UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
--------- THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
--------- THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-4448
BAXTER INTERNATIONAL INC.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-0781620
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Baxter Parkway, Deerfield, Illinois 60015-4633
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(847) 948-2000
-------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No_____
-----
The number of shares of the registrant's Common Stock, par value $1.00 per
share, outstanding as of November 5, 1998, the latest practicable date, was
285,993,166 shares.
BAXTER INTERNATIONAL INC.
FORM 10-Q
For the quarterly period ended September 30, 1998
TABLE OF CONTENTS
Page Number
-----------
Part I. FINANCIAL INFORMATION
- --------------------------------
Item 1. Financial Statements
Condensed Consolidated Statements of Income................ 2
Condensed Consolidated Balance Sheets...................... 3
Condensed Consolidated Statements of Cash Flows............ 4
Notes to Condensed Consolidated Financial Statements....... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 9
Review by Independent Public Accountants................................ 19
Report of Independent Accountants....................................... 20
Part II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings............................................ 21
Item 6. Exhibits and Reports on Form 8-K............................. 24
Signature............................................................... 25
Exhibits................................................................ 26
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
(in millions, except per share data)
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
------------------------ ------------------------
Operations
Net sales $1,649 $1,494 $4,763 $4,506
Costs and expenses
Cost of goods sold 916 825 2,605 2,462
Marketing and administrative expenses 361 325 1,029 995
Research and development expenses 102 97 287 282
Acquired research and development 0 0 116 352
Net litigation charge 178 0 178 0
Exit and other reorganization costs 131 0 131 0
Interest, net 37 42 122 124
Goodwill amortization 13 11 39 32
Other income (13) (18) (6) (21)
- ------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,725 1,282 4,501 4,226
- ------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (76) 212 262 280
Income tax expense 48 53 159 162
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) ($124) $159 $103 $118
- ------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share:
Basic ($.43) $.57 $.36 $.43
========================================================================================================================
Diluted ($.43) $.56 $.36 $.42
========================================================================================================================
Weighted average number
of common shares outstanding:
Basic 285 280 283 277
========================================================================================================================
Diluted 285 285 288 281
========================================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Baxter International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions, except shares)
September 30, December 31,
1998 1997
(unaudited)
---------------------------------------
Current assets Cash and equivalents $ 478 $ 465
Accounts receivable 1,485 1,372
Notes and other current receivables 299 367
Inventories 1,366 1,208
Short-term deferred income taxes 320 253
Prepaid expenses 278 205
-----------------------------------------------------------------------------------------------------
Total current assets 4,226 3,870
- ----------------------------------------------------------------------------------------------------------------------
Property, At cost 4,701 4,407
plant and Accumulated depreciation and amortization (2,258) (2,047)
equipment -----------------------------------------------------------------------------------------------------
Net property, plant and equipment 2,443 2,360
- ----------------------------------------------------------------------------------------------------------------------
Other assets Goodwill and other intangibles 1,783 1,622
Insurance receivables 461 409
Other 658 446
-----------------------------------------------------------------------------------------------------
Total other assets 2,902 2,477
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 9,571 $ 8,707
======================================================================================================================
Current Notes payable to banks $ 224 $ 102
liabilities Current maturities of long-term debt and lease obligations 10 42
Accounts payable and accrued liabilities 2,005 1,963
Income taxes payable 502 450
-----------------------------------------------------------------------------------------------------
Total current liabilities 2,741 2,557
- ----------------------------------------------------------------------------------------------------------------------
Long-term debt and lease obligations 2,921 2,635
- ----------------------------------------------------------------------------------------------------------------------
Long-term deferred income taxes 531 316
- ----------------------------------------------------------------------------------------------------------------------
Long-term litigation liabilities 296 210
- ----------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 383 370
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' Common stock, $1 par value, authorized 350,000,000
equity shares, issued 291,248,251 shares in 1998 and
287,701,247 shares in 1997 291 288
Additional contributed capital 2,059 1,876
Retained earnings 861 1,006
Common stock in treasury, at cost, 5,453,569
shares in 1998 and 7,662,187 shares in 1997 (232) (329)
Accumulated other comprehensive income (280) (222)
-----------------------------------------------------------------------------------------------------
Total stockholders' equity 2,699 2,619
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 9,571 $ 8,707
======================================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
(in millions)
- ---------------------------------------------------------------------------------------------------------
Nine months ended September 30,
(brackets denote cash outflows) 1998 1997
----------------------
Cash flow Net income $ 103 $ 118
from Adjustments
operations Depreciation and amortization 314 299
Deferred income taxes (18) 109
Acquired research and development 116 352
Net litigation charge 178 0
Exit and other reorganization costs 131 0
Other (13) (16)
Changes in balance sheet items
Accounts receivable (71) (46)
Inventories (153) (136)
Accounts payable and other accrued liabilities (48) (169)
Net litigation payments (1) (201)
Other (97) (77)
----------------------------------------------------------------------------------------
Cash flow from operations 441 233
- ---------------------------------------------------------------------------------------------------------
Investment Capital expenditures (348) (267)
activities Acquisitions, net of cash received,
and investments in affiliates (288) (592)
Proceeds from asset dispositions 0 9
----------------------------------------------------------------------------------------
Investment activities, net (636) (850)
- ---------------------------------------------------------------------------------------------------------
Financing Issuance of debt and lease obligations 498 505
activities Redemption of debt and lease obligations (531) (427)
Increase in debt with maturities
of three months or less, net 416 363
Common stock dividends (248) (235)
Stock issued under employee benefit plans 90 107
----------------------------------------------------------------------------------------
Financing activities, net 225 313
- ---------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash and equivalents (17) (48)
- ---------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 13 (352)
Cash and equivalents at beginning of period 465 761
- ---------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 478 $ 409
=========================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
Baxter International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
1. FINANCIAL INFORMATION
- ------------------------
The unaudited interim condensed consolidated financial statements of Baxter
International Inc. and its subsidiaries (the "Company" or "Baxter") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These interim condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes included in the Company's 1997
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, except for the charges for in-process
research and development, litigation and exit and other reorganization costs,
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 1997 financial
statements to the 1998 presentation.
