<PAGE>
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 June 30, 1994
------- 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Baxter Parkway, Deerfield, Illinois 60015-4633
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(Address of principal executive offices) (Zip Code)
(708) 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, $1 par value, outstanding
as of July 29, 1994 the latest practicable date, was 282,420,133 shares.
<PAGE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------
(In millions, except per share data) Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Operations
Net Sales $2,316 $2,215 $4,509 $4,256
Costs and expenses
Cost of goods sold 1,504 1,413 2,937 2,706
Marketing and administrative expenses 459 497 899 932
Research and development expenses 84 85 160 163
Settlement of patent litigation 0 0 0 105
Interest expense 64 55 120 107
Interest income (15) (7) (24) (13)
Goodwill amortization 17 16 34 33
Other 14 (14) 20 (2)
- - ---------------------------------------------------------------------------------------------------------
Total costs and expenses 2,127 2,045 4,146 4,031
- - ---------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of accounting changes 189 170 363 225
Income tax expense 45 38 88 36
- - ---------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting
changes 144 132 275 189
Cumulative effect of changes in accounting
principles, net of income taxes 0 0 0 70
- - ---------------------------------------------------------------------------------------------------------
Net income $144 $132 $275 $259
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
Earnings per common share
Operations $0.52 $0.48 $0.99 $0.68
Cumulative effect of changes in accounting
principles 0.00 0.00 0.00 0.25
- - ---------------------------------------------------------------------------------------------------------
Net income $0.52 $0.48 $0.99 $0.93
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
Average number of common shares outstanding 278 277 278 278
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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Baxter International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------
(In millions, except shares) June 30, December 31,
1994 1993
(Unaudited)
<S> <C> <C>
Current assets Cash and equivalents $ 296 $ 479
Accounts receivable 1,508 1,594
Notes and other current
receivables 183 82
Inventories 1,788 1,772
Other 517 495
-------------------------------------------------------------------------------------
Total current assets 4,292 4,422
- - ---------------------------------------------------------------------------------------------------------
Property, At cost 4,629 4,491
plant and Accumulated depreciation
equipment and amortization (1,984) (1,836)
-------------------------------------------------------------------------------------
Net property, plant and equipment 2,645 2,655
- - ---------------------------------------------------------------------------------------------------------
Other assets Goodwill and other intangibles 2,468 2,490
Non-current receivables 188 180
Insurance receivables 429 509
Investments in affiliates 146 180
Other 113 109
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Total other assets 3,344 3,468
- - ---------------------------------------------------------------------------------------------------------
Total assets $10,281 $10,545
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
Current
liabilities Short-term debt $ 643 $ 822
Accounts payable and other
current liabilities 2,148 2,111
-------------------------------------------------------------------------------------
Total current liabilities 2,791 2,933
- - ---------------------------------------------------------------------------------------------------------
Long-term debt and lease obligations 2,565 2,800
- - ---------------------------------------------------------------------------------------------------------
Long-term deferred income taxes 238 201
- - ---------------------------------------------------------------------------------------------------------
Long-term litigation liabilities 441 674
- - ---------------------------------------------------------------------------------------------------------
Other non-current liabilities 743 752
- - ---------------------------------------------------------------------------------------------------------
Stockholders' Common stock, $1 par value,
equity authorized 350,000,000 shares,
issued 287,701,247 shares in
1994 and 1993 288 288
Additional contributed capital 1,830 1,883
Retained earnings 1,588 1,452
Common stock in treasury, at cost,
5,514,929 shares in 1994 and
11,187,278 shares in 1993 (149) (350)
Foreign currency adjustment (54) (88)
-------------------------------------------------------------------------------------
Total stockholders' equity 3,503 3,185
- - ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $10,281 $10,545
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------
Six months ended June 30, (in millions) 1994 1993
(Brackets denote cash outflows)
<S> <C> <C>
Cash flow provided Income before cumulative effect
by operations of accounting changes $275 $189
Adjustments
Depreciation and amortization 254 239
Deferred income taxes 41 38
Asset dispositions, net (pre-tax) (30) (38)
Other 20 57
Changes in balance sheet items
Accounts receivable 74 79
Inventories (15) (105)
Accounts payable and other
accrued liabilities (160) (124)
Restructuring program payments (47) (12)
Other (32) (33)
-------------------------------------------------------------------------------------
Cash flow provided by operations 380 290
- - ---------------------------------------------------------------------------------------------------------
Investment Capital expenditures (1) (189) (237)
transactions Acquisitions (net of cash received)
and investments in affiliates (52) (78)
Proceeds from asset dispositions 92 69
-------------------------------------------------------------------------------------
Investment transactions, net (149) (246)
- - ---------------------------------------------------------------------------------------------------------
Financing Issuances of debt and lease
transactions obligations 1,107 944
Redemption of debt and lease
obligations (1,188) (531)
Increase (decrease) in debt with maturities
of three months or less, net (343) 157
Stock issued under Shared
Investment Plan 121 0
Common stock dividends (139) (139)
Common stock issued under employee
benefit plans 26 29
Purchase of treasury stock 0 (96)
-------------------------------------------------------------------------------------
Financing transactions, net (416) 364
- - ---------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash
and equivalents 2 (11)
- - ---------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents (183) 397
Cash and equivalents at beginning of period 479 32
- - ---------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $296 $429
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(1) Includes additions to the pool of equipment leased or rented to customers.
<PAGE>
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Baxter International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 consolidated
financial statements should be read in conjunction with the condensed
consolidated financial statements and notes included in the Company's 1993
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. The results of operations for the interim period are not
necessarily indicative of the results of operations to be expected for the full
year.
INVENTORIES
Inventories consisted of the following (in millions):
June 30, December 31,
1994 1993
(Unaudited)
Raw materials $ 243 $ 238
Work in process 229 221
Finished products 1,316 1,313
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Total inventories $1,788 $1,772
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LEGAL PROCEEDINGS
Please refer to "Part II - Item 1. Legal Proceedings" which begins on page 15 of
this document for the status of cases and claims from individuals seeking
damages for injuries allegedly caused by silicone gel-filled mammary prostheses
manufactured by a division of American Hospital Supply Corporation. That section
also discusses the status of lawsuits and claims involving individuals suffering
with hemophilia, seeking damages for injuries allegedly caused by anti-
hemophilic factor VIII and IX concentrates derived from human blood plasma
processed and sold by the Company and other commercial producers.
