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, 1997
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 7, 1997, the latest practicable date, was
280,049,331 shares
BAXTER INTERNATIONAL INC.
FORM 10-Q
For the quarterly period ended September 30, 1997
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. . . . . . . . . . . . . . . . . . . 10
Review by Independent Public Accountants . . . . . . . . . . . . . . . . . 17
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . 18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 25
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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,
1997 1996 1997 1996
------------------- ---------------------
Operations
Net sales $1,494 $1,310 $4,506 $3,944
Costs and expenses
Cost of goods sold 825 720 2,462 2,182
Marketing and administrative expenses 325 272 995 830
Research and development expenses 97 84 282 250
Interest, net 42 26 124 76
Goodwill amortization 11 8 32 25
Acquired research and development - - 352 -
Other (income) expense (18) 10 (21) 6
- ----------------------------------------------------------------------------------------------------
Total costs and expenses 1,282 1,120 4,226 3,369
- ----------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 212 190 280 575
Income tax expense 53 53 162 158
- ----------------------------------------------------------------------------------------------------
Income from continuing operations 159 137 118 417
Discontinued operations
Income from discontinued operations,
net of applicable income tax expense
of $7 and $25 in 1996 - 40 - 94
- ----------------------------------------------------------------------------------------------------
Net income $159 $177 $118 $511
- ----------------------------------------------------------------------------------------------------
Earnings per common share
Continuing operations $.57 $.50 $.43 $1.53
Discontinued operations - .15 - .35
- ----------------------------------------------------------------------------------------------------
Net income per common share $.57 $.65 $.43 $1.88
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Average number of common shares outstanding 280 273 277 272
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
Baxter International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions, except shares)
- ---------------------------------------------------------------------------------------------------
September 30, December 31,
1997 1996
(unaudited)
------------ ------------
Current assets Cash and equivalents $409 $761
Accounts receivable 1,344 1,219
Notes and other current receivables 422 266
Inventories 1,219 883
Short-term deferred income taxes 103 212
Prepaid expenses 204 139
--------------------------------------------------------------------------------
Total current assets 3,701 3,480
- -----------------------------------------------------------------------------------------------
Property, At cost 4,220 3,795
plant and Accumulated depreciation and amortization (2,021) (1,952)
equipment ---------------------------------------------------------------------------------
Net property, plant and equipment 2,199 1,843
- ------------------------------------------------------------------------------------------------
Other assets Goodwill and other intangibles 1,535 1,386
Insurance receivables 403 641
Other 317 246
--------------------------------------------------------------------------------
Total other assets 2,255 2,273
- ------------------------------------------------------------------------------------------------
Total assets $8,155 $7,596
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Current Notes payable to banks $178 $121
liabilities Current maturities of long-term debt and
lease obligations 15 225
Accounts payable and accrued liabilities 1,729 1,704
Income taxes payable 295 395
--------------------------------------------------------------------------------
Total current liabilities 2,217 2,445
- ------------------------------------------------------------------------------------------------
Long-term debt and lease obligations 2,560 1,695
- ------------------------------------------------------------------------------------------------
Long-term deferred income taxes 309 255
- ------------------------------------------------------------------------------------------------
Long-term litigation liabilities 180 365
- ------------------------------------------------------------------------------------------------
Other non-current liabilities 420 332
- ------------------------------------------------------------------------------------------------
Stockholders' Common stock, $1 par value, authorized 350,000,000
equity shares, issued 287,701,247 shares in 1997 and 1996 288 288
Additional contributed capital 1,878 1,825
Retained earnings 905 1,022
Common stock in treasury, at cost, 7,872,125
shares in 1997 and 15,261,100 shares in 1996 (334) (611)
Foreign currency adjustment (268) (20)
--------------------------------------------------------------------------------
Total stockholders' equity 2,469 2,504
- ------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $8,155 $7,596
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
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) 1997 1996
----------------- -------------
Cash flow Income from continuing operations $118 $417
from Adjustments
continuing Depreciation and amortization 299 255
operations Deferred income taxes 109 37
Acquired research and development 352 -
Other (16) (1)
Changes in balance sheet items
Accounts receivable (46) (23)
Inventories (136) (42)
Accounts payable and other accrued liabilities (419) (258)
Restructuring program payments (14) (30)
Other (14) (15)
- -----------------------------------------------------------------------------------------------------
Cash flow from continuing operations 233 340
- -----------------------------------------------------------------------------------------------------
Cash flow from discontinued operations - 100
- -----------------------------------------------------------------------------------------------------
Investment Capital expenditures (267) (255)
transactions Acquisitions, net of cash received,
and investments in affiliates (592) (229)
Proceeds from asset dispositions 9 4
- -----------------------------------------------------------------------------------------------------
Investment transactions, net (850) (480)
- -----------------------------------------------------------------------------------------------------
Financing Issuance of debt and lease obligations 505 1,834
transactions Redemption of debt and lease obligations (427) (1,666)
Increase in debt with maturities
of three months or less, net 363 426
Common stock dividends (235) (243)
Stock issued under employee benefit plans 107 149
Purchase of treasury stock - (92)
- -----------------------------------------------------------------------------------------------------
Financing transactions, net 313 408
- -----------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash and equivalents (48) (11)
- -----------------------------------------------------------------------------------------------------
(Decrease) increase in cash and equivalents (352) 357
Cash and equivalents at beginning of period 761 476
- -----------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $409 $833
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
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 1996
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 in-process research and
development charge relating to the acquisitions discussed below, 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.
Earnings per share amounts for each quarter are required to be computed
independently and do not equal the total per share amount computed for the year
to date period.