2. EARNINGS PER SHARE
- ---------------------
The numerator for both basic and diluted earnings per share (EPS) is net income
(loss). The denominator for basic EPS is the weighted-average number of common
shares outstanding during the period. The denominator for diluted EPS is
increased for the effect of dilutive securities, which consist primarily of
employee stock options, unless the effect would be anti-dilutive. Earnings per
share amounts for 1997 have been restated to conform to the requirements of SFAS
No. 128, "Earnings per Share," which was adopted in 1997. For Baxter, diluted
earnings per share amounts under the new standard are the same as primary
earnings per share amounts previously presented.
3. COMPREHENSIVE INCOME
- -----------------------
In 1998, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, Reporting Comprehensive Income. This statement establishes rules for
the reporting of comprehensive income and its components. Comprehensive income
consists of net income and foreign currency translation adjustments and will be
presented in the Consolidated Statement of Stockholders' Equity for the year
ended December 31, 1998. Prior year financial statements will be reclassified
to conform to the SFAS No. 130 requirements. The adoption of SFAS No. 130 had
no impact on total stockholders' equity. Comprehensive income (loss) for the
three and nine months ended September 30, 1998 was ($127) million and $45
million, respectively, and for the three and nine months ended September 30,
1997 was $67 million and ($130) million, respectively.
6
4. ACQUISITIONS
- ---------------
All acquisitions during the nine months ended September 30, 1998 and 1997 were
accounted for under the purchase method. The purchase price of each acquisition
was allocated to the net assets acquired based on estimates of their fair values
at the date of the acquisition. The excess of the purchase price over the fair
values of the net tangible assets and liabilities acquired was allocated to
intangible assets. On the basis of independent appraisals, a portion of the
purchase price for certain of the acquisitions was allocated to in-process
research and development (R&D) which, under generally accepted accounting
principles, was immediately expensed.
Results of operations of acquired companies are included in the Company's
results of operations as of the respective acquisition dates. Excluding the in-
process R&D charges, had the 1998 and the 1997 acquisitions taken place on
January 1 of 1998 or 1997, consolidated sales, net income (loss) and earnings
(loss) per share for the quarters and nine-month periods ended September 30,
1998 and 1997, respectively, would not have been significantly different from
reported amounts.
Somatogen, Inc.
- ---------------
In May 1998, the Company acquired Somatogen, Inc. (Somatogen), a
biopharmaceutical company that is developing recombinant oxygen-carrying
therapeutics. The purchase price was approximately $206 million and was
principally settled with 3,547,004 shares of Baxter International Inc. common
stock. In addition, Somatogen shareholders are entitled to a contingent
deferred cash payment of up to $2.00 per Somatogen share, or approximately $42
million, based on a percentage of sales of certain future products through the
year 2007. Approximately $116 million of the purchase price was allocated to
in-process R&D, and immediately expensed, as discussed above. In connection
with the acquisition, the Company recorded a $37 million net deferred tax asset
for the tax effect of Somatogen's net operating loss carryforward.
Pharmaceutical Products Division of the BOC Group
- -------------------------------------------------
In April 1998, the Company acquired the Pharmaceutical Products Division of the
BOC Group's Ohmeda health-care business, a manufacturer of gases and drugs used
for general and local anesthesia, for approximately $94 million. The fair value
of the identifiable net assets acquired exceeded the purchase price by
approximately $136 million. Such excess was allocated to reduce the values
assigned to noncurrent assets in determining their fair values.
Bieffe Medital S.p.A.
- ---------------------
In early 1998, the Company acquired a majority interest in Bieffe Medital
S.p.A., a European manufacturer of dialysis and intravenous solutions and
containers, with the remaining shares purchased in July 1998. The total
purchase price was approximately $244 million, which included assumption of
debt. Approximately $40 million and $13 million of the purchase price was
allocated to existing product technology and trademarks, respectively, and is
being amortized on a straight-line basis over 25 years. Approximately $75
million of the purchase price was allocated to goodwill and is being amortized
on a straight-line basis over 40 years.
7
Research Medical, Inc.
- ----------------------
In March 1997, Baxter acquired Research Medical, Inc., a provider of specialized
products used in open-heart surgery. The purchase price was approximately $239
million and was principally settled with 4,801,711 shares of Baxter
International Inc. common stock. Approximately $132 million of the purchase
price was allocated to in-process R&D, and immediately expensed, as discussed
above. Approximately $40 million of the purchase price was allocated to
existing product technology and is being amortized on a straight-line basis over
14 years. Approximately $38 million of the purchase price was allocated to
goodwill and is being amortized on a straight-line basis over 20 years.
Immuno International AG
- -----------------------
In the first fiscal quarter of 1997, the Company acquired Immuno International
AG, a global manufacturer of biopharmaceutical products and services for
transfusion medicine. The acquisition cost was approximately $600 million plus
assumption of $280 million of net debt. Approximately $61 million of the
purchase price is being withheld to cover certain legal contingencies.
Approximately $220 million of the purchase price was allocated to in-process
R&D, and immediately expensed, as discussed above. Approximately $99 million of
the purchase price was allocated to existing product technology and is being
amortized on a straight-line basis over 20 years. Approximately $82 million of
the purchase price was allocated to goodwill and is being amortized on a
straight-line basis over 40 years.