<PAGE>
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Item. 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company's 1993 Annual Report to Stockholders ("ARS") contains management's
discussion and analysis of financial condition and results of operations at and
for the year ended December 31, 1993. In the ARS, management outlined its key
financial objectives in 1994 which are summarized as follows:
- - - Improve operational cash flows to $450 million in 1994 thereby allowing the
Company to remain debt-neutral in 1994, after payment of dividends and all
financing costs;
- - - Grow sales and net earnings in the high single digit percentage range;
- - - Hold operating expenses flat for 1994 and 1995 and position Baxter to
further reduce its expense ratio in the years beyond 1995;
- - - Reduce the Company's net debt to net capital ratio from approximately 50%
at the end of 1993 to the mid 40's by the end of 1994, before considering
the use of any proceeds from the divestiture of the Diagnostics
manufacturing businesses; and
- - - Complete the divestiture of Baxter's Diagnostics manufacturing businesses.
The following discussion and analysis describes management's progress toward the
above objectives and material changes in the Company's financial condition since
December 31, 1993. Trends of a material nature are discussed to the extent known
and considered relevant. The analysis of results compares the three months and
six months ended June 30, 1994 with the corresponding periods of 1993.
RESULTS OF OPERATIONS
Second quarter net sales increased 5% to $2.3 billion and net sales for the six
months ended June 30, 1994 increased 6% to $4.5 billion. The following table
shows net sales for each industry segment (unaudited):
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------
(in millions) Three months ended Six months ended
June 30, Percent June 30, Percent
1994 1993 Increase 1994 1993 Increase
<S> <C> <C> <C> <C> <C> <C>
Medical specialties $892 $822 9% $1,685 $1,564 8%
Medical/laboratory products and
distribution 1,424 1,393 2% 2,824 2,692 5%
- - -----------------------------------------------------------------------------------------------------
Total net sales $2,316 $2,215 5% $4,509 $4,256 6%
- - -----------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------
</TABLE>
Domestic sales for the second quarter of 1994 were approximately $1.7 billion,
an increase of 4% over the comparable period in 1993. Domestic sales for the
six months ended June 30, 1994 were approximately $3.3 billion, an increase of
6% over the comparable 1993 period. Sales from international markets in the
second quarter were $663 million, representing a 7% increase over 1993, while
international sales in the six month period rose 6% to a level of $1.2 billion.
International sales growth in local currency was approximately 9% for both the
second quarter and six months ended June 30, 1994. Sales growth in the medical
specialties segment was strong for both the
<PAGE>
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quarter and six month periods although sales were adversely impacted by weaker
foreign currency exchange rates. Sales in the medical/laboratory products and
distribution segment slowed slightly to a 2% increase for the quarter ended
June 30, 1994, primarily reflecting the continuing impact of decreased surgical
hospital procedures in the United States, hospital cost containment programs,
the flattening of year over year growth comparisons of major distributed sales
alliances launched in 1993 and the decline in sales of diagnostics products as
a result of reduced capital purchases by hospitals.
The gross profit rate was 35.1% for the quarter ended June 30, 1994, versus
36.2% for the prior year and was 34.9% for the six months ended June 30, 1994,
versus 36.4% for the similar period of 1993. These declines reflect pricing
pressures on certain product lines, a heavier mix of lower-margin distributed
products, and the voluntary market withdrawal of Gammagard-R- IGIV, an immune
globulin intravenous product. In the second quarter of 1994, a new product,
Gammagard-R- S/D was licensed for sale in the United States and Germany. This
product was previously approved for sale in Sweden, Finland, Iceland, Holland
and the United Kingdom. This product is the second generation of Gammagard-R-
IGIV. Gammagard-R- S/D is treated with a solvent and two detergents known to
inactivate viruses such as hepatitis B, hepatitis C and HIV.
Savings in marketing and administrative expenses continue to offset the gross
margin erosion. Marketing and administrative expenses as a percent of sales
were 19.8% and 19.9% for the quarter and six months ended June 30, 1994, versus
22.4% and 21.9% for the similar periods in 1993. This decrease reflects improved
expense leveraging as a result of initiatives taken in connection with the 1993
downsizing and restructuring programs. As mentioned above, the company expects
to hold marketing and administrative expenses flat for the next two years and to
further reduce the expense ratio over the next five years. The second quarter of
1993 included a $40 million charge taken to provide for staff reductions
primarily in the Company's hospital businesses. This charge was taken as part of
ongoing efforts to reduce marketing and administrative expenses and drive more
efficiencies through re-engineering of the administrative and field support
operations. This charge was substantially offset by the gain from the sale of a
minor business unit discussed below.
The following table shows research and development expenses for each industry
segment (unaudited):
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------
(in millions) Three months ended Percent Six months ended Percent
June 30, Increase June 30, Increase
1994 1993 (Decrease) 1994 1993 (Decrease)
<S> <C> <C> <C> <C> <C> <C>
Medical specialties $63 $60 5% $119 $111 7%
Medical/laboratory products and
distribution 21 25 (16%) 41 52 (21%)
- - -----------------------------------------------------------------------------------------------------
Total research and development
expenses $84 $85 (1%) $160 $163 (2%)
- - -----------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------
</TABLE>
The Company's research and development expenses ("R&D") decreased 1% to $84
million and decreased 2% to $160 million for the three and six months ended June
30, 1994, respectively, as compared to the similar periods of 1993, primarily as
a result of the Company's strategic review of research and development
initiatives. R&D expenses have increased in the medical specialties segment as
the company continues to increase its investment in high-growth, strategic
initiatives such as kidney transplants, Novacor and Blood Substitutes. The
decrease in R&D spending in the
<PAGE>
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medical/laboratory products and distribution segment is related to the
rationalization of projects being performed in the diagnostics businesses.
The operating results for the first half of 1993 included the effect of a
worldwide settlement of patent litigation with Scripps Research Institute and
Rhone-Poulenc Rorer, Inc. ("Rorer"), which required Baxter to pay $105 million
to Rorer, and reduced earnings per share by $.23.
Interest expense increased $9 million to $64 million and increased $13 million
to $120 million for the three and six months ended June 30, 1994, respectively,
as compared to the similar periods ended June 30, 1993, as a result of higher
interest rates and higher average debt levels.
Interest income increased $8 million to $15 million and increased $11 million to
$24 million for the three and six months ended June 30, 1994, respectively, as
compared to the similar periods ended June 30, 1993, as a result of higher
interest rates and additional investments.
Other costs and expenses includes approximately $17 million and $30 million for
the three and six months ended June 30, 1994 (as compared to $35 million and $38
million in the similar periods of 1993), in net gains associated with the
disposal or discontinuance of minor, non-strategic business and investments.