Certain reclassifications have been made to the prior period financial
statements to conform to the current presentation.
2. ACQUISITIONS
All acquisitions during the nine months ended September 30, 1997 and 1996, were
accounted for under the purchase method. The purchase price of an acquisition
is 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 net
tangible assets and liabilities acquired is allocated to intangible assets. The
initial purchase price allocation is preliminary and is subject to change during
the year following the acquisition as additional information concerning asset
and liability valuation is obtained. Therefore, the final allocation may differ
from the preliminary allocation. Results of operations of acquired companies
are included in the Company's results of operations as of the respective
acquisition dates. The pro forma information presented below is not necessarily
indicative of what operating results would have been had the acquisitions
occurred on the indicated dates, nor is it necessarily indicative of future
operating results.
IMMUNO INTERNATIONAL AG
In December 1996, the Company commenced the acquisition of Immuno International
AG ("Immuno"), a European manufacturer of biopharmaceutical products and
services for transfusion medicine. The acquisition of Immuno was completed in a
three-part transaction and is valued at approximately $600 million. In
addition, the Company assumed approximately $280 million of Immuno's net debt.
The first and second parts of the transaction were completed during the first
fiscal quarter of 1997 with a $200 million payment to the private shareholders
and $170 million in payments relating to a tender offer for most of the publicly
6
traded shares of Immuno. The third part of the acquisition, the purchase of the
remaining shares from private shareholders for approximately $173 million, was
completed in the third fiscal quarter of 1997. The remaining portion of the
total purchase price, approximately $58 million, is being withheld to cover
certain legal contingencies, as further discussed in "Part II - Item 1. Legal
Proceedings".
The operations of Immuno are included in the condensed consolidated financial
statements on the basis of fiscal years ending November 30, which is the same
basis used for the Company's other foreign operations. Therefore, the
acquisition was recorded in the Company's first fiscal quarter of 1997.
On the basis of an independent appraisal, approximately $220 million of the
Immuno purchase price was allocated to in-process research and development
("R&D") which, under generally accepted accounting principles ("GAAP"), was
immediately expensed by the Company during the first quarter of 1997. The
technological feasibility of the in-process R&D had not yet been established
and, at present, the technology has no alternative future use. A significant
portion of the purchase price was allocated to existing product technology and
this amount, which was approximately $95 million, is being amortized on a
straight-line basis over 20 years.
Included in other income and expense in the first quarter of 1997 is a $29
million charge relating to the integration of certain of Baxter's operations
with those of Immuno. Also included in other income in the first quarter of
1997 is a $27 million foreign currency translation gain relating to the Swiss
Franc-denominated acquisition liabilities to the former shareholders of Immuno.
RESEARCH MEDICAL, INC.
In March 1997, Baxter acquired Research Medical Inc. ("RMI"), a provider of
specialized products used in open-heart surgery. The purchase price was
approximately $239 million and was settled with 4,801,711 shares of Baxter
International Inc. common stock, issued from treasury.
On the basis of an independent appraisal, approximately $132 million of the RMI
purchase price was allocated to in-process R&D which, under GAAP, was
immediately expensed by the Company during the first quarter of 1997. The
technological feasibility of the in-process R&D had not yet been established
and, at present, the technology has no alternative future use. Approximately
$40 million of the excess of the purchase price over the net tangible assets was
allocated to existing product technology and is being amortized on a straight-
line basis over 14 years. The majority of the remainder of the excess purchase
price was allocated to goodwill in the amount of approximately $29 million and
is being amortized on a straight-line basis over 20 years.
PSICOR, Inc.
In January 1996, the Company acquired PSICOR, Inc., a perfusion-services
business, for $17.50 per share, or $84 million.
7
PRO FORMA INFORMATION
Had the acquisitions of Immuno and RMI taken place at the beginning of the first
fiscal quarter of 1997, net sales, net income and earnings per share would not
have been materially different from the reported amounts and, therefore, pro
forma information is not presented. Had the acquisitions of Immuno, RMI and the
Clintec parenteral-nutrition business taken place at the beginning of the first
fiscal quarter of 1996, the Company's unaudited pro forma net sales would have
been approximately $1,497 million and $4,520 million for the three and nine
months ended September 30, 1996, respectively. Excluding the in-process R&D
charge relating to the acquisitions of Immuno and RMI, unaudited pro forma net
income and earnings per share for the three and nine months ended September 30,
1996 would have been $173 million and $526 million, respectively, and $.63 per
share and $1.91 per share, respectively.
3. INVENTORIES
Inventories consisted of the following:
- -----------------------------------------------------
September 30, December 31,
1997 1996
(in millions) (unaudited)
- -----------------------------------------------------
Raw materials $303 $190
Work in process 254 152
Finished products 662 541
- -----------------------------------------------------
Total inventories $1,219 $883
- -----------------------------------------------------
- -----------------------------------------------------
4. RESTRUCTURING RESERVES
In November 1993, the Company recorded a $216 million restructuring charge to
cover costs associated with strategic actions designed to accelerate growth and
reduce costs, including reorganizations and consolidations in the United States,
Europe, Japan and Canada. The restructuring program is expected to be completed
in 1998.
Employee-related costs include provisions for severance, outplacement
assistance, relocation and retention payments. Since the inception of the
program, the Company has eliminated 1,876 positions, which exceeds the 1,640
positions originally targeted.