5. INVENTORIES
- --------------
Inventories consisted of the following:
- --------------------------------------------------------------------------------
September 30, December 31,
1998 1997
(in millions) (unaudited)
- --------------------------------------------------------------------------------
Raw materials $ 334 $ 279
Work in process 293 243
Finished products 739 686
- --------------------------------------------------------------------------------
Total inventories $1,366 $1,208
================================================================================
6. EXIT AND OTHER REORGANIZATION COSTS
- --------------------------------------
In September 1998, the Company decided to end the clinical development of its
first-generation oxygen-carrying therapeutic called HemAssist/TM/ (DCLHb) and
focus its oxygen-carrying therapeutics research and development efforts on its
second-generation program. Unlike the first-generation program, which was based
on human hemoglobins, the second-generation program is based on genetically
engineered hemoglobin molecules. In addition, the Company decided to exit
certain non-strategic investments, primarily in Asia, and reorganize certain
other activities. As a result of these decisions, the Company recorded a $131
million pre-tax charge primarily for asset writedowns and employee severance.
Approximately $40 million of this charge relates to the employee severance
associated with the elimination of approximately 400 positions worldwide. The
majority of the asset writedowns relate to assets at the Company's manufacturing
facility in Neuchatel, Switzerland that were used solely in the manufacture of
HemAssist/TM/ (DCLHb). In 1999, the Company plans to begin modifications to this
manufacturing facility, which was designed to manufacture a human hemoglobin
8
product, to produce other of the Company's biopharmaceutical products. Such
production is expected to commence at the Neuchatel facility in the next two to
four years.
In September 1995, the Company recorded a restructuring charge of $103 million
primarily to eliminate excess plant capacity and reduce manufacturing costs, as
well as to initiate certain organizational structure changes. The charge
predominantly relates to the closure of the intravenous-solutions plant and
warehouse in Carolina, Puerto Rico. Production and warehousing will be
transferred and consolidated into other facilities. The Company currently
estimates that approximately 1,200 positions will be eliminated in total.
Approximately 900 positions have been eliminated to date and completion of the
plan is anticipated in early 1999. The original timetable for the program has
been affected by delays in required governmental regulatory reviews relating to
the transfer of equipment and production processes to other facilities in Puerto
Rico and the United States. During the nine months ended September 30, 1998,
approximately $7 million in reserves were utilized.
The restructuring program initiated in 1993 is substantially complete and
achieved all employee headcount reduction and savings goals established at
inception.
7. LEGAL PROCEEDINGS
- --------------------
Refer to "Part II - Item 1. Legal Proceedings" below for the status of lawsuits
and claims involving the Company and a discussion of the net litigation charge
recorded in the third quarter of 1998.
8. INTEREST, NET
- ----------------
Net interest expense consisted of the following (unaudited):
- -------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(in millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Interest expense $ 47 $ 53 $ 149 $ 151
Interest income (10) (11) (27) (27)
- -------------------------------------------------------------------------------
Interest, net $ 37 $ 42 $ 122 $ 124
===============================================================================
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Baxter International Inc.'s ("Baxter" or the "Company") 1997 Annual Report to
Stockholders ("Annual Report") contains management's discussion and analysis of
financial condition and results of operations for the year ended December 31,
1997. In the Annual Report, management outlined its key financial objectives
for 1998. These objectives and the results achieved through September 30, 1998
are summarized as follows:
- -----------------------------------------------------------------------------------------------------------
RESULTS THROUGH
FULL YEAR 1998 OBJECTIVES SEPTEMBER 30, 1998
- -----------------------------------------------------------------------------------------------------------
. Increase net sales approximately 10%, . Net sales during the nine months ended September
before 1998 acquisitions and the impact 30, 1998 increased 7% before 1998 acquisitions and
of foreign exchange. before the effect of the strengthening U.S. dollar,
and increased 6% including acquisitions and at actual
currency translation rates. Management expects the
sales growth percentage for the full year to be in the
high single digits before 1998 acquisitions and the
impact of foreign exchange, and approximately 10% after
1998 acquisitions and before the impact of foreign
exchange.
- -----------------------------------------------------------------------------------------------------------
. Grow earnings in the mid-teens, before . Excluding the charges for acquired research and
the impact of foreign exchange, and in development, litigation and exit and other
the low double digits after absorbing the reorganization costs, net income for the nine months
impact of foreign exchange. ended September 30, 1998 increased approximately 19%
before the impact of foreign exchange, and increased
11% after absorbing the impact of foreign exchange.
- -----------------------------------------------------------------------------------------------------------
. Generate at least $500 million in . The Company had operational cash flow of $165
operational cash flow, after investing million during the nine months ended September 30,
approximately $1 billion in capital 1998. The total of capital expenditures and research
improvements and research and development. and development expenses, excluding the acquired
research and development charge, was $635 million for
the nine months ended September 30, 1998.
- -----------------------------------------------------------------------------------------------------------
10
RESULTS OF OPERATIONS
NET SALES TRENDS
- ------------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, Percent September 30, Percent
(in millions) 1998 1997 Increase 1998 1997 Increase
- ------------------------------------------------------------------------------------------------------------------------------
International $ 881 $ 804 9% $2,532 $2,401 5%
United States 768 690 11% 2,231 2,105 6%
- ------------------------------------------------------------------------------------------------------------------------------
Total net sales $1,649 $1,494 10% $4,763 $4,506 6%
==============================================================================================================================
Without the effect of changes in foreign exchange rates, total net sales growth
was 14% and 10% for the three- and nine-month periods ended September 30, 1998,
respectively.
Growth in international sales for the three- and nine-month periods ended
September 30, 1998, excluding the impact of foreign exchange, was 16% and 13%,
respectively. Sales in the Blood Therapies business were strong during the third
quarter of 1998, particularly with respect to the Company's genetically
engineered blood clotting factor for people with hemophilia. Also contributing
to the sales growth rates for both the quarter and year-to-date period was
the1998 acquisition of Bieffe Medital S.p.A. (Bieffe). Refer to "Item 1.