Income before income taxes was $189 million and $363 million for the three and
six months ended June 30, 1994 versus $170 million and $225 million for the
comparable periods of 1993. The following table shows income before income taxes
for each industry segment (unaudited):
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------
(in millions) Three months ended Percent Six months ended
June 30, Increase June 30, Percent
1994 1993 (Decrease) 1994 1993 Increase
<S> <C> <C> <C> <C> <C> <C>
Medical specialties $145 $150 (3%) $276 $192 44%
Medical/laboratory products and
distribution 120 93 29% 234 186 26%
General corporate and other (27) (25) (51) (59)
Interest - net (49) (48) (96) (94)
- - -----------------------------------------------------------------------------------------------------
Total income before income taxes $189 $170 11% $363 $225 61%
- - -----------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------
</TABLE>
The decrease in pretax income in the medical specialties segment for the quarter
ended June 30, 1994 is primarily due to the decrease in sales of Gammagard-R-
IGIV and related rework costs related to the voluntary market withdrawal
discussed above. The increase in pretax income in the medical specialties
segment for the six month period is primarily due to the reduction in the 1993
operating results for this segment as a result of the $105 million settlement of
the patent litigation described above. The medical specialties segment was also
adversely impacted in 1994 by weaker foreign currency exchange rates. The
medical/laboratory products and distribution segment's income before income
taxes increased 29% and 26% for the second quarter and six months ended June 30,
1994, respectively, as compared to the similar periods of 1993 as a result of
the benefits of cost containment measures implemented throughout 1993 and the
first half of 1994, a decrease in the level of net gains of divestitures in 1994
offset by the $40 million of downsizing costs incurred in the second quarter of
1993. The net decrease in costs in general corporate and other for the six month
period primarily reflects the effect of net gains associated with the disposal
or discontinuance of minor, non-strategic business investments.
<PAGE>
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The effective tax rate was 23.8% and 24.2% for the three and six months ended
June 30, 1994, versus 22.4% and 23.6% (excluding the tax effects from the patent
litigation settlement described above) for the similar periods of 1993. These
increases are primarily due to a larger proportion of earnings generated in
higher-tax jurisdictions during 1994.
Net income increased 9% to $144 million for the quarter ended June 30, 1994, as
compared to the prior year. Earnings per share increased 8% to 52 cents for the
similar period, reflecting the impact of shares issued to Senior Management
("Shared Investment Plan") which is discussed later.
Income before cumulative effect of accounting changes was $275 million for the
six months of 1994 versus $189 million in the comparable period of 1993.
Earnings per common share from operations increased from 68 cents to 99 cents.
As described above, the settlement of patent litigation reduced earnings per
share in 1993 by 23 cents. Earnings per share from operations, excluding the
settlement of patent litigation in 1993, increased 9% from the prior year. This
increase in 1994 reflects general growth in the Company's operations and
improved expense control.
The 1993 benefit for the cumulative effect of adopting FASB Statement No. 109,
"Accounting for Income Taxes" was $81 million, or 29 cents per common share.
This Statement was adopted on January 1, 1993. The 1993 charge for the
cumulative effect of adopting FASB Statement No.112, "Accounting for
Postemployment Benefits" was $11 million (net of $7 million in income tax
benefits) or 4 cents per common share. Statement No. 112 was adopted during the
fourth quarter of 1993, retroactive to January 1, 1993.
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.
Cash flow provided by continuing operations (which includes working capital
components) increased to $380 million from a level of $290 million for the six
months ended June 30, 1994. This increase primarily reflects the increase in
income. At $47 million for the first half of 1994, the restructuring program
payments are in line with the Company's plan. Management believes that this
level of cash flow is sufficient to support normal ongoing business
requirements.
As a result of the Company's increased emphasis on cash flow, management
introduced a new internal performance measure called "operational cash flow"
which evaluates each operating business on all aspects of cash flow under their
direct control. Management's objective in 1994 is to generate operational cash
flow of at least $450 million (after the payment of restructuring costs planned
in 1994) compared to $292 million in operational cash flow in 1993. In addition,
the incentive compensation programs for the Company's senior management in each
business have been modified to include significant emphasis on the attainment of
both operational cash flow as well as earnings objectives.
<PAGE>
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The following table reconciles cash flow provided by continuing operations, as
determined by generally accepted accounting principles, to the Company's
internal measure of operational cash flow (unaudited):
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------
(in millions) (Brackets denote cash outflows) Six Months Ended
June 30,
1994 1993
<S> <C> <C>
Cash flow provided by operations per the Company's
condensed consolidated statements of cash flows $380 $290
Capital expenditures (189) (237)
Net interest after tax 57 56
Other 44 15
- - ----------------------------------------------------------------------------------------------------
Total operational cash flow $292 $124
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
</TABLE>
Operational cash flow of $292 million for the second quarter of 1994 is
consistent with the Company's internal projections and is in line to achieve at
least $450 million for the year.
Investment transactions for the six months ended June 30, 1994 totaled $149
million (compared to the $246 million expended in the similar period of 1993),
and included $189 million in capital expenditures and additions to the pool of
equipment leased or rented to customers, $52 million for the acquisition of
minor businesses and investment positions for the purpose of acquiring
technologies, broadening product lines or expanding market coverage and $92
million in proceeds from the disposal or discontinuance of minor, non-strategic
business units and investments.
The following table shows capital expenditures for each industry segment
(unaudited):
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------
(in millions) Six months ended Percent
June 30, Increase
1994 1993 (Decrease)
<S> <C> <C> <C>
Medical specialties $109 $ 94 16%
Medical/laboratory products and distribution 76 119 (36%)
General corporate 4 24 (83%)
- - ---------------------------------------------------------------------------------------------------
Total capital expenditures $189 $237 (20%)
- - ---------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------
</TABLE>
Capital expenditures in the medical specialties segment represented 58% and 40%
of total company capital expenditures during the periods ended June 30, 1994 and
1993, respectively. In comparison, capital expenditures in the medical/
laboratory products and distribution segment represented 40% and 50% of total
Company capital expenditures during the periods ended June 30, 1994 and 1993,
respectively. This shift is consistent with the company's strategy to increase
its investment in its higher growth medical specialties businesses. The Company
has made significant investments in recent years in its U.S. Distribution and
manufacturing infrastructure. As a consequence, the level of capital
expenditures in the medical/laboratory products and distribution segment will
decline as compared to 1993 levels. Incremental capital investments are being
made in the medical specialties segment primarily for the expansion of
manufacturing capacity for renal products.
<PAGE>
- 11 -
In connection with a newly implemented Shared Investment Plan, the Company
received $121 million in cash from 63 members of Baxter's senior management team
who collectively purchased 4.7 million shares of the Company's common stock.
This Plan more directly aligns management and shareholder interests. Under terms
of the voluntary program, Baxter managers used personal full-recourse loans to
exercise options to purchase stock at the June 15, 1994 closing price of $26.
The loans, borrowed from several commercial banks, are the personal obligations
of the participants. Baxter has agreed to unconditionally guaranty the loans in
case of default.
The Company's current assets exceeded current liabilities by $1.5 billion at
June 30, 1994 and at December 31, 1993. Current assets included receivables of
$1.7 billion and inventories of $1.8 billion. These sources of liquidity are
convertible into cash over a relatively short period of time and thus, will help
the Company satisfy normal operating cash requirements.
