UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K -- CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 1, 1996
ALLEGIANCE CORPORATION
(Exact Name of Registrant as Specified in Charter)
Delaware 1-11885 36-4095179
(State or other Commission File (I.R.S. Employer
jurisdiction of Number Identification No.)
incorporation or
organization)
1430 Waukegan Road, McGaw Park 60085
(Address of principal executive offices) (Zip Code)
(847) 689-8410
Registrant's telephone number, including area code
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
Item 5. Other Events.
On November 1, 1996, Registrant announced the approval of a change in its
accounting policy for assessing goodwill impairment as described in the attached
press release (Exhibit 99.1), form of subsequent event footnote for Form 10-Q
(Exhibit 99.2) and letter from Price Waterhouse L.L.P. (Exhibit 99.3).
Item 7. Financial Statements and Exhibits.
(c) Exhibits
Exhibit Number Description
99.1 Press release dated November 1, 1996
1996 issued by the registrant
99.2 Form of subsequent event footnote for Form 10-Q
99.3 Price Waterhouse L.L.P. letter
SIGNATURES
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.
ALLEGIANCE CORPORATION
By: /s/ William L. Feather
William L. Feather
Secretary
Date: November 1, 1996
Exhibit 99.1
FOR IMMEDIATE RELEASE
Media contact: Geoffrey D. Fenton, (847) 578-4432
Investor contact: Jessica M. Fisher, (847) 578-4405
ALLEGIANCE CHANGES ACCOUNTING POLICY FOR GOODWILL
- - - - -
RECORDS NON-CASH CHARGE IN FOURTH QUARTER
McGAW PARK, Ill., November 1, 1996 -- Allegiance Corporation (NYSE: AEH), the
health-care products and cost-management services company that spun off from
Baxter International on October 1, said today it has changed its method of
assessing goodwill impairment. The decision, which the company s board approved
yesterday, will result in a non-cash charge of $550 million in the fourth
quarter.
Allegiance had approximately $1.1 billion of goodwill as of September 30,
1996. The company said the accounting change and resulting write-down of
goodwill will reduce amortization expenses by $4.7 million in the 1996 fourth
quarter and by $18.9 million annually. The change will increase the company s
annual net income by the same amount $18.9 million, or 34 cents per share.
Previously as a part of Baxter, Allegiance used an accounting method for
assessing goodwill impairment based on projected, undiscounted cash flows.
Allegiance s newly adopted policy accounts for goodwill based on a fair-value
method. For Allegiance s businesses, this method is preferred, the company
said.
Through its operating subsidiaries, Allegiance Corporation is America s
largest provider of health-care products and cost-management services needed by
hospitals, laboratories and others in health care. The company manufactures
many of the products it markets, while others come from leading health and
medical companies around the world. Allegiance also provides a range of
integrated services such as clinical consulting, procedure-based supply
packaging, just-in-time delivery and other services that help medical
professionals control costs and improve quality in patient care. Allegiance
reported 1995 pro forma sales of more than $4.5 billion.
# # #
Exhibit 99.2
ALLEGIANCE CORPORATION
FINANCIAL STATEMENT FOOTNOTE FOR FORM 10-Q
DRAFT
Subsequent Event - Goodwill Write-down
Allegiance Corporation became an independent public company on October 1, 1996
when it spun off from Baxter International Inc.
As part of Baxter, Allegiance followed the accounting policies established by
Baxter for its consolidated group. At September 30, 1996, goodwill, net of
accumulated amortization, was approximately $1,060 million. Baxter s policy was
to evaluate the overall recoverability of goodwill using projected undiscounted
cash flows.
Subsequent to the Distribution Date, the market value of Allegiance s stock was
substantially below its historical book value. As a result of this market value
and management s expectations that cost-containment efforts in the health-care
industry will continue to result in intense competitive pressures among health-
care suppliers, management reevaluated its accounting policy regarding goodwill
impairment. On October 31, 1996, the Company s board of directors approved the
adoption of a new policy for assessing goodwill impairment based upon a fair
value approach. The Company believes that fair value is a preferable method to
assess goodwill as it is a more objective indicator of the Company s inherent
value as a separate publicly-traded entity and will be reflective of the
challenges and pressures that continue to be a fundamental part of the U.S.
health-care system.
The change in the method of assessing goodwill impairment will result in a
fourth quarter 1996 charge of $550 million to operations. This change will also
result in a reduction of $18.9 million and $4.7 million of goodwill amortization
expense on an annual and quarterly basis, respectively, for the next twenty-nine
years.
The Company computes fair value based upon the price/earnings ( P/E ) multiple
for a group of similar companies. This P/E multiple, calculated based on actual
quoted market prices per share and analysts consensus earnings estimates for
these companies, is applied to management s best estimate of earnings for
Allegiance to arrive at an overall fair value of the Company. Management will
continue to utilize the same group of companies in order to determine this
multiple, provided that there are no significant changes in the underlying
characteristics of such companies.
The Company will assess goodwill impairment every quarter based upon the above
methodology. In addition, when evaluating the need to record a charge for
goodwill impairment, the Company will evaluate whether such impairments are of a
temporary or permanent nature, and will record appropriate charges (if any) to
operations for permanent goodwill impairments.
Exhibit 99.3
200 East Randolph Drive Telephone 312-565-1500
Chicago, IL 60601
PRICE WATERHOUSE L.L.P.
October 31, 1996
To the Board of Directors of
Allegiance Corporation
Dear Directors:
We have been furnished with a copy of the Report on Form 8-K of Allegiance
Corporation (the Company) that describes a change in the method of determining
goodwill impairment from the undiscounted cash flow basis to a fair value basis
(the Form 8-K). It should be understood that the preferability of one
acceptable method of goodwill impairment assessment has not been addressed in
any authoritative accounting literature and in arriving at our opinion expressed
below, we have relied on management's business planning and judgment. Based
upon our discussions with management and the stated reasons for the change, we
believe that such change represents, in your circumstances, the adoption of a
preferable alternative accounting principle for goodwill impairment assessment
in conformity with Accounting Principles Board Opinion No. 20.
We have not made any audit in accordance with generally accepted auditing
standards of the financial statements of the Company for any period subsequent
to December 31, 1995 and, accordingly, we express no opinion thereon or on the
financial information filed as part of the Form 8-K of which this letter is to
be an exhibit.
Sincerely,
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
