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[Allegiance Letterhead]
September 6, 1996
Mr. Thomas Jones and
Mr. David M. Lynn
Mail Stop 7 - 6
450 Fifth Street, N.W.
The United States Securities and Exchange Commission
Washington, D.C. 20549
Re: ALLEGIANCE CORPORATION FORM 10 -- SEC FILE NO. 1-11885
Dear Messrs. Jones and Lynn:
As contemplated by Rule 24b-2 under the Securities Exchange Act of 1934, as
amended, Allegiance Corporation ("Allegiance") respectfully requests
confidential treatment for this letter of response, its contents and all
related attachments. Please advise us (by telephone at 847.948.3781) promptly
if you will be unable to honor this request.
RESPONSES TO YOUR SEPTEMBER 4, 1996 COMMENT LETTER
COMPANY RESPONSE TO STAFF COMMENT 1
Both this letter, and the August 22, 1996 initial letter of response have
been submitted in an electronic, non-public format under header submission
type "CORRESP."
STAFF COMMENT
2. The staff notes the response to comment 11 of the staff's August 9, 1996
letter. Please supplementally provide the market and management data
referenced in the response.
COMPANY RESPONSE
The requested materials attached as Appendix A are submitted on a
confidential basis. According to Owens & Minor's most recent Form 10-K, it
reported sales in 1995 of $2.976 billion. Allegiance's pro-forma sales were
$4.571 billion in 1995 (page 35).
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Moreover, and as originally indicated in its August 22 letter of response,
Allegiance management supplementally advises the staff that it believes
Allegiance is unique in health care because it integrates distribution,
product manufacturing and a range of cost-management services. It has
specific competitors in each of these areas, but no single company competes
with Allegiance in all three. Allegiance is frequently compared with Owens &
Minor, the second largest distributor of medical and surgical supplies in the
United States. But Owens & Minor does not distribute laboratory products, nor
does it manufacture its own product lines or offer as comprehensive a
portfolio of cost-management services.
As the second page of Appendix A indicates, Allegiance's fluid suction and
collection products, marketed under the Medi-Vac-Registered Trademark-
container brand name, are, according to Allegiance management, the
best-selling of such products. The market for this product category is
fragmented, but Allegiance's two closest competitors, C.R. Bard and Becton
Dickinson, are each believed to enjoy less than half the sales Allegiance
generates for these surgical products.
STAFF COMMENT
3. We note the responses to comment 19 and 20. Disclosure regarding the
consideration and approval of the distribution by the Baxter Board in
response to these comments should be provided via pre-effective amendment. We
may have further comment.
COMPANY RESPONSE
The following sentence has been added to the end of the first paragraph
of the section captioned "Opinions of Financial Advisor" on page 17:
"It is expected that the Baxter Board will rely, in part, upon the receipt of
the below opinions in deciding to formally declare the Distribution dividend."
STAFF COMMENT
4. Reference is made to the second full paragraph on page 29. The last
sentence states that, "To the extent that savings do not materialize from
these efforts, Allegiance will be obligated to reimburse the customer for a
portion of the shortfall." Please disclose whether the Company has estimated
and recorded a liability for its potential obligation under the
shared-risk/shared-savings programs.
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COMPANY RESPONSE
Savings commitments are reviewed and monitored for the
shared-risk/shared-savings agreements quarterly. Based upon current sales
levels and estimated supply and related cost savings, Allegiance does not
believe that it currently has any probable obligations under these agreements
and, therefore, no such liability has been recorded in the financial
statements.
STAFF COMMENT
5. The staff notes the response to comment 25. The introduction to the pro
forma information, and the pro forma information itself, if necessary, should
be revised to present the Statements of Income as if the transaction was
consummated as of January 1, 1995. Please revise.
COMPANY RESPONSE
The introduction has been so revised.
STAFF COMMENT
6. Refer to adjustment (a) on page 36. Since the proceeds will be used for
the repayment of approximately $1 billion of intercompany notes, it appears
to the staff that the intercompany notes should be classified as liabilities
(i.e. not as part of equity) in the historical financial statements.