Short-term debt decreased from $822 million to $643 million and long-term debt
decreased from $2,800 million to $2,565 million at June 30, 1994. Net debt
(after consideration of cash equivalents) declined by $231 million since the
beginning of the year after paying $139 million in dividends. At June 30, 1994,
the Company's net debt to net capital ratio was 45.4% versus 49.7% at year-end
1993, a decrease of 4.3%. The Company intends to utilize the net proceeds from
the planned divestiture of the diagnostics-products manufacturing and other non-
strategic businesses to reduce net debt, and thus, anticipates that its net debt
to net capital ratio will decline during the balance of 1994, with the goal of
reaching the 40% range in the years ahead.
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.
Notes and other current receivables increased and insurance receivables
(included in the Other Asset category on the Balance Sheet) decreased primarily
due to the reclassification of insurance receivables from long-term to current
to reflect payments expected to be received within one year.
The decrease in long-term litigation liabilities is primarily due to the
reclassifications to current liabilities of payments expected to be made within
one year.
The decrease in common stock in treasury is due to the issuance of 4.7 million
shares under the Shared Investment Plan, discussed earlier.
Refer to "Part II - Item 1. Legal Proceedings" which begins on page 15 of this
document for the status of cases and claims from individuals seeking damages for
injuries allegedly caused by silicone gel-filled mammary prostheses manufactured
by a division of American Hospital Supply Corporation. That section also
discusses the status of lawsuits and claims involving individuals suffering with
hemophilia, seeking damages for injuries allegedly caused by anti-hemophilic
factor VIII and IX concentrates derived from human blood plasma processed and
sold by the Company and other commercial producers.
Upon resolution of any of the uncertainties described in "Part II - Item 1.
Legal Proceedings", the Company may incur charges in excess of presently
established reserves. While such
<PAGE>
- 12 -
future charges could have a material adverse impact on the Company's net income
in the period in which it is recorded, management believes that any outcome of
these actions will not have a material adverse effect on the Company's
consolidated financial position.
The Company believes it has lines of credit adequate to support ongoing business
operations and has sufficient financial flexibility to attract long-term capital
on satisfactory terms to support its obligations and growth objectives.
<PAGE>
- 13 -
REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
A review of the interim consolidated financial information included in this
Quarterly Report on Form 10-Q for the three months and six months ended June 30,
1994 has been performed by Price Waterhouse, the Company's independent public
accountants. Their report on the interim consolidated financial information
follows. There have been no adjustments or disclosures proposed by Price
Waterhouse which have not been reflected in the interim 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.
<PAGE>
- 14 -
REPORT OF INDEPENDENT ACCOUNTANTS
August 9, 1994
Board of Directors and Stockholders
Baxter International Inc.
We have reviewed the accompanying condensed consolidated balance sheet and the
related condensed consolidated statements of income and condensed consolidated
statements of cash flows of Baxter International Inc. and its subsidiaries as of
June 30, 1994 and for the three-month and six-month periods ended June 30, 1994
and 1993. 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, 1993, 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,
1994 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, 1993, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
Price Waterhouse
<PAGE>
- 15 -
PART II. OTHER INFORMATION
Baxter International Inc. and Subsidiaries
Item 1. Legal Proceedings
As of June 30, 1994, the Company was a defendant, together with other
defendants, in 5,153 lawsuits and had 1,772 pending claims from individuals, all
of which seek damages for injuries allegedly caused by silicone mammary
prostheses ("mammary implants") manufactured by the American Heyer-Schulte
division of American Hospital Supply Corporation ("American"). The Company's
responsibility for mammary implants results from the American Heyer-Schulte
division of American which manufactured these products from 1974 until 1984, at
which time the products and related assets were sold to Mentor Corporation.
American retained the product liability responsibility for products sold before
the divestiture, and that responsibility was assumed by a subsidiary of the
Company as part of its 1985 acquisition of American. The Company has never
manufactured this product nor does it have any of the product in its inventory.
The typical case or claim alleges that the individual's mammary implants caused
one or more of a wide range of ailments, including non-specific autoimmune
disease, scleroderma, lupus, rheumatoid arthritis, fibromyalgia, mixed
connective tissue disease, Sjogren's Syndrome, dermatomyositis, polymyositis,
and chronic fatigue. The comparable number of cases and claims was 137 as of
December 31, 1991; 1,612 as of December 31, 1992; 4,870 as of December 31, 1993;
and 6,206 as of March 31, 1994. In 1991, 76 cases and claims were disposed of;
in 1992, 309 cases and claims were disposed of; in 1993, 634 cases and claims
were disposed of; and in the first and second quarters of 1994, 211 cases and
claims were disposed of.
In addition to the individual suits against the Company, a class action on
behalf of all women with mammary implants filed against all manufacturers of
such implants has been conditionally certified and is pending in the United
States District Court for the Northern District of Alabama (DANTE, ET AL., V.
DOW CORNING, ET AL., U.S.D.C., N. Dist., Ala., 92-2589; part of IN RE: SILICONE
GEL BREAST IMPLANT PRODUCT LIABILITY LITIGATION, U.S.D.C., N. Dist. Ala., MDL
926, (U.S.D.C., N. Dist. Ala., CV 92-P-10000-S)). Another class action has been
certified and is pending in state court in Louisiana (SPITZFADDEN, ET AL., V.
DOW CORNING CORP., ET AL., Dist. Ct., Parish of Orleans, 92-2589). Baxter also
has been named in three purported additional class actions, none of which is
currently certified. (BARCELLONA, ET AL., V. DOW CORNING, ET AL., U.S.D.C.,
Mich., 9300 72045 DT and MOSS, ET AL., V. DOW CORNING, ET AL., U.S.D.C., Minn.,
92-P-10560-S, both of which have been transferred to and are part of IN RE:
SILICONE GEL BREAST IMPLANT PRODUCT LIABILITY LITIGATION, U.S.D.C., N. Dist.
Ala., MDL-926 for discovery purposes, and DOE, ET AL., V. INAMED CORPORATION, ET
AL., Circuit Ct., Dade County, Fla., 92-07034.) A suit seeking class
certification on behalf of all residents of the Province of Ontario, Canada, who
received Heyer-Schulte implants has also been filed (BURKE, V. AMERICAN HEYER-
SCHULTE, ET AL., Ontario Prov. Court, Gen. Div., 15981/93.)
Additionally, the Company has been served with a purported class action brought
on behalf of children allegedly exposed to silicone in utero and through breast
milk. (FEUER, ET AL., V. McGHAN, ET AL., U.S.D.C., E. Dist. N.Y., 93-0146.) The
suit names all mammary implant manufacturers as defendants and seeks to
establish a medical monitoring fund.