The following table summarizes the 1993 restructuring reserves as of December
31, 1996 and September 30, 1997 (unaudited):
- ------------------------------------------------------------------------------
Divestitures
Employee- and asset
related write- Other
(in millions) costs downs costs Total
- ------------------------------------------------------------------------------
December 31, 1996 balance $14 $16 $9 $39
- ------------------------------------------------------------------------------
Utilization:
Cash 8 - 2 10
Non-cash - 6 - 6
- ------------------------------------------------------------------------------
September 30, 1997 balance $6 $10 $7 $23
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- ------------------------------------------------------------------------------
8
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. Employee-related costs
consist of severance for the approximately 1,450 positions that will be
eliminated. Approximately 344 positions have been eliminated to date and
completion of the plan is anticipated by the end of 1998. The original
timetable for the 1995 program has been affected by delays in required
regulatory reviews relating to the transfer of equipment and production
processes to other facilities in Puerto Rico and the United States.
The following table summarizes the 1995 restructuring reserves as of December
31, 1996 and September 30, 1997 (unaudited):
- ------------------------------------------------------------------------------
Employee- Asset
related write- Other
(in millions) costs downs costs Total
- ------------------------------------------------------------------------------
December 31, 1996 balance $16 $11 $8 $35
- ------------------------------------------------------------------------------
Non-cash utilization - 2 1 3
- ------------------------------------------------------------------------------
September 30, 1997 balance $16 $9 $7 $32
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
5. LEGAL PROCEEDINGS
Please see "Part II - Item 1. Legal Proceedings" below for the status of
lawsuits and claims from individuals seeking damages for injuries allegedly
caused by silicone mammary implants manufactured by a division of American
Hospital Supply Corporation. That section also discusses the status of lawsuits
and claims involving the Company's plasma-based therapies and other legal
proceedings involving the Company.
6. INTEREST, NET
Net interest expense consisted of the following (unaudited):
- ------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(in millions) 1997 1996 1997 1996
- ------------------------------------------------------------------------------
Interest expense $53 $60 $151 $177
Interest income (11) (11) (27) (34)
- ------------------------------------------------------------------------------
Interest, net $42 $49 $124 $143
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Continuing operations $42 $26 $124 $76
Discontinued operations $ - $23 $ - $67
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
9
7. AGREEMENT TO ACQUIRE BIEFFE MEDITAL S.P.A.
On July 31, 1997, the Company signed a definitive agreement to acquire Bieffe
Medital S.P.A., a leading European manufacturer of dialysis and intravenous
solutions and containers, for approximately $245 million, which includes
assumption of debt. Approximately $48 million in purchase price installments
have been made during the second and third quarters of 1997. The acquisition is
subject to customary review and clearance from the Italian anti-trust
authorities.
8. AGREEMENT TO FORM NEW CELL THERAPIES BUSINESS
In October 1997, the Company entered into a definitive agreement with VIMRx
Pharmaceuticals Inc. ("VIMRx") to form a new cell therapy company to develop
innovative treatments for cancer and other life-threatening diseases. The
Company will transfer certain assets of its Immunotherapy division into the new
company and hold a minority ownership position along with warrants to acquire an
additional ownership interest in the future. VIMRx will obtain a majority
interest in the new company in exchange for 11 million shares of VIMRx common
stock and convertible preferred shares with a nominal value of $40 million. To
the extent the 11 million common shares are worth less than $50 million at the
closing, the Company will receive additional convertible preferred shares. In
addition, the Company will lend $30 million and VIMRx will lend $10 million to
the new company in initial operating funds. The agreement is subject to
approval by the shareholders of VIMRx, which is expected to occur before year-
end.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Baxter International Inc.'s ("Baxter" or the "Company") 1996 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,
1996. In the Annual Report, management outlined its key financial objectives
for 1997. These objectives and the results achieved through September 30, 1997
are summarized as follows:
- ------------------------------------------------------------------------------
FULL YEAR 1997 OBJECTIVES RESULTS THROUGH
SEPTEMBER 30, 1997
- ------------------------------------------------------------------------------
Increase net sales approximately Net sales for the first nine months of
10% before the impact of 1997 the year increased 4% before the impact
acquisitions and 20% including 1997 of the 1997 acquisitions of Immuno
acquisitions. International AG ("Immuno") and Research
Medical, Inc. ("RMI"), and increased 14%
including these acquisitions. Excluding
the effect of the strengthening U.S.
dollar, net sales for the nine-month
period increased 7% before the impact of
the 1997 acquisitions and 17% including
the 1997 acquisitions. Excluding the
effects of changes in foreign exchange
rates, management expects similar growth
rates during the fourth quarter of the
year.
- ------------------------------------------------------------------------------
Achieve growth in income from The Company's growth in income from
continuing operations in the low continuing operations for the nine
double digits. months ended September 30, 1997,
excluding the in-process research and
development charge relating to the
acquisitions of Immuno and RMI discussed
below, was 13%. Management expects to
achieve the full year objective.
- ------------------------------------------------------------------------------
Generate $300 million in The Company generated $240 million of
"operational cash flow", "operational cash flow" in the nine
before litigation payments. months ended September 30, 1997, before
litigation payments. Management expects
to achieve the full year objective.
- ------------------------------------------------------------------------------
11
RESULTS OF OPERATIONS
In December 1996, Baxter acquired Immuno, a European manufacturer of
biopharmaceutical products and services for transfusion medicine. In March
1997, the Company acquired RMI, a provider of specialized products used in open-
heart surgery. See Note 2 to the Condensed Consolidated Financial Statements
for further information regarding these acquisitions.
NET SALES TRENDS
- ------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
------------------- Percent ------------------ Percent
(in millions) 1997 1996 increase 1997 1996 increase
- -------------------------------------------------------------------------------
International $804 $679 18% $2,401 $2,018 19%
United States 690 631 9% 2,105 1,926 9%
- -------------------------------------------------------------------------------
Total net sales $1,494 $1,310 14% $4,506 $3,944 14%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Without the effect of changes in foreign exchange rates, international sales
growth was 25% for both the three- and nine-month periods ended September 30,
1997.