COMPANY RESPONSE
The $1 billion of intercompany notes referred to in footnote (a) did not
exist as a liability of Allegiance as of the June 30, 1996. The liability is
the mechanism by which Allegiance will transfer cash to Baxter for the
retirement of Baxter's third party debt. Consequently, management believes
that this transfer of cash to Baxter is appropriately classified as a
reduction in "Investment by and advances from Baxter International Inc." and
accurately reflects Allegiance's pro forma equity as $1.4 billion at June 30,
1996. We know of no requirement to adjust the historical financial
statements to reflect this distribution to Baxter.
STAFF COMMENT
7. Refer to adjustment (b) on page 36. It is unclear to the staff how the
adjustment of $1,346 million was calculated and why the full amount is
included in retained earnings. Please advise or revise.
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COMPANY RESPONSE
After distributing the $1.16 billion to Baxter for the retirement of Baxter's
third party debt as discussed above, Allegiance's pro forma equity at June
30, 1996 is $1.4 billion. Assuming a distribution of approximately 54
million shares of $1 par value common stock, $54 million was reclassified
from "Investments by and advances from Baxter International Inc." to "Common
stock" and the remaining $1,346 was reclassified to retained earnings. Upon
reviewing the historical activity of Allegiance, it was determined that the
Allegiance businesses generated earnings in excess of $1,346 million and,
therefore, the full amount should be properly classified as retained earnings.
MANAGEMENT'S DISCUSSION AND ANALYSIS, PAGES 38-45
STAFF COMMENT
8. Reference is made to the discussion of Pretax Income on page 41. Please
revise the first full paragraph to discuss the first six months of 1996
instead of only the first quarter of 1996.
COMPANY RESPONSE
The paragraph has been so revised.
STAFF COMMENT
9. Refer to the third full paragraph on page 42. Please advise the staff
supplementally in more detail of the Company's basis in GAAP for the possible
change from Baxter's current undiscounted cash flow methodology to one based
upon fair value.
COMPANY RESPONSE
Baxter's stated policy is to amortize goodwill on a straight-line basis over
estimated useful lives not exceeding 40 years. The recoverability of the
goodwill is assessed based on the projected undiscounted operating cash flows
of the related businesses. As subsidiaries of Baxter, the businesses that
now comprise Allegiance Corporation, have appropriately followed the
accounting policies established by Baxter for its consolidated group.
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Allegiance management believes that the market value of Allegiance,
subsequent to the Distribution, could be substantially below its book value.
Since market prices in an active market are generally considered to be an
objective and relevant measure of an asset's fair value, management is
evaluating its accounting policy for assessment of recoverability of goodwill
under Accounting Principles Board Opinion No. 17 (APB 17) to ensure that its
present policy remains appropriate for Allegiance as a separate,
publicly-traded company. APB 17 paragraph 31, as amended by Statement of
Financial Accounting Standards No. 121 (FASB Statement No. 121), states that:
"Identifiable intangible assets not covered by FASB Statement No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, and goodwill not identified with assets
subject to an impairment loss should be evaluated as follows. A company
should evaluate the periods of amortization continually to determine
whether later events and circumstances warrant revised estimates of
useful lives....Estimation of value and future benefits of an intangible
asset may indicate that the unamortized cost should be reduced
significantly by a charge to net income."
Since Allegiance management believes that its market value (fair value) could
be substantially less that its book value, the company is considering whether
recognition and measurement of impairment of its goodwill based upon a fair
value methodology represents a more preferable method of accounting.
STAFF COMMENT
10. Please provide a signed, currently dated consent from the independent
auditors in the amendment.
COMPANY RESPONSE
As discussed and agreed in a telephone conference between representatives of
Price Waterhouse LLP and Mary Farrar of the SEC staff on September 6, 1996,
no currently dated consent need be provided with this amendment.
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* * * * *
As previously discussed with the staff, and as indicated in our August 22
letter of response, on September 11, 1996, Allegiance management will begin
road show activities (and, on September 9, 1996, print this revised
preliminary Information Statement for use in connection therewith). September
30, 1996 continues to be the scheduled Distribution Date. Also, we expect
that "when-issued" trading in Allegiance common stock will begin on September
23, 1996. Accordingly, management respectfully requests an SEC effectiveness
order related to the Form 10 as of the close of business on September 20,
1996.
Please feel free to contact Patrick Fitzsimmons, telephone 847.948.3781, or
in his absence, me at 847.689.6812 with any questions or requests for
additional information.
Sincerely,
/s/ William L. Feather
William L. Feather
Senior Vice President
General Counsel and Secretary
Enclosure
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