These implant cases and claims generally 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
<PAGE>
- 16 -
differences in applicable law. Many of the cases and claims are at very
preliminary stages, and the Company has not been able to obtain information
sufficient to evaluate each case and claim.
There also are issues concerning which of the Company's insurers is 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 the
liability and defense costs related to mammary implant cases and claims will be
covered by insurance, subject to self-insurance retentions, exclusions,
conditions, coverage gaps, policy limits and insurer solvency. Most of the
Company's insurers have 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 has been, and will
continue to be, engaged in active negotiations with its insurers concerning
coverages and the settlement described below. Also, some of the mammary implant
cases pending against the Company seek punitive damages and compensatory damages
arising out of alleged intentional torts. Depending on policy language,
applicable law, and agreements with insurers, the damages awarded pursuant to
such claims may or may not be covered, in whole or in part, by insurance. On
February 7, 1994, the Company filed suit against all of the insurance companies
which issued product liability policies to American, American Heyer-Schulte and
Baxter for a declaratory judgment that: the policies cover each year of injury
or claim, the Company may choose among multiple coverages; coverage begins with
the date of implant; and legal fees and punitive damages are covered.
Subsequently, certain of the Company's product liability insurance carriers
filed suit against the Company and all of its other carriers for a declaratory
judgment to define various terms in the Company's insurance policies, the extent
of the Company's coverage, the date of the occurrences giving rise to coverage,
and the relative liabilities of the various insurance carriers involved.
Representatives of the plaintiffs and certain defendants in these cases have
negotiated a global settlement of the issues under the jurisdiction of the Court
in the DANTE V. DOW CORNING, ET AL. case (now known as LINDSAY, ET. AL. V. DOW
CORNING, ET. AL.). The monetary provisions of the settlement providing
compensation for all present and future plaintiffs and claimants based on a
series of specific funds and scheduled medical conditions have been agreed upon
by most of the significant defendants and representatives of the plaintiffs. The
total of all of the specific funds, which would be paid-in and made available
over approximately thirty years following final approval of the settlement by
the Courts, is capped at $4.75 billion. The settling defendants have agreed to
fund $4.255 billion of this amount. The Company's share of this settlement has
been established by the settlement negotiations at $556 million. The global
settlement is subject to a series of court proceedings, including a court review
of its fairness, and the opportunity for individual plaintiffs and claimants to
elect to remove themselves from the settlement ("opt-out"). On April 11, 1994,
the court began the process of notifying all potential claimants of the class
action settlement and their rights to opt-out. The initial opt-out period ended
July 1, 1994. As of July 28, 1994, 14,849 individuals have opted out of the
global settlement, of which 4,322 appear to have claims against Baxter. Of the
opt-outs who previously filed claims, inquiries or lawsuits against Baxter,
1,502 represent U.S. claimants, 2,608 represent foreign claimants and 212 are
currently unidentified. The number of opt-outs against Baxter will change as
some claimants elect to rescind their opt-out notice and other opt-outs are
identified as having claims against Baxter. At present, the Company is not able
to estimate the nature and extent of its potential future liability with respect
to opt-outs. The Company believes that most of its potential future liability
with respect to opt-outs is covered by insurance.
<PAGE>
- 17 -
In the fourth quarter of 1993, the Company accrued $556 million for its
estimated liability resulting from the global settlement of the mammary implant
class action and recorded a receivable for estimated insurance recovery of $426
million, resulting in a net charge of $130 million. The reserves for the
settlement do not include any provisions for opt-outs and are in addition to the
general reserves for the mammary implant cases discussed below.
In connection with its acquisition of American, the Company had established
reserves at the time of the merger for product liability, including mammary
implant cases and claims. At June 30, 1994, the reserve allocated to mammary
implant cases and claims was approximately $14 million. This reserve has been
significantly reduced in the past quarter. Based on current information,
management believes that this reserve represents the Company's remaining minimum
net exposure in connection with future mammary implant cases and claims beyond
the effect of the global settlement described above, and that most of such
future claims are covered by the Company's insurance.
Upon resolution of any of the uncertainties concerning these cases, the Company
will ultimately 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 in the period in which it is recorded, management believes that any
outcome of this litigation will not have a material adverse effect on the
Company's consolidated financial position.
As of June 30, 1994, the Company was a defendant, together with other
defendants, in 157 lawsuits, and had one pending claim, in the United States
involving individuals who have hemophilia, or their representatives. Those cases
and claim seek damages for injuries allegedly caused by anti-hemophilic factor
concentrates VIII and IX derived from human blood plasma processed and sold by
the Company. Furthermore, 58 lawsuits seeking damages based on similar
allegations are pending in Ireland, Japan and Germany.
The typical case or claim alleges that the individual with hemophilia was
infected with HIV by infusing Factor VIII or Factor IX concentrates ("Factor
Concentrates") containing HIV. The total number of cases and claims asserted
against the Company as of December 31, 1991, was 16, as of December 31, 1992,
was 52, and as of December 31, 1993, was 178. In 1991, 11 cases and claims were
disposed of; in 1992, 9 cases and claims were disposed of; in 1993, 11 cases and
claims were disposed of; and in the first and second quarters of 1994, 26 cases
and claims were disposed of.
All Federal Court cases have been transferred to the U.S.D.C. for the Northern
District of Illinois for case management under Multi District Litigation (MDL)
rules. In addition to the individual suits against the Company, a purported
class action was filed on September 30, 1993, on behalf of all U.S. residents
with hemophilia (and their families) who were treated with Factor Concentrates
and who allegedly are infected with HIV as a result of the use of such Factor
Concentrates. This lawsuit was filed in the United States District Court for the
Northern District of Illinois (WADLEIGH, ET AL., V. RHONE-POULENC RORER, ET AL.,
U.S.D.C., N. Dist., Ill. 93C 5969). The court has certified the class for
purposes of determining whether the defendants' actions were negligent. Baxter
has also been named in three purported class actions, none of which have been
certified. ALVAREZ V. ARMOUR ET AL., U.S.D.C., 94-0649(E)(4); MARTIN V. RHONE
POULENC ET AL., U.S.D.C., ND CV-94-B-0537 and STANGER V. BAYER ET AL., U.S.D.C.,
AZ CIV-94-392-TUC, all of which will be or have been transferred to the MDL for
discovery purposes.
<PAGE>
- 18 -
Many of the cases and claims are at very preliminary stages, and the Company has
not been able to obtain information sufficient to evaluate each case and claim.
In most states, the Company's potential liability is limited by laws which
provide that the sale of blood or blood derivatives, including Factor
Concentrates, is not the sale of a "good," and thus is not covered by the
doctrine of strict liability. As a result, each claimant will have to prove that
his or her injuries were caused by the Company's negligence. The WADLEIGH case
alleges that the Company was negligent in failing: to use available purification
technology; to promote research and development for product safety; to withdraw
Factor Concentrates once it knew or should have known of viral contamination of
such concentrates; to screen plasma donors properly; to recall contaminated
Factor Concentrates; and to warn of risks known at the time the product was
used. The Company denies these allegations and has filed a challenge to the
class proceedings.