Included in international sales for the three- and nine-month periods ended
September 30, 1997 were $109 million and $329 million in sales, respectively, as
a result of the acquisition of Immuno. Growth in international sales for the
three and nine months ended September 30, 1997, excluding Immuno, was 2% and 3%,
respectively, and without the effect of changes in foreign exchange rates, was
9% for both periods. Such growth was primarily due to continued penetration
into new geographic markets, especially the Latin American market, and
particularly with respect to the Company's renal products. The quarter and
year-to-date period also benefited from increased sales as a result of the
October 1996 acquisition of the Clintec parenteral-nutrition business
("Clintec") after the dissolution of the Company's joint venture with Nestle
S.A.
Continued strong demand for the Company's tissue heart valves and Recombinate-
TM- Anti-hemophilic factor (Recombinant) products were significant contributors
to domestic sales growth during the first nine months of 1997. Competitive and
pricing pressures in the United States continue to affect sales growth across
various product lines. Despite these market conditions, domestic sales of the
renal business have continued to improve throughout the year. Also contributing
to 1997 domestic sales growth was the acquisition of Clintec discussed above and
a favorable patent settlement occurring during the second quarter of the year.
12
The following table shows key ratios of certain income statement items as a
percent of sales:
GROSS MARGIN AND EXPENSE RATIOS
- -------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
------------------- Increase -----------------
1997 1996 (decrease) 1997 1996 Increase
- ---------------------------------------------------------------------------------------
Gross profit margin 44.8% 45.0% (.2 pts) 45.4% 44.7% .7 pts
Marketing and
administrative expenses 21.8% 20.8% 1.0 pt 22.1% 21.0% 1.1 pts
- ---------------------------------------------------------------------------------------
The gross profit margin declined .2 points from the prior year quarter; however,
excluding the effect of the strengthening dollar, the gross profit margin for
the quarter increased .2 points over the prior year period. The increase in the
gross profit margin (excluding the effect of changes in foreign exchange rates)
for the three and nine months ended September 30, 1997 was primarily a result of
the acquisitions of Immuno, Clintec and RMI, and a more favorable product mix,
particularly with respect to the Cardiovascular and Renal business products.
Partially offsetting these increases in the three- and nine-month periods ended
September 30, 1997 was increased sales in the lower-margin perfusion-services
business and the effect of manufacturing variances during the third quarter.
Marketing and administrative expenses increased as a percent of sales in the
three- and nine-month periods ended September 30, 1997 primarily due to the
acquisition of Immuno and expansion into developing markets and new business
initiatives.
RESEARCH AND DEVELOPMENT
- --------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
------------------- Percent -------------------- Percent
(in millions) 1997 1996 increase 1997 1996 increase
- ---------------------------------------------------------------------------------------
Research and
development expenses $97 $84 15% $282 $250 13%
- ---------------------------------------------------------------------------------------
As a percent of sales 6.4% 6.4% 6.3% 6.3%
- ---------------------------------------------------------------------------------------
Research and development ("R&D") expenses, excluding the in-process R&D charge
recorded in the first quarter of 1997, increased primarily due to the
acquisition of Immuno. The Company's R&D expenses are focused on initiatives
such as "blood substitutes", renal therapy, xenotransplantation and the Novacor
left-ventricular assist system. With respect to the Company's "blood
substitute", HemAssist-TM-(DCLHb), the Company recently learned from the
European Medicines Evaluation Agency that additional clinical data will be
needed before the product is granted marketing clearance as an alternative to
blood in cardiac-surgery patients in Europe. The expected product launch date
is now late 1999 or early 2000.
13
OTHER INCOME AND EXPENSE
Net interest expense increased in 1997 as compared to the prior period primarily
due to increased net debt assumed and incurred resulting from the acquisition of
Immuno.
Goodwill amortization increased in 1997 primarily due to the acquisition of
Clintec.
Included in other income in the third quarter of 1997 is a $17 million gain
relating to the disposal of a non-strategic investment.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations increased 16% in the three months ended
September 30, 1997, and on a per share basis, increased 14%. Excluding the
first quarter 1997 in-process R&D charge relating to the acquisitions of Immuno
and RMI, income from continuing operations increased 13% in the nine-month
period ended September 30, 1997, and on a per-share basis, increased 11%.
Excluding the first quarter 1997 in-process R&D charge, the Company's effective
income tax rate was 25.0% and 25.6% for the three- and nine-month periods ended
September 30, 1997, respectively. The effective income tax rates in the
corresponding prior periods were 27.9% and 27.5%, respectively. The rate has
declined as compared to the prior year primarily due to a larger portion of the
Company's earnings generated in lower tax jurisdictions.
INCOME FROM DISCONTINUED OPERATIONS
Income from discontinued operations in 1996 related to the Company's former
health-care cost management and distribution businesses. In September 1996,
Baxter stockholders received all of the outstanding stock of Allegiance
Corporation, its health-care cost management and distribution businesses, in a
tax-free spin-off.
RESTRUCTURING PROGRAMS
The Company has two restructuring programs in process. See Note 4 to the
Condensed Consolidated Financial Statements for a discussion of the charges,
utilization of the reserves and headcount reductions to date. Management
believes remaining restructuring reserves are adequate to complete the actions
contemplated by the programs.
With respect to the 1993 program, the Company realized approximately $95 million
in pretax savings during the first nine months of 1997 and expects to realize
approximately $130 million in pretax savings for the full year. Such savings
are consistent with the original targets. Future expected savings of
approximately $130 million annually are also in line with original projections.