Financial Statements" - Note 4 to the Condensed Consolidated Financial
Statements for further information regarding this acquisition. Partially
offsetting the impact of this acquisition were reduced sales due to the
termination of the European distribution agreement with Allegiance Corporation.
Strong sales of the Company's peritoneal dialysis products and services used to
treat kidney disease and tissue valves used in heart-valve therapy contributed
to the international sales growth rate for both the three- and nine-month
periods ended September 30, 1998. Growth was particularly strong in Latin
America, where sales rose more than 20% over the prior year quarter and year-to-
date period.
Favorably impacting domestic sales growth in the quarter and year-to-date period
was the April 1998 acquisition of the Pharmaceutical Products Division of the
BOC Group's Ohmeda health-care business (Ohmeda). Refer to "Item 1. Financial
Statements" - Note 4 to the Condensed Consolidated Financial Statements for
further information regarding this acquisition. Sales in the Blood Therapies
business increased during the third quarter of 1998 due to improved product
supply levels. Sales in the Blood Therapies business had recently been
unfavorably affected by regulatory and production issues that have impacted and
continue to impact the supply of factor concentrates in the entire industry.
Continued strong demand for the Company's tissue heart valves, increased sales
as a result of the multiyear agreement with Premier, a major U.S. group of
customers, and sales of the Colleague/TM/ volumetric infusion pump, which was
introduced in 1997, also contributed to domestic sales growth in both the
quarter and year-to-date period. Competitive pressures in the United States
continue to unfavorably affect sales growth across certain product lines.
Management believes recent sales trends will continue in the fourth quarter and
into 1999, with significant sales growth generated from the Blood Therapies
business due to the previously discussed improved product supply levels.
11
GROSS MARGIN AND EXPENSE RATIOS
- -------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, Increase September 30, Increase
1998 1997 (decrease) 1998 1997 (decrease)
- -------------------------------------------------------------------------------------------------------
Gross profit margin 44.5% 44.8% (.3 pts) 45.3% 45.4% (.1 pt)
Marketing and
administrative expenses 21.9% 21.8% .1 pt 21.6% 22.1% (.5 pts)
- -------------------------------------------------------------------------------------------------------
The gross profit margin decreased slightly in both the three- and nine-month
periods ended September 30, 1998 due partially to a less favorable mix of sales.
In addition, due to the increased regulatory activity in the factor concentrates
industry, as discussed above, the Blood Therapies business has experienced
unfavorable manufacturing variances that negatively impacted the gross profit
margin during the third quarter of 1998. Management expects the gross profit
margin for the full year to be approximately 45%, as unfavorable manufacturing
variances will continue to have an impact in the fourth quarter of 1998.
The Company has offset the incremental costs of expanding into developing
markets and new business initiatives with a continued focus on cost control
across all business units, coupled with realizing benefits of integrating recent
acquisitions and implementing the reorganization programs discussed below.
Management expects to further leverage costs in the fourth quarter of 1998.
RESEARCH AND DEVELOPMENT
- -------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, Percent September 30, Percent
(in millions) 1998 1997 Increase 1998 1997 Increase
- -------------------------------------------------------------------------------------------------------
Research and
development expenses $102 $97 5% $287 $282 2%
As a percent of sales 6.2% 6.5% 6.0% 6.3%
- -------------------------------------------------------------------------------------------------------
Research and development ("R&D") expenses above exclude the in-process R&D
charges recorded in 1998 and 1997 relating to the acquisitions of Somatogen,
Inc. (Somatogen), Immuno International AG (Immuno) and Research Medical, Inc.
(RMI). Refer to "Item 1. Financial Statements" - Note 4 to the Condensed
Consolidated Financial Statements for further information regarding these
charges. The Company continues to rationalize R&D spending with the 1997
acquisition of Immuno.
As discussed in "Item 1. Financial Statements" - Note 6 to the Condensed
Consolidated Financial Statements, during the third quarter of 1998, the Company
recorded a charge to earnings relating to the writedown of assets at the
Neuchatel, Switzerland facility that were used solely in the manufacture of
HemAssist /TM/(DCLHb), and related employee severance costs. Management
anticipates that a significant portion of its R&D spending relating to the
first-generation HemAssist /TM/(DCLHb) program will be refocused on the second-
generation oxygen-carrying therapeutics program as well as on other R&D
initiatives.
12
OTHER INCOME AND EXPENSE
As further discussed in "Item 1. Financial Statements" - Note 7 to the Condensed
Consolidated Financial Statements, during the third quarter of 1998, the Company
recorded a $178 million net litigation charge relating to mammary implants,
plasma-based therapies and other litigation.
As further discussed in "Item 1. Financial Statements" - Note 6 to the Condensed
Consolidated Financial Statements, and as noted above, during the third quarter
of 1998, the Company recorded a $131 million charge as a result of its decision
to end its first-generation oxygen-carrying therapeutics program, exit certain
non-strategic investments, primarily in Asia, and reorganize certain other
activities.
Net interest expense decreased for both the quarter and year-to-date period
principally due to a higher level of foreign currency denominated debt, which
bears a lower interest rate, partially offset by higher debt levels due to the
acquisitions of Bieffe and Ohmeda.
Goodwill amortization increased in 1998 primarily as a result of the acquisition
of Bieffe.
Included in other income in the three months ended September 30, 1998 and 1997
are gains of $20 million and $17 million, respectively, relating to the disposal
of certain minority investments. The remainder of other income or expense for
the quarter and year-to date periods in both 1998 and 1997 relates primarily to
the impact of changes in currency exchange rates.
PRETAX AND NET INCOME
Excluding the 1998 and 1997 acquired R&D charges relating to the acquisitions of
Somatogen, Immuno and RMI, and excluding the 1998 charges for net litigation
costs and exit and other reorganization costs, pretax income increased 10% and
9% during the quarter and nine-month period ended September 30, 1998,
respectively.