The Company believes that a substantial portion of the liability and defense
costs related to anti-hemophilic factor concentrates cases and claims will be
covered by insurance, subject to self-insurance retentions, exclusions,
conditions, coverage gaps, policy limits and insurer solvency. Most of the
Company's insurers have 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. Zurich Insurance Co., one of the
Company's comprehensive general liability insurance carriers has filed a suit
against the Company seeking a declaratory judgment that the policies it had
issued do not cover the losses that the Company has notified it of for a number
of reasons, including that Factor Concentrates are products, not services, and
are, therefore, excluded from the policy coverage, and that the Company has
failed to comply with various obligations of tender, notice, and the like under
the policies. The Company has filed suit against all of the insurance companies
which issued comprehensive general liability and product liability policies to
the Company for a declaratory judgment that the policies of all the excess
carriers provide coverage. In that suit, the Company also sued Zurich for
failure to defend it and Zurich and Columbia Casualty Company for failure to
indemnify it. Subsequently, the Company's excess product liability insurance
carriers also brought suit for a declaratory judgment as to the parties
respective liabilities.
The Company has notified its insurers concerning coverages and the status of the
cases. Also, some of the anti-hemophilic factor concentrates cases pending
against the Company seek punitive damages and compensatory damages arising out
of alleged intentional torts. Depending on policy language, applicable law and
agreements with insurers, the damages awarded pursuant to such claims may or may
not be covered, in whole or in part, by insurance. Accordingly, the Company is
not currently in a position to estimate the amount of its potential future
recoveries from its insurers, but has estimated its recovery with respect to the
reserves it has established.
The Company is vigorously defending each of the cases and claims against it. At
the same time, the Company will continue to seek ways to resolve pending and
threatened litigation concerning these issues through a negotiated resolution.
Representatives of the plaintiffs and the Company and Rhone-Poulenc Rorer
("RPR") negotiated a tentative settlement of the issues as to them under the
jurisdiction of the court in the WADLEIGH case. The terms of the Memorandum of
Understanding were to be incorporated into a settlement agreement to be filed
with the court. The settlement is currently in question due to the court's
certification of the class action negligence issue. It is unclear whether
settlement will proceed on
<PAGE>
- 19 -
the terms originally reached. The Company and RPR had agreed to fund jointly
$140 to $160 million for the settlement, based on the number of claimants
seeking reimbursement, of which the Company's share was to be 49.2%.
In Canada, the provincial governments created a settlement fund to which all of
the fractionators, including the Company, have contributed. The Company's
contribution to the fund was approximately $3 million. Those Canadian claimants
who availed themselves of this fund signed releases in favor of the Company
against further litigation. The period in which to file a claim against the fund
expired on March 15, 1994.
In the fourth quarter of 1993, the Company accrued $131 million for its
estimated worldwide liability for litigation and settlement expenses involving
anti-hemophilic Factor Concentrate cases, and recorded a receivable for
insurance coverage of $83 million, resulting in a net charge of $48 million. The
expense of the Canadian settlement is and the anticipated expense of the
settlement of the WADLEIGH case was to be covered by this reserve.
Upon resolution of any of the uncertainties concerning these cases, or if the
Company, along with the other defendants, enters into a comprehensive settlement
of the class actions described above, 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 in the period in which it is
recorded, management believes that any outcome of this litigation will not have
a material adverse effect on the Company's consolidated financial position.
On February 21, 1994, the Company began the voluntary withdrawal world-wide of
its Gammagard-R- IGIV (intravenous immune globulin) because of indications that
it might be implicated in Hepatitis C infections occurring in users of the
product. Gammagard is a concetration of antibodies derived from human plasma and
is used to tread immune-suppressed patients. A new immune globulin product,
Gammagard-R- S/D, produced with an additional viral inactivation process was
introduced by the Company after licensure in the United States and certain other
countries.
As of July 8, 1994, the Company had received reports of Hepatitis C transmission
from 133 patients from five countries (U.S., U.K., Spain, Sweden and Germany).
The exact cause for these reports has not been determined; however, all reports
have been associated with Gammagard injection produced from plasma which was
screened for antibodies to the Hepatitis C virus through second generation
testing. The number of patients receiving Gammagard-R- IGIV produced from the
second generation screened plasma is not yet known, nor is the number of
patients claiming exposure to Hepatitis C known.
As of August 5, 1994, two suits resulting from this incident (BORDONARO V.
BAXTER, ET AL., Sup. Ct., MA 94-11454-DPW; and AREFFEEN V. BAXTER, U.S.D.C., MN
4-94 Civil 670), have been served upon the Company. The suits allege infection
with the Hepatitis C virus from the use of Gammagard-R-. The Company is
defending against these cases.
At this time the Company cannot estimate its level of exposure to claims or
lawsuits stemming from the market withdrawal. The Company does not, however, at
this time expect the exposure to have a material adverse effect on the Company's
operations or its consolidated financial condition.
<PAGE>
- 20 -
Most of the individuals who served as directors of American in 1985, including
Mr. Cathcart and Ms. Evans, who currently are directors of the Company, were
defendants in a pending lawsuit filed as a derivative action. LEWIS V. BAYS, ET
AL. was filed on March 23, 1990, in the Circuit Court of Cook County, Illinois.
The plaintiffs allege breach of fiduciary duty claims relating to American's
buyout of an agreement with Hospital Corporation of America ("HCA") in
connection with the Company's merger with American in 1985.
On April 12, 1994, the parties in this case filed a settlement agreement with
the court for approval. The Court entered a preliminary order of fairness, and,
on April 26, 1994, the Company began notifying its stockholders of the
settlement. The settlement order was entered on June 15,1994, and the time for
appeal has expired. The terms of the settlement did not have a material adverse
effect on the Company's results of operations or consolidated financial
position.
Baxter Healthcare Corporation ("BHC") was one of ten defendants named in a
purported class action filed in August, 1993, on behalf of all medical and
dental personnel in the state of California who suffered allergic reactions to
natural rubber latex gloves and other protective equipment or who have been
exposed to natural rubber latex products. (KENNEDY, ET AL., V. BAXTER HEALTHCARE
CORPORATION, ET AL., Sup. Ct., Sacramento Co., Cal., #535632). The case alleges
that users of various natural rubber latex products, including medical gloves
made and sold by BHC and other manufacturers, suffered allergic reactions to the
products ranging from skin irritation to systemic anaphylaxis. The Court granted
defendants' demurrer to the class action allegations. This is currently on
appeal. In April, 1994, a similar purported class action, GREEN, ET AL. V.