Management anticipates restructuring savings will be partially invested in R&D
and expansion into growing international markets.
The Company is in the process of implementing the 1995 program. Management
expects that the plant closures and consolidations in Puerto Rico will be
substantially completed by year-end 1998 and will lower manufacturing costs and
help mitigate future exposure to gross margin erosion arising from pricing
pressures, primarily in the United States. The original timetable for
14
the 1995 program has been affected by delays in required regulatory reviews
relating to the transfer of equipment and production processes to other
facilities in Puerto Rico and the United States.
Future cash expenditures related to both the 1993 and 1995 programs will be
funded by cash generated from operations.
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"
which evaluates each operating business on all aspects of cash flow under its
direct control. The incentive compensation programs for the Company's senior
management include significant emphasis on the attainment of both "operational
cash flow" and earnings objectives.
The following table reconciles cash flow provided by continuing operations, as
determined by generally accepted accounting principles, to "operational cash
flow":
- ------------------------------------------------------------------------------
Nine months ended September 30,
(in millions) 1997 1996
- ------------------------------------------------------------------------------
Cash flow from continuing operations
per the Company's condensed consolidated
statements of cash flows $233 $340
Capital expenditures (267) (255)
Net interest after tax 73 45
Mammary implant litigation, net 56 116
Other - 5
- ------------------------------------------------------------------------------
"Operational cash flow" - continuing operations $95 $251
"Operational cash flow" - discontinued operations - $206
- ------------------------------------------------------------------------------
Total "operational cash flow" $95 $457
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
"Operational cash flow", as defined, reflects all litigation payments and
related insurance recoveries except for those payments and recoveries relating
to mammary implants, which the Company never manufactured or sold. If all of
the Company's net litigation payments were excluded from "operational cash flow"
(including those relating to plasma-based therapies), the amount generated from
continuing operations would be $240 million and $290 million during the nine
months ended September 30, 1997 and 1996, respectively. Cash flows in the first
nine months of 1997 were consistent with expectations and the Company expects to
achieve the targeted $300 million in "operational cash flow" for the full year,
exclusive of all net litigation payments.
Approximately $497 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 acquisition of Immuno. In addition, approximately $48 million in
purchase price installments relating to the acquisition of Bieffe Medital S.P.A.
have been made during the second and third quarters of 1997. Refer to Note 7 to
the Condensed Consolidated Financial Statements for further information. Net
cash flows used for acquisitions and investments in affiliates for the nine
months ended September 30, 1996 related primarily to the acquisitions of several
perfusion-services businesses, and also included a payment relating to the
Company's purchase of Clintec. See Note 2 to the
15
Condensed Consolidated Financial Statements for additional information
regarding these acquisitions.
The Company's net-debt-to-net-capital ratio was 48.7% and 33.8% at September 30,
1997 and December 31, 1996, respectively. The increase in the ratio was
primarily due to increased net debt as a result of the acquisition of Immuno.
Management expects the net-debt-to-capital ratio to decline to approximately 40%
over time as a result of ongoing operations.
As authorized by the board of directors, the Company repurchases its stock to
optimize its capital structure depending upon its operational cash flows, net
debt level and current market conditions. In November 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.
As discussed above, the Company's net-debt-to-net-capital ratio is currently
48.7% 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 issued $450 million of term debt during 1997 and used the proceeds to
retire commercial paper. The Company's current assets exceeded current
liabilities by $1,484 million and $1,035 million at September 30, 1997 and
December 31, 1996, respectively. Such working capital can be used to satisfy
normal operating cash requirements. Increases in certain asset and liability
balances in 1997 relate primarily to the acquisitions discussed above. The
Company believes it has lines of credit adequate to support ongoing operational
requirements. Beyond that, the Company believes it has sufficient financial
flexibility to attract long-term capital on acceptable terms as may be needed to
support its growth objectives.
See "Part II - Item 1. Legal Proceedings" for a discussion of the Company's
legal contingencies and related insurance coverage with respect to cases and
claims relating to the Company's plasma-based therapies and mammary implants
manufactured by the Heyer-Schulte division of American Hospital Supply
Corporation, as well as other matters. Upon resolution of any of these
uncertainties, 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 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.
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, 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, the United States and
global regulatory, trade and tax policies, continued price competition related
to the Company's United States operations, product development risks, including
technological difficulties, ability to
16
enforce patents and unforeseen foreign 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. Additionally, as discussed in "Part II - Item 1.
Legal Proceedings", 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 altogether unavailable. If the United States dollar
continues to strengthen against most foreign currencies, the Company's projected
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.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings per Share", which is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. The Statement replaces the presentation of primary earnings per share
("EPS") with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. There is an
immaterial difference between the Company's basic and diluted EPS as calculated
pursuant to the Statement and EPS as currently presented in accordance with
existing accounting rules, and therefore the Company's pro forma EPS information
is not presented.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" and Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information". Both Statements are effective for fiscal years beginning
after December 15, 1997 and require reclassification of prior-period financial
statements for comparative purposes. Statement No. 130 requires the
presentation of comprehensive income and its components in a full set of
financial statements. Statement No. 131 establishes 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. The Company is currently evaluating both of the
new Statements and plans to adopt them during the year ended December 31, 1998.
17
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, 1997 has been performed by Price Waterhouse LLP, the Company's
independent public accountants. Their report on the interim condensed
consolidated financial information follows. There have been no adjustments or
disclosures proposed by Price Waterhouse 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.
18
REPORT OF INDEPENDENT ACCOUNTANTS
November 13, 1997
Board of Directors and Stockholders of
Baxter International Inc.