Excluding the above-mentioned charges, the Company's effective income tax rate
was 24% for the both three- and nine-month periods ended September 30, 1998 and
25% and 26% for the three- and nine-month periods ended September 30, 1997,
respectively. The effective income tax rate is lower in 1998 as compared to
1997 because a larger portion of the Company's earnings were generated in lower
tax jurisdictions.
EXIT AND OTHER REORGANIZATION COSTS
Refer to "Item 1. Financial Statements" - Note 6 to the Condensed Consolidated
Financial Statements for a discussion of the Company's charges, utilization of
the reserves and headcount reductions to date. Management believes remaining
reserves are adequate to complete the actions contemplated by the programs.
Future cash expenditures will be funded by cash generated from operations.
The Company has substantially completed the 1993 program. Originally targeted
annual pretax savings of approximately $130 million are being achieved.
Management is partially investing these savings in R&D, new business
initiatives, and expansion into growing international markets.
13
The Company is in the process of implementing the 1995 program, which is
designed to eliminate excess plant capacity and reduce manufacturing costs.
Management expects that the plant closures and consolidations in Puerto Rico
will be substantially completed in 1999, and will help mitigate any future
exposure to gross margin erosion arising from pricing pressures, primarily in
the United States.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Management assesses the Company's liquidity in terms of its overall ability to
mobilize cash to support ongoing business levels and to fund its growth.
Management uses an internal performance measure called operational cash flow
that evaluates each operating business and geographic region on all aspects of
cash flow under its direct control.
Certain amounts on the Condensed Consolidated Balance Sheet, including accounts
receivable and inventory, have increased since December 31, 1997 due to the
acquisitions discussed above. Contributing to the increase in inventory are the
regulatory and production issues in the Blood Therapies business which are also
affecting all companies in this industry segment. In addition, accounts
receivable have increased due to higher sales outside the United States, which
have longer collection periods. Notes and other current receivables decreased
significantly since December 31, 1997 due principally to collections from
insurance companies related to the Company's mammary implant litigation.
The following table reconciles cash flow provided by operations, as determined
by generally accepted accounting principles, to operational cash flow:
- -------------------------------------------------------------------------------
Nine months ended September 30,
(in millions) 1998 1997
- -------------------------------------------------------------------------------
Cash flow from operations per the Company's
Condensed Consolidated Statements of Cash Flows $ 441 $ 233
Capital expenditures (348) (267)
Net interest after tax 73 73
Mammary implant litigation, net (1) 56
- -------------------------------------------------------------------------------
Operational cash flow $ 165 $ 95
===============================================================================
The increase in cash flow from operations for the nine months ended September
30, 1998 is due to significantly lower net litigation payouts related to plasma-
based therapies in the current period. The Company has exceeded its annual
operational cash flow goals for the last three years. Management expects to
achieve its goal of generating at least $500 million in operational cash flow in
1998.
Approximately $134 million and $94 million of the total net cash flows used for
acquisitions and investments in affiliates for the nine months ended September
30, 1998 related to the acquisitions of Bieffe and Ohmeda, respectively, with
the remainder primarily related to acquisitions of dialysis centers in
international markets. Approximately $497 million and $48 million of the total
net cash flows used for acquisitions and investments in affiliates for the nine
months ended September 30, 1997 related to the acquisitions of Immuno and
Bieffe, respectively. Refer to "Item 1. Financial Statements" --Note 4 to the
Condensed Consolidated Financial Statements for further information regarding
these acquisitions.
14
The Company's net-debt-to-capital ratio was 49.8% and 46.9% at September 30,
1998 and December 31, 1997, respectively. The increase in the ratio was
primarily due to increased net debt as a result of the acquisitions of Bieffe
and Ohmeda, currency translation and the charges for acquired R&D, net
litigation costs and exit and other reorganization costs recorded during the
nine months ended September 30, 1998. Management expects the ratio to decline
to the low-40% range over time as a result of ongoing operations.
As authorized by the board of directors, the Company repurchases its stock from
time to time to optimize its capital structure depending upon its operational
cash flows, net debt level and current market conditions. In November 1995, the
board of directors authorized the repurchase of up to $500 million over a period
of several years, of which $267 million was repurchased as of December 31, 1996.
No shares have been repurchased since the end of 1996. As discussed above, the
Company's net-debt-to-capital ratio is currently 49.8% and, therefore,
management does not presently intend to repurchase shares.
The Company intends to fund its short-term and long-term obligations as they
mature by issuing additional debt or through cash flow from operations. The
Company believes it has lines of credit adequate to support ongoing operational
requirements. Beyond that, the Company believes it has sufficient financial
flexibility to attract long-term capital on acceptable terms as may be needed to
support its growth objectives.
YEAR 2000
- ---------
The Company has developed, and is implementing, a comprehensive program to
address Year 2000 issues pertaining to both information technology (IT) and non-
IT systems. The program is monitored by a steering committee comprised of
senior management in key functional areas, which periodically reports to the
audit committee of the board of directors as to the program's status. The
program consists of identification, compliance and post-implementation phases
and considers the effect of the Year 2000 on the Company's internal systems,
customers, products and services, and manufacturing systems, as well as on its
suppliers and other critical business partners. The current status of these
areas of scope vary, with the compliance and post-implementation phases
proceeding in parallel.
The Company has begun upgrading, replacing or modifying non-compliant internal
systems. All major systems are expected to be Year 2000 compliant, based on a
phased implementation plan, by the end of the third quarter of 1999. To date,
the Company has achieved all major milestones relating to this initiative.