BAXTER HEALTHCARE CORPORATION, ET AL., (Cir. Ct., Milwaukee Co., WI) was filed
in Wisconsin against Baxter and three other defendants. The class action
allegations have been withdrawn, but Leave to Amend was granted allowing
additional plaintiffs to be added. The Company will vigorously defend against
these actions. Management believes that the outcome of these matters will not
have a material adverse effect on the Company's results of operations or
consolidated financial position.
All of the individuals who served as directors of the Company as of September 1,
1993, as well as Lester B. Knight, executive vice president of the Company, are
named as defendants in a pending lawsuits ostensibly filed as a "demand excused"
derivative action. SEIGEL V. LOUCKS, ET AL., was filed September 15, 1993, in
the Court of Chancery in New Castle County, Delaware Cir. Ct., New Castle Co.,
Del., Cir. Act #13130. On October 24, 1993, a substantially identical complaint
was filed in the same court by Bartholomew J. Millano. The two complaints have
been consolidated. The plaintiffs allege, among other things, that the directors
failed to oversee management in connection with actions which are the basis for
the dispute between the Company and the DVA which are described above, failed to
prevent such actions, and failed to create a compliance program to prevent or
detect such actions. The complaint seeks to recover alleged damages incurred by
the Company as the result of lost sales due to the proposed debarment discussed
above, as well as the compensation paid to Messrs. Gantz, Knight, Loucks and
Tobin since 1991. The Company and its directors have filed motions to dismiss
the suit, have answered the complaint and have filed a counterclaim seeking to
permanently bar and enjoin the plaintiff from prosecuting this case because her
claims have been disposed of and barred in a prior suit against the Company.
<PAGE>
- 21 -
As of July 1, 1994,the Company has been named as a potentially responsible party
for cleanup costs at 17 hazardous waste sites. The Company was a significant
contributor to waste disposed on only one of these sites, the Thermo-Chem site
in Muskegon, Michigan. The company expects that the total cleanup costs for this
site will be between $37 million and $82 million, of which the Company's share
will be approximately $5 million. This amount has been reserved and reflected in
the Company's financial statements.
In all of the other sites, the Company was a minor contributor and, therefore,
does not have information on the total cleanup costs. The Company has, however,
in most of these cases been advised by the potentially responsible party of its
roughly estimated exposure at these sites. Those estimated exposures total
approximately $5 million. This amount has been reserved and reflected in the
Company's financial statements.
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 the
other claims, investigations and lawsuits individually or in the aggregate, will
have a material adverse effect on the Company's operations or its consolidated
financial condition.
<PAGE>
- 22 -
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) Report on Form 8-K
None
<PAGE>
- 23 -
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: August 10, 1994 By: /s/ Harry M. Jansen Kraemer, Jr.
--------------------------------
Harry M. Jansen Kraemer, Jr.
Senior Vice President and
Chief Financial Officer
<PAGE>
- 24 -
Exhibit Index
NUMBER DESCRIPTION OF EXHIBIT
10.1 1994 Shared Investment Plan
10.2 Terms and Conditions
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
(All other exhibits are inapplicable.)
- - -------------------------------------------------------------------------------
Copies of the above exhibits not contained herein are available at a charge of
35 cents per page upon written request to the Stockholder Services Department,
Baxter International Inc., One Baxter Parkway, Deerfield, IL 60015. Copies are
also available at a charge of at least 25 cents per page from the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street
N.W., Washington, D.C., 20549.
- - -------------------------------------------------------------------------------
<PAGE>
EXHIBIT 10.1
BAXTER INTERNATIONAL INC.
SHARED INVESTMENT PLAN
1. PURPOSE. The Shared Investment Plan ("Plan"), of Baxter International Inc.
("Baxter"), is adopted pursuant to the Baxter International Inc. 1994
Incentive Compensation Program ("1994 Program") to facilitate the immediate
purchase, by the senior managers of Baxter and its subsidiaries
(collectively, the "Company"), of Baxter's common stock, $1.00 par value,
("Common Stock"). The purchases facilitated by the plan are intended to
achieve the following specific purposes:
a) more closely align key employees' financial rewards with the
financial rewards realized by all other holders of the Common
Stock;
b) increase key employees' motivation to manage the Company as
owners; and
c) increase the ownership of Common Stock among key employees of the
Company.
2. ELIGIBILITY. To be eligible to participate in the Plan, the individual
must have been granted an option to purchase a specified number of shares
of Common Stock at a meeting of the Compensation Committee of Baxter's
Board of Directors held on June 15, 1994 ("Stock Option") and, in
connection with the grant of the Stock Option, the individual must be
designated as a member of Group A on Exhibit 1 to the minutes of that
Compensation Committee meeting ("Eligible Employee").
<PAGE>
3. PARTICIPATION. To become a Plan participant ("Participant"), an Eligible
Employee must satisfy the following requirements:
a) submit a completed, signed and irrevocable agreement to exercise
all or a portion of the Stock Option, subject to the terms and
conditions of the Stock Option Plan adopted by the Compensation
Committee on June 15, 1994;
(b) complete and sign all necessary agreements and other documents
relating to the loan described in Section 4 below; and
(c) satisfy all other conditions of participation specified in the
Plan.
The agreements and other documents specified in subsections 3(a), (b) and
(c) must be in such forms and must be submitted at such times and to such
Company offices as specified by the Committee or its designee(s). No
Eligible Employee is required to participate in the Plan.
4. PAYMENT OF EXERCISE PRICE. Each Participant must deliver in cash 100% of
the exercise price of the shares, with respect to which the Stock Option is
exercised ("Purchased Shares"), within five days after the option exercise
date ("Exercise Date"). The Purchased Shares will not be issued to the
Participant until Baxter has received such payment. The payment must be
made at the time, place and manner specified by the Committee or its
designee(s).
Baxter has arranged the opportunity for each Participant to obtain a loan
through a syndicate of banks agented by the First National Bank of Chicago
("Banks") to fund the purchase of the Purchased Shares. Each Participant
must sign a letter of direction which directs all loan proceeds to be paid
directly to Baxter in payment of the Purchased Shares. Each Participant is
responsible for satisfying all
<PAGE>
of the lending requirements specified by the Banks to qualify for the loan.
Each Participant is fully obligated to repay to the Banks all principal,
interest, and any prepayment fees on the loan when due and payable.
5. REGISTRATION OF SHARES. The Purchased Shares will be registered in the
name of the Participant and certificated. Each certificate will bear a
legend referring to the Plan and the agreements between the Participant and
Baxter relating to the Purchased Shares. The certificates for the
Purchased Shares will be held in Baxter's Stockholder Services Department
until all restrictions on the Purchased Shares have lapsed. Each
Participant must deliver to the Stockholder Services Department a stock
power endorsed in blank with respect to the Purchased Shares.