We have reviewed the accompanying condensed consolidated balance sheet as of
September 30, 1997 and the related condensed consolidated statements of income
for the three- and nine-month periods ended September 30, 1997 and 1996, and
condensed consolidated statements of cash flows for the nine-month periods ended
September 30, 1997 and 1996 of Baxter International Inc. and its subsidiaries.
This interim financial information is the responsibility of the Company's
management.
We conducted our reviews 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 reviews, 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, 1996, 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 10,
1997 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, 1996, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
Price Waterhouse LLP
19
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 and sold by the Company
or by companies that were acquired by the Company. 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 or claim, the jurisdiction in which each
suit is brought, and differences in applicable law. Accordingly, in many cases,
the Company is not able to estimate the amount of its liabilities with respect
to such matters.
Upon resolution of any of the legal matters discussed below, the Company may
incur charges in excess of presently established reserves. While such a future
charge could have a material adverse impact on the Company's net income and net
cash flows in the period in which it is recorded or paid, management believes
that no such charge would have a material adverse effect on the Company's
consolidated financial position.
Mammary Implant Litigation
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 ("Heyer-Schulte")
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, 1997, the Company, together with certain of its
subsidiaries, had been named as a defendant or co-defendant in 7,228 lawsuits
and 1,758 claims relating to mammary implants, brought by 16,878 plaintiffs. Of
those plaintiffs, 9,192 are currently included in the LINDSEY class action
Revised Settlement described below, which accounts for 3,944 of the pending
lawsuits against the Company. Additionally, 6,870 plaintiffs have opted-out of
the Revised Settlement (representing 3,152 pending lawsuits), and the status of
the remaining 816 plaintiffs (representing 84 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, 1997, 1,897 of the
opt-out plaintiffs had confirmed Heyer-Schulte mammary implant product
identification. Furthermore, during the third quarter of 1997, the Company
obtained dismissals, or agreements for dismissals, with respect to 1,519
plaintiffs against the Company that did not involve Heyer-Schulte mammary
implants.
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
in the United States District Court for the Northern District of Alabama
involving most manufacturers of such implants, including the Company (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,
20
and the settlement terms were subsequently revised and approved on December
22, 1995 (the "Revised Settlement"). The monetary provisions of the Revised
Settlement, provide compensation for all present and future plaintiffs and
claimants through a series of specific funds and a disease-compensation
program involving certain specified medical conditions. Appeals have been
filed challenging the Revised Settlement.
On May 15, 1995, Dow Corning Corporation, one of the defendants in the mammary
implant cases, declared bankruptcy and filed for protection under Chapter 11 (IN
RE: DOW CORNING CORPORATION, U.S.D.C., E.D. Mich. 95-20512, 95CV72397-DT). The
full impact of these proceedings on the Revised Settlement is unclear.
On January 16, 1996, the Company, Bristol-Myers Squibb Company and Minnesota
Mining and Manufacturing Company each paid $125 million into the court-
established fund as an initial fund to pay claims under the Revised Settlement.
Union Carbide Corporation and McGhan Medical Corporation are also parties to the
Revised Settlement. Under the Revised Settlement, plaintiffs and claimants have
a second opportunity to opt-out of the Revised Settlement, once they receive a
"Notification of Status" letter from the claims-administration office.
"Notification of Status" letters were delivered to virtually all domestic
claimants by July 1997, and the opt-out period for most claimants expired on
September 1, 1997.
In addition to the LINDSEY class action, the Company also has been named in 11
other purported class actions in various state and provincial courts, only two
of which have been certified: SPITZFADDEN, ET AL., V. DOW CORNING CORP., ET AL.,
Dist. Ct., Parish of Orleans, 92-2589 and HARRINGTON V. DOW CORNING CORP., ET
AL., Supreme Court, British Columbia, C954330. Currently, a trial of
SPITZFADDEN plaintiffs is proceeding solely against the Dow Chemical Company.
The class action in British Columbia has been certified solely with respect to
the issue whether silicone gel breast implants are reasonably fit for their
intended purpose.
In the fourth quarter of 1993, the Company accrued $556 million for its
estimated liability resulting from the settlement of the LINDSEY class action
and recorded a receivable for estimated insurance recoveries totaling $426
million, resulting in a net charge of $130 million. Based on its continuing
evaluation of the remaining opt-outs, the Company accrued an additional $298
million for its estimated liability to litigate or settle cases and claims
involving opt-outs and recorded an additional receivable for estimated insurance
recoveries totaling $258 million, resulting in an additional net charge of $40
million in the first quarter of 1995.
The mammary implant litigation includes issues related to which of the Company's
insurers are responsible for covering each matter and the extent of the
Company's claims for contribution against third parties. The Company believes
that a substantial portion of its liability and defense costs for mammary
implant litigation will be covered by insurance, subject to self-insurance
retentions, exclusions, conditions, coverage gaps, policy limits and insurer
solvency. The Company has entered into "coverage-in-place" agreements with a
number of its insurers, each of which issued or subscribed to policies of
insurance between 1974 and 1985. These agreements resolve the signatory
insurers' coverage defenses and specify rules and procedures for allocation and
payment of defense and indemnity costs pursuant to which signatory insurers will
reimburse the Company for mammary implant losses. Five of the Company's claims-
made insurers which issued policies subsequent to 1985 have agreed to pay under
their policies with respect to mammary implant claims. The combined total of
the amount thus far paid by insurers, committed for payment, and projected by
the Company to be paid by
21
insurers under these agreements is in excess of $525 million, based on the
Company's current estimate of mammary implant expenditures. The insurers
with which the Company has not reached coverage agreements have generally
reserved (i.e., neither admitted nor denied), and may attempt to reserve in
the future, the right to deny coverage, in whole or in part, due to differing
theories regarding, among other things, the applicability of coverage and
when coverage may attach. The Company is engaged in active litigation with
each of these insurers and is negotiating with certain of them to resolve
outstanding insurance coverage issues.