Products affected by the Year 2000 issue have been identified and product
modifications and replacements are expected to be complete by mid-1999. The
Company has launched a Year 2000 website for its customers that includes a
complete list of the Company's electronic medical products, detailed and
frequently updated information regarding the status of the Year 2000 affected
products, and other information regarding the Company's Year 2000 program.
The Company is actively addressing systems in its manufacturing plants and other
facilities and expects remediation decisions for critical items to be made by
the end of 1998 and implementation of required changes for all date-dependent
items to be completed by mid-1999. In addition, the Company has initiated
communications, which include solicitation of written responses to
questionnaires and follow-up meetings, with critical suppliers and other
business partners to determine the extent to which any Year 2000 issues
affecting such third parties will
15
affect the Company. Such communications are ongoing and are expected to
continue through the end of 1999, with action plans developed and implemented as
necessary.
The total cost to upgrade or replace systems that would not have been Year 2000
ready is estimated to be approximately $130 million. This amount will be
capitalized and amortized over the systems' estimated useful lives.
Approximately fifty percent of this total has been expended to date, with the
remainder to be substantially expended by the end of 1999. None of the
Company's systems are being upgraded or replaced solely to address Year 2000
issues, although in some cases the timing of the system upgrades and
replacements is being accelerated. Based upon the Company's current estimates,
and information available at this time, incremental out-of-pocket costs of the
Year 2000 program, which are required to be expensed as incurred, have been and
are expected to be immaterial to the Company's financial results. A large part
of the Year 2000 effort has been accomplished through the redeployment of
existing resources. The cost of such redeployment or of internal management
time has not been specifically quantified. However, no critical projects of the
Company have been deferred due to the Year 2000 program. Management does not
believe there has been or will be a significant disruption to the Company's
business due to the Year 2000 remediation effort.
Management of the Company believes that its program will be effective to resolve
the Year 2000 issue in a timely manner. The Company has, however, begun
contingency planning to address any situations that may arise in which the
readiness of the Company's internal technology or that of third parties is not
reasonably expected to be adequate, and where practical alternatives are
available. There can be no assurance that the Company's Year 2000 program or
the programs of critical business partners will be successful. Any failure to
adequately address the Year 2000 issue could significantly disrupt the Company's
operations and possibly lead to litigation against the Company. The costs and
expenses associated with any such failure or litigation, or with any disruptions
in the economy in general as a result of the Year 2000, are not presently
estimable, but could have a material adverse effect on the Company's business
and results of operations.
EURO CONVERSION
- ---------------
On January 1, 1999, eleven of the fifteen countries which are members of the
European Union are scheduled to introduce a new currency called the "euro." The
conversion rates between the euro and the participating nations' currencies will
be fixed irrevocably as of January 1, 1999. Prior to full implementation of the
new currency on January 1, 2002, there will be a transition period during which
parties may use either the existing currencies or the euro to pay for goods and
services.
Action plans are currently being implemented which are expected to result in
compliance with all laws and regulations relating to the euro conversion.
Management expects that the adaptation of its information technology and other
systems to accommodate euro-denominated transactions as well as the requirements
of the transition period will not have a material impact on the company's
results of operations. The Company is also addressing the impact of the euro on
currency exchange rate risk, taxation, contracts, competition and pricing.
While it is not possible to accurately predict the impact the euro will have on
the Company's business or on the economy in general, management currently does
not anticipate that the euro conversion will have a material adverse impact on
the Company's results of operations or financial condition.
16
LEGAL PROCEEDINGS
- -----------------
See "Part II - Item 1. Legal Proceedings" for a discussion of the Company's
legal contingencies and related insurance coverage with respect to cases and
claims relating to the Company's plasma-based therapies and mammary implants
manufactured by the Heyer-Schulte division of American Hospital Supply
Corporation, as well as other matters. Upon resolution of any of these matters,
the Company may incur charges in excess of presently established reserves.
While such future charges could have a material adverse impact on the Company's
net income or cash flows in the period in which they are recorded or paid,
management believes that the outcomes of these actions, individually or in the
aggregate, will not have a material adverse effect on the Company's consolidated
financial position.
FORWARD-LOOKING INFORMATION
- ---------------------------
The matters discussed in this section that are not historical facts include
forward-looking statements. These statements are based on the Company's current
expectations and involve numerous risks and uncertainties. Some of these risks
and uncertainties are factors that affect all international businesses, while
some are specific to the Company and the health-care arenas in which it
operates. The factors below in some cases have affected and could affect the
Company's actual results, causing results to differ, and possibly differ
materially, from those expressed in any such forward-looking statements. These
factors include technological advances in the medical field, unforeseen
information technology issues related to the Company or third parties, economic
conditions, demand and market acceptance risks for new and existing products,
technologies and health-care services, the impact of competitive products and
pricing, manufacturing capacity, new plant start-ups, global regulatory, trade
and tax policies, continued price competition, product development risks,
including technological difficulties, ability to enforce patents and unforeseen
commercialization and regulatory factors. In particular, the Company, as well
as other companies in its industry, is experiencing increased regulatory
activity by the U.S. Food and Drug Administration with respect to its plasma-
based biologicals and its complaint-handling systems.
Currency fluctuations are also a significant variable for global companies,
especially fluctuations in local currencies where hedging opportunities are
unreasonably expensive, or altogether unavailable. If the United States dollar
continues to strengthen against most foreign currencies, the Company's growth
rates in its sales and net earnings will continue to be negatively impacted.
Management believes that its expectations with respect to forward-looking
statements are based upon reasonable assumptions within the bounds of its
knowledge of the Company's business and operations, but there can be no
assurance that the actual results or performance of the Company will conform to
any future results or performance expressed or implied by such forward-looking
statements.
