S. federal courts, eight of which are purported class actions,
seeking damages, injunctive relief and medical monitoring for claimants alleged
to have contracted autism or other attention deficit disorders as a result of
exposure to vaccines for childhood diseases containing Thimerosal. In the fourth
quarter of 2002, the U.S.D.C. for the Southern District of Mississippi dismissed
with prejudice three suits and the U.S.D.C. for the Southern District of New
York dismissed with prejudice one suit brought against Baxter and others based
on the application of the National Vaccine Injury Compensation Act. Additional
Thimerosal cases may be filed in the future against Baxter and other companies
that marketed Thimerosal-containing products.
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, 2003, the company was named as a defendant in 250
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 addition to the cases discussed above, Baxter is a defendant in a number of
other claims, investigations and lawsuits. Based on the advice of counsel,
management does not believe that, individually or in the aggregate, these other
claims, investigations and lawsuits will have a material adverse effect on the
company's results of operations, cash flows or consolidated financial position.
28
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the
Exhibit Index hereto.
(b) Reports on Form 8-K
On January 22, 2003, Baxter International Inc. filed a current report
on Form 8-K under Item 9 attaching a press release reporting its
financial results for the fourth quarter and full-year 2002.
On January 23, 2003, Baxter International Inc. filed a current report
on Form 8-K under Item 9 reporting that Key Product Line Sales for
2002 attachment to the press release issued on January 22, 2003
contained an inadvertent typographical error, and including the
corrected attachment.
On March 13, 2003, Baxter International Inc. filed a current report on
Form 8-K under Item 9 attaching a press release announcing revised
sales growth and earnings per share expectations for the first quarter
and full-year 2003.
29
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAXTER INTERNATIONAL INC.
-------------------------
(Registrant)
Date: May 7, 2003 By: /s/ Brian P. Anderson
--------------------------------
Brian P. Anderson
Senior Vice President and Chief
Financial Officer
(Chief Accounting Officer)
30
CERTIFICATION OF CHIEF EXECUTIVE OFFICER ADOPTED PURSUANT TO SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
I, Harry M. Jansen Kraemer, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Baxter
International Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
31
Date: May 7, 2003 By: /s/ Harry M. Jansen Kraemer, Jr.
-------------------------------------------------
Harry M. Jansen Kraemer, Jr.
Chairman of the Board and Chief Executive Officer
32
CERTIFICATION OF CHIEF FINANCIAL OFFICER ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Brian P. Anderson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Baxter
International Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
33
Date: May 7, 2003 By: /s/ Brian P. Anderson
--------------------------------------
Brian P. Anderson
Senior Vice President and Chief
Financial Officer
(Chief Accounting Officer)
34
EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
Number Description of Exhibit
- ------ ----------------------
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter Re Unaudited Interim Financial Information
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350
35