Factor Concentrates Litigation
The Company 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 in the early and
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 September 30, 1997, the Company is named in 560 lawsuits and 417 claims in
the United States, Canada, Ireland, Italy, Spain, Japan and the Netherlands.
All United States federal court Factor Concentrate cases have been transferred
to the United States District Court for the Northern District of Illinois for
case management under Multi District Litigation ("MDL") rules (MDL Docket No.
MDL-986). The Company also has been named in eight purported class actions.
None of these class actions has been certified, and five have been transferred
to the MDL for discovery.
In most states, the Company's potential liability is limited by laws that
provide that the sale of blood or blood derivatives, including Factor
Concentrates, is not covered by the doctrine of strict liability. As a result,
each claimant must prove that his or her injuries were caused by the Company's
negligence.
On May 6, 1997, the court approved a settlement submitted by the plaintiffs'
steering committee for the MDL, the Company, Alpha Therapeutic Corporation,
Armour Pharmaceutical and Bayer Corporation. The essential terms of the
settlement would provide payments of $100,000 per person to each HIV-positive
person with hemophilia in the United States who can demonstrate use of Factor
Concentrates produced by one of the settling defendants between 1978 and 1985.
Additionally, the defendants would establish a $40 million fund for payment of
attorneys' fees, costs and court-administration expenses. The Company's agreed
contribution to the proposed settlement is 20% of the total settlement proceeds.
The settlement requires insurance-carrier approval, the signing of releases and
the resolution of potential subrogation, reimbursement and eligibility issues.
The Company and the other defendants have reached agreements to settle potential
subrogation and reimbursement claims with most private insurers, the federal
government and 45 states, the District of Columbia, Puerto Rico and Guam. The
Company expects most, if not all, remaining states to sign subrogation
agreements by year-end 1997. Although the period for claimants to decide
whether or not to participate in the settlement does not expire until October
31, 1997, the approximate number of eligible claimants as of September 30, 1997
was 5,899, and the number of eligible opt-outs was approximately 533. On July
29, 1997, the court dismissed two appeals
22
that had been filed challenging the settlement, and payments to eligible
claimants began in October, 1997.
In Japan, the Company is a defendant, along with the Japanese government and
four other co-defendants, in Factor Concentrates cases in Osaka, Tokyo,
Nagoya, Tohoku, Fukuoka, Sapporo and Kumamoto. As of September 30, 1997, the
cases involved 1,234 plaintiffs, at least 1,167 of whom allegedly used Factor
Concentrates manufactured by the Company. Based upon the Osaka and Tokyo
courts' recommendations, the parties have agreed to a settlement of all
pending and future Factor Concentrates cases. In general, the settlement
provides for payment of an up-front, lump sum amount of approximately
$360,000 per plaintiff to be funded 40% by the Japanese government and 60% by
the corporate defendants. The share of the settlement to be paid by each
corporate defendant was determined based upon its market share, resulting in
a contribution by the Company of approximately 15.36%. The portion of the
settlement to be funded by the corporate defendants will include prior
payments made by the corporate defendants under a Japanese
government-administered program which pays monthly amounts to HIV-positive
and AIDS-manifested hemophiliacs and their survivors. Additionally, monthly
payments will be made to each plaintiff according to a set schedule.
In Spain, the Company was notified in 1995 that approximately 1,350 HIV-positive
people with hemophilia wished to explore settlement possibilities with the
Company in lieu of filing suit in both Spain and the United States. The parties
have reached agreement on the terms of a settlement whereby each claimant will
receive $25,000 (including attorneys' fees and costs) in return for a general
release and protection against contribution claims by other defendants. As of
September 30, 1997, 1,346 claimants had agreed to the settlement. The Company
does not expect the few remaining claimants to agree to the settlement.
The Company believes that a substantial portion of the liability and defense
costs related to Factor Concentrates litigation will be covered by insurance,
subject to self-insurance retentions, exclusions, conditions, coverage gaps,
policy limits and insurer solvency. The Company has entered into "coverage in
place" agreements with certain of its insurers that issued or subscribed to
policies of insurance between 1978 and 1985. These agreements resolve the
signatory insurers' coverage defenses and specify rules and procedures for
allocation and payment of defense and indemnity costs pursuant to which the
signatory insurers will reimburse the Company for Factor Concentrates losses.
The insurers with which the Company has not reached coverage agreements have
generally reserved (i.e., neither admitted nor denied), and may attempt to
reserve in the future, the right to deny coverage, in whole or in part, due to
differing theories regarding, among other things, the applicability of coverage
and when coverage may attach. The Company is engaged in active litigation and
negotiations with certain of these insurers to resolve outstanding insurance
coverage issues.
In the fourth quarter of 1993, the Company accrued $131 million for its
estimated worldwide liability for litigation and settlement expenses involving
Factor Concentrates cases and recorded a receivable for insurance coverage of
$83 million, resulting in a net charge of $48 million. In the third quarter of
1995, significant developments occurred, primarily in the United States, Europe
and Japan relative to claims and litigation pertaining to the Company's plasma-
based therapies. After analyzing circumstances in light of recent developments
and considering various factors and issues unique to each geography, the Company
revised its estimated exposure from the $131 million previously recorded for
Factor Concentrates litigation to $378 million for all litigation relating to
plasma-based therapies, including the Factor Concentrates
23
litigation and the Gammagard-Registered Trademark- IVIG litigation (see
"-- Other Litigation" below). Related estimated insurance recoveries were
revised from $83 million for Factor Concentrates to $274 million for all
plasma-based therapies. This resulted in a net charge of $56 million in the
third quarter of 1995.