NEW ACCOUNTING AND DISCLOSURE STANDARDS
- ---------------------------------------
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997,
and requires reclassification of prior-period financial statements. Statement
No. 130 requires the presentation of comprehensive income, which consists of net
income and other comprehensive income, and its
17
components in a full set of financial statements. The Company's other
comprehensive income consists of foreign currency translation adjustments, which
currently are reported as a component of stockholders' equity. Additional items
may be included in other comprehensive income in the future. The Company plans
to display comprehensive income and its components in the Consolidated Statement
of Stockholders' Equity in the year-end 1998 financial statements. The total of
comprehensive income for the three- and nine-month periods ended September 30,
1998 and 1997 is disclosed in "Item 1. Financial Statements" - Note 3 to the
Condensed Consolidated Financial Statements.
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997, and requires reclassification of prior-period
financial statements. Statement No. 131 established standards for reporting
information about operating segments and related disclosures about products and
services, geographic areas and major customers in annual financial statements
and interim financial reports. Management currently is evaluating its
reportable segments under the new Statement and anticipates disclosure for four
operating segments under the new rules: Blood Therapies, CardioVascular, I.V.
Systems/Medical Products and Renal. The Company will adopt the new disclosure
rules in its year-end 1998 financial statements.
In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which is effective for fiscal
years beginning after December 15, 1997, and requires restatement of prior year
periods presented. The Statement does not change the measurement or recognition
of pension and other postretirement plans. It standardizes the disclosure
requirements, requires additional information on changes in benefit obligations
and fair values of plan assets, and eliminates certain disclosures. The Company
will adopt the new disclosure rules in its year-end 1998 financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which is effective for fiscal
years beginning after December 15, 1998. This SOP provides guidance on when
costs incurred for internal-use computer software should and should not be
capitalized. The SOP requires that costs incurred prior to initial application
of the SOP, whether capitalized or not, should not be adjusted to the amounts
that would have been capitalized had this SOP been in effect when those costs
were incurred. Management is in the process of evaluating this standard and
does not anticipate that it will have a material effect on the Company's
financial statements.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. This Statement requires that all
derivatives be recorded in the balance sheet as either assets or liabilities and
be measured at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
Management is in the process of evaluating this standard and has not yet
determined the future impact on the Company's consolidated financial statements.
18
In April 1998, the AICPA issued Statement of Position (SOP) 98-5, "Reporting on
the Costs of Start-Up Activities," which is effective for fiscal years beginning
after December 15, 1998. This SOP provides guidance on the financial reporting
of start-up costs and organization costs and requires such costs, as defined, to
be expensed as incurred. Initial application of the SOP is required to be
reported as the cumulative effect of a change in accounting principle, as
described in APB Opinion No. 20, "Accounting Changes". Management is in the
process of evaluating this standard and has not yet determined the future impact
on the Company's consolidated financial statements.
19
Review by Independent Public Accountants
- ----------------------------------------
A review of the interim condensed consolidated financial information included in
this Quarterly Report on Form 10-Q for the three months and nine months ended
September 30, 1998 has been performed by PricewaterhouseCoopers LLP, the
Company's independent public accountants. Their report on the interim condensed
consolidated financial information follows. There have been no material
adjustments or disclosures proposed by PricewaterhouseCoopers LLP, which have
not been reflected in the interim condensed consolidated financial information.
Their report is not considered a report within the meaning of Sections 7 and 11
of the Securities Act of 1933 and therefore, the independent accountants'
liability under Section 11 does not extend to it.
20
Report of Independent Accountants
---------------------------------
November 10, 1998
Board of Directors and Stockholders of
Baxter International Inc.
We have reviewed the accompanying condensed consolidated balance sheet as of
September 30, 1998 and the related condensed consolidated statements of income
for the three-month and nine-month periods ended September 30, 1998 and 1997,
and condensed consolidated statements of cash flows for the nine-month period
ended September 30, 1998 and 1997 of Baxter International Inc. and its
consolidated subsidiaries. This interim financial information is the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial information for it to be in
conformity with generally accepted accounting principles.
We previously audited, in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1997, 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 5, 1998
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, 1997, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
PricewaterhouseCoopers LLP
21
PART II. OTHER INFORMATION
Baxter International Inc. and Subsidiaries
Item 1. Legal Proceedings
Baxter International Inc. and certain of its subsidiaries are named as
defendants in a number of lawsuits, claims and proceedings, including product
liability claims involving products now or formerly manufactured or sold by the
Company or by companies that were acquired by Baxter. The most significant of
these are reported in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 and Quarterly Report on Form 10-Q for the quarters ended
March 31, 1998 and June 30, 1998. Material developments in such matters for the
quarter ended September 30, 1998 are described below. Upon resolution of any of
such matters, Baxter may incur charges in excess of presently established
reserves. While such a future charge could have a material adverse impact on
the Company's net income and net cash flows in the period in which it is
recorded or paid, management believes that no such charge would have a material
adverse effect on Baxter's consolidated financial position.
Mammary Implant Litigation
As previously reported in the Company's Annual Report on Form 10-K, the Company,
together with certain of its subsidiaries, is currently a defendant in various
courts in a number of lawsuits brought by individuals, all seeking damages for
injuries of various types allegedly caused by silicone mammary implants formerly
manufactured by the Heyer-Schulte division of American Hospital Supply
Corporation (AHSC). AHSC, which was acquired by the Company in 1985, divested
its Heyer-Schulte division in 1984. It is not known how many of these claims
and lawsuits involve products manufactured and sold by Heyer-Schulte, as opposed
to other manufacturers.
As of September 30, 1998, Baxter, together with certain of its subsidiaries, had
been named as a defendant or co-defendant in 7,362 lawsuits and 2,021 claims
relating to mammary implants, brought by approximately 15,344 plaintiffs. Of
those plaintiffs, 8,020 are currently included in the Revised Settlement
described below, which accounts for 3,296 of the pending lawsuits against the
Company. Additionally, 7,113 plaintiffs have opted out of the Revised
Settlement (representing 3,940 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 September 30, 1998, 2,589 of the opt-out plaintiffs
had confirmed Heyer-Schulte product identification. Furthermore, during the
third quarter of 1998, Baxter obtained dismissals, or agreements for dismissals,
with respect to 652 plaintiffs.
In addition to the individual suits against the Company, a class action on
behalf of all women with silicone mammary implants is pending in the United
States District Court (U.S.D.C.) for the Northern District of Alabama involving
most manufacturers of such implants, including Baxter (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 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 the third quarter of 1998, Baxter accrued an additional $250 million for its
estimated liability resulting from the class action settlement and remaining
opt-out cases and claims.
22
Substantially more women have both participated in, and opted out of, the global
class action than originally anticipated, thereby increasing the total estimated
costs of this litigation and necessitating an increase in litigation reserves.
Baxter recorded a receivable for related estimated insurance recoveries of $121
million, resulting in an additional net charge of $129 million.
Plasma-based Therapies Litigation
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 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. None of these cases involves factor concentrates currently processed by
the Company.
As of September 30, 1998, Baxter had been named in approximately 348 lawsuits
and 411 claims in the United States, Canada, Ireland, Italy, Taiwan, Japan,
Argentina and the Netherlands. The U.S.D.C. for the Northern District of
Illinois has approved a class action settlement of all U.S. factor concentrate
claims. As of September 30, 1998, approximately 6,100 claimant groups had been
found eligible to participate in the settlement, and approximately 350 claimants
had opted out of the settlement. Approximately 5,500 of the claimant groups had
received payments as of September 30, 1998, and payments are expected to
continue through the end of 1998 as releases are received from the remaining
claimant groups.
In Japan, Baxter, the Japanese government and four other co-defendants have
settled factor concentrates cases in Osaka, Tokyo, Nagoya, Tohoku, Fukuoka,
Sapporo and Kuramoto. As of September 30, 1998, these Japanese cases involved
1,284 plaintiffs, of whom 1,259 had entered into settlements.
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. As of September 30, 1998, Baxter
was a defendant in 68 lawsuits and 63 claims in the United States, Denmark,
France, Germany, Italy, Spain and the United Kingdom. Five suits currently
pending in the United States have been filed as purported class actions, but
only one has been certified. All U.S. federal court Gammagard(R) IVIG cases have
been transferred to the U.S.D.C. for the Central District of California for case
management under the Multi District Litigation rules. On February 21, 1996, the
court certified a nationwide class of persons who had infused Gammagard(R) IVIG
(Fayne, et al. v. Baxter Healthcare Corporation, U.S.D.C., C.D. Calif., ML-95-
160-R). The Company sought and received an immediate stay of the class notice
from the 9th Circuit Court of Appeals and subsequently filed a Writ of Mandamus
seeking class decertification. On August 5, 1997, the 9th Circuit Court of
Appeals denied the Writ of Mandamus but invited Baxter to challenge the class
issues in the trial court. On July 20, 1998, the trial court again denied
Baxter's challenge to the class certification. Baxter intends to appeal this
decision to the 9th Circuit Court of Appeals.
The Company has settled and continues to settle claims and lawsuits relating to
its plasma-based therapies through court-ordered mediation and other mechanisms.
Based on this and other currently available information, the Company has revised
its estimate of liabilities and insurance recoveries and, in the third quarter
of 1998, accrued an additional $180 million for its
23
estimated liability for plasma-based therapies litigation and other litigation
and recorded a receivable for related estimated insurance recoveries of $131
million, for a net charge of $49 million.
Other Litigation
As of September 30, 1996, Allegiance Corporation 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 September 30, 1998, the Company had been
named as a defendant in 303 lawsuits, including the following purported class
action: Swartz v. Baxter Healthcare Corp., et al., Court of Common Pleas,
Jefferson County, PA, 656-1997 C.D.
A purported class action was filed against Baxter, Caremark International Inc.
(Caremark), C.A. (Lance) Piccolo, James G. Connelly and Thomas W. Hodson (all
former officers of Caremark) alleging securities law disclosure violations in
connection with the November 30, 1992 spin-off of Caremark in the Registration
and Information Statement and subsequent SEC filings submitted by Caremark
(Isquith v. Caremark International Inc., et al., U.S.D.C., N. Dist. Ill., 94C
5534). The trial court dismissed the action against the Company essentially on
the ground that the plaintiffs lacked standing to bring this action, and on
February 10, 1998, the 7th Circuit Court of Appeals affirmed the trial court's
ruling. The plaintiffs filed a petition for certiorari with the United States
Supreme Court which was denied on October 5, 1998 and this federal suit is now
concluded. Additionally, in February 1997, the plaintiffs served a separate
state court action, styled as a class action, against Mr. Piccolo, Vernon R.
Loucks Jr., William H. Gantz, William B. Graham and James R. Tobin, alleging
violations of various state laws pertaining to the Caremark spin-off (Isquith,
et. al. v. C.A. (Lance) Piccolo, et al., Circuit Court, Cook County, IL,
Chancery Division, 96CH0013652). On April 9, 1998, the trial court dismissed
the plaintiffs' case with prejudice. Plaintiffs' appeal to the Illinois
Appellate Court is pending.
24
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit
Index hereto.
(b) Reports on Form 8-K
A report on Form 8-K was filed on September 16, 1998, which reported under
"Item 5 -- Other Events" the decision to end clinical development of the
Company's first-generation oxygen-carrying therapeutics program.
25
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAXTER INTERNATIONAL INC.
------------------------------
(Registrant)
Date: November 10, 1998 By: Brian P. Anderson
-----------------
Brian P. Anderson
Senior Vice President and Chief
Financial Officer
(Chief Accounting Officer)
26
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
27 Financial Data Schedule
(All other exhibits have been omitted because they are not applicable or
not required.)