In addition, as described in Note 2 to the financial statements, the Company
acquired Immuno International AG ("Immuno") in fiscal year 1997. Immuno 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. In addition, the stock purchase
agreement between the Company and Immuno provides that approximately 84 million
Swiss francs (or approximately $58 million at quarter-end) of the purchase price
will be withheld to cover these contingent liabilities. Based on management's
estimates, the amount of these contingencies, net of insurance recoveries and
reserves, is not expected to exceed the negotiated contingent payment held back
from the total purchaseprice.
Other Litigation
The Company is currently a defendant in a number of claims and lawsuits
brought by individuals who infused the Company's Gammagard-Registered
Trademark- IVIG (intravenous immune globulin), all of whom are seeking
damages for Hepatitis C infections allegedly caused by infusing
Gammagard-Registered Trademark- IVIG. As of September 30, 1997, the Company
was a defendant in 161 lawsuits and 68 claims in the United States, Denmark,
France, Germany, Italy, Spain, Sweden and the United Kingdom. Eleven suits
currently pending in the United States have been filed as purported class
actions but none have been certified. All United States federal court
Gammagard-Registered Trademark- IVIG cases have been transferred to the
United States District Court for the Central District of California for case
management under MDL rules. On February 21, 1996, the court certified a
nationwide class of persons who had infused Gammagard-Registered Trademark-
IVIG (FAYNE, ET AL., V. BAXTER HEALTHCARE CORPORATION, U.S.D.C., C.D., CA,
ML-95-160-R). The Company sought an immediate stay of the class notice from
the 9th Circuit Court of Appeals and subsequently filed a Writ of Mandamus
seeking class decertification. The 9th Circuit Court of Appeals granted the
stay of the class notice on March 19, 1996, and on April 12, 1996, granted a
stay of the class certification pending final determination on the writ. On
August 5, 1997, the 9th Circuit Court of Appeals denied the Writ of Mandamus.
The Company is vigorously defending these cases.
As of September 30, 1996, Allegiance Corporation and/or its affiliates
("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 the
Company pursuant to certain contractual obligations for all expenses and
potential liabilities associated with claims pertaining to latex gloves. As of
September 30, 1997, the Company had been named as a defendant in 124 lawsuits,
including the following purported class actions: WOLF V. BAXTER HEALTHCARE
CORP., ET AL., Circuit Court, Wayne County, MI, 96-617844NP; MURRAY, ET AL., V.
BAXTER HEALTHCARE CORP., ET AL., U.S.D.C., S. Dist. Ind., IP96-1889C, COWART,
ALMA M. V. BAXTER INTERNATIONAL, INC., U.S.D.C. Orleans Cty, LA, 97-7237 and
DELPIT, ANGELA C.
24
V. BAXTER HEALTHCARE CORP., ET AL., U.S.D.C., Eastern District, LA, 97-1112.
On February 26, 1997, all federal cases involving latex gloves were ordered
to be transferred to the United States District Court for the Eastern
District of Pennsylvania for case management under the MDL rules (MDL Docket
No. 1148).
A purported class action has been filed against the Company, Caremark
International Inc. ("Caremark"), C.A. (Lance) Piccolo, James G. Connelly and
Thomas W. Hodson (all former officers of Caremark) alleging securities law
disclosure violations in connection with the November 30, 1992, spin-off of
Caremark in the Registration and Information Statement ("Registration
Statement") and subsequent SEC filings submitted by Caremark (ISQUITH V.
CAREMARK INTERNATIONAL INC., ET AL., U.S.D.C., N. Dist. Ill., 94C 5534). On
March 26, 1997, the Court dismissed the action against the Company essentially
on the ground that plaintiffs lacked standing to bring this action. On April
24, 1997, plaintiffs filed a notice of appeal. Additionally, in February, 1997,
the plaintiffs served a separate state court action, styled as a class action,
against 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). The Company and the
other defendants are vigorously defending this action.
The Company has been named a potentially responsible party ("PRP") for
environmental cleanup costs at 16 hazardous-waste sites. Under the United
States Superfund statute and many state laws, generators of hazardous waste that
is sent to a disposal or recycling site are liable for cleanup of the site if
contaminants from that property later leak into the environment. The laws
generally provide that PRP's may be held jointly and severally liable for the
costs of investigating and remediating the site. Allegiance has assumed
responsibility for 10 of these sites, the largest of which is the Thermo-Chem
site in Muskegan, Michigan. The estimated exposure for the Company's remaining
six sites is approximately $2 million, which has been accrued (and not
discounted) in the Company's condensed consolidated financial statements.
In addition to the cases discussed above, the Company is a defendant in a number
of other claims, investigations and lawsuits. Based on the advice of counsel,
management does not believe that, 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.
25
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
None.
26
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 13, 1997 By: /s/ Brian P. Anderson
----------------------------------
Brian P. Anderson
Corporate Vice President, Finance
(Principal Accounting Officer duly
authorized to sign on behalf of the
Registrant)
27
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EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
Number Description of Exhibit
- ------ ----------------------
11.1 Computation of Primary Earnings Per Common Share
11.2 Computation of Fully Diluted Earnings Per Common Share
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter Re Unaudited Interim Financial Information
27 Financial Data Schedule
(All other exhibits are inapplicable.)
- ------------------------------------------------------------------------------