6. STOCKHOLDER RIGHTS. The Purchased Shares will be shares issued from
treasury shares. During the period in which the Purchased Shares are
subject to restrictions on transfer, each Participant will have all of the
rights of a stockholder with respect to the Purchased Shares, including the
right to vote the shares and the right to receive all dividends paid on the
shares. To the extent required by the loan agreements and documents
identified in subsection 3(b), Baxter will be irrevocably directed to
deliver all such dividends directly to the Banks for payment of loan
interest. Any dividends in excess of required interest payments will be
deposited to the Participant's account at the First National Bank of
Chicago.
<PAGE>
7. SALE OF PURCHASED SHARES. Each Participant is permitted to sell all or any
portion of the Purchased Shares, subject to the following restrictions:
a) except in the event of death or disability, termination of
employment as described in Section 10, or a Change in Control (as
defined in the 1994 Program), no Participant may sell any portion
of the Purchased Shares before the first anniversary of the
Exercise Date;
b) no Participant may sell any portion of the Purchased Shares
unless all principal, interest and any prepayment fees due on the
loan contemplated by Section 4 of the Plan have previously been
paid or all proceeds of the sale are simultaneously applied first
to the payment of all such principal, interest and prepayment
fees; and
c) the Committee has the right to impose restrictions on the timing,
amount and form of the sale of the Purchased Shares with respect
to any Participant to the extent it determines that such
restrictions are in the best interests of Baxter. Each
Participant must notify the Stockholder Services Department of
his or her intention to sell the Purchased Shares before such a
sale is implemented. Baxter may elect to allow the Participant
to sell the Purchased Shares in the open market, Baxter may
repurchase the shares, or Baxter may take other actions as it
deems appropriate. If Baxter repurchases the Purchased Shares,
the purchase price will be the average closing sale price of a
share of Common Stock on the New York Stock Exchange Composite
Reporting Tape over the six-day period consisting of the three
trading days before and the three trading days after the
notification to the Stockholder Services Department of the intent
to sell.
<PAGE>
8. RISK SHARING. If the Participant remains employed by Baxter or one of its
subsidiaries until the first anniversary of the Exercise Date, Baxter will
share the loss, if any, which the Participant incurs upon the sale of the
Purchased Shares. The loss will be measured by the difference between the
purchase price of the Purchased Shares and the sale price of the Purchased
Shares. The risk of loss on the Purchased Shares will be allocated as
follows:
a) if any portion of the Purchased Shares is sold before the third
anniversary of the Exercise Date, the Participant
1) is responsible for 100% of the loss on that portion of the
Purchased Shares; and
2) is entitled to receive 50% of the gain on that portion of
the Purchased Shares.
b) if any portion of the Purchased Shares is sold on or after the
third anniversary of the Exercise Date, the Participant
1) is responsible for 50% of the loss on that portion of the
Purchased Shares; and
2) is entitled to receive 100% of the gain on that portion of
the Purchased Shares.
The risk sharing provisions of this Section 8 will apply only to such
Purchased Shares as are sold by the Participant and the proceeds from which
sale are applied to repayment of the loan under Section 4.
<PAGE>
9. DEATH OR DISABILITY. If a Participant's employment with the Company
terminates, at any time while his or her loan under Section 4 is
outstanding, because of the Participant's death or disability, the
Participant (or the Participant's representative in the case of death) may
sell all or any portion of the Purchased Shares subject to the conditions
specified in subsections 7(b) and (c). Upon the death of a Participant,
her or his loan will become immediately due and payable. With respect to
the Purchased Shares sold after the Participant's death or disability and
while his or her loan under Section 4 is outstanding, the Participant is
not responsible for any loss on the sale of the Purchased Shares but is
entitled to receive 100% of the gain on the sale of the Purchased Shares.
This Section 9 has no effect on a deceased or disabled Participant's sale
of Purchased Shares before the Participant's death or disability or after
the Participant's loan under Section 4 has been repaid.
10. EMPLOYMENT TERMINATION BY TRANSACTION. If a Participant's employment with
the Company terminates because of an acquisition, divestiture, merger,
spin-off or similar transaction ("Transaction"), the Participant may sell
all or any portion of the Purchased Shares, subject to the conditions
specified in subsections 7(b) and (c). With respect to the risk sharing
provisions of Section 8, the Participant will be deemed to have remained
employed by Baxter or one of its subsidiaries until the first anniversary
of the Exercise Date (if her or his employment termination date occurs
before the first anniversary of the Exercise Date), without regard to her
or his actual employment termination date. In all other respects, the
Participant whose employment is terminated because of a Transaction will
remain subject to all of the terms and conditions of the Plan.
<PAGE>
11. OTHER EMPLOYMENT TERMINATION. If a Participant's employment with the
Company terminates for any reason other than death or disability, pursuant
to a Transaction, or a Change in Control, the following will apply:
a) if the Participant's employment with the Company terminates
after the first anniversary of the Exercise Date, he or she
will remain subject to all of the terms and conditions of
the Plan, as if his or her employment had not terminated,
including specifically the risk sharing provisions of
Section 8.
b) if the Participant's employment with the Company terminates
before the first anniversary of the Exercise Date, he or she
is:
1) permitted to sell the Purchased Shares subject to the
restrictions specified in the subsections 7(a), (b) and
(c);
2) responsible for 100% of the loss on the sale of the
Purchased Shares; and
3) entitled to receive 50% of the gain on the sale of the
Purchased Shares, and the remaining 50% of the gain
must be paid to Baxter simultaneously with the sale.
12. RISK SHARING IMPLEMENTATION. If a Participant sells any portion of the
Purchased Shares at a loss (as determined by the provisions of Section 8)
while his or her loan under Section 4 is outstanding, and if the
Participant is responsible for less than 100% of that loss under the
provisions of the Plan, Baxter will assume the portion of the loss for
which the Participant is not responsible. Baxter will assume its portion
of the loss by delivering cash equal to such portion ("Risk Sharing
Payment") directly to the Participant simultaneously with the repayment of
the Participant's loan under Section 4. Baxter anticipates that the Risk
Sharing Payment will constitute compensation to the Participant, subject to
tax withholding and reporting. Baxter also anticipates deducting the Risk
Sharing Payment as compensation in
<PAGE>
the year in which it is paid. If Baxter determines that it is not entitled
to a current tax deduction for the Risk Sharing Payment with respect to any
Participant, because such compensation is not deemed to constitute
qualified performance-based compensation within the meaning of section
162(m) and the related regulations under the Internal Revenue Code of 1986,
as amended, Baxter will not make the Risk Sharing Payment to the
Participant in connection with the repayment of the Participant's loan
under Section 4. Instead the Participant will receive deferred
compensation equal to the Risk Sharing Payment at a time and in a form
intended to secure Baxter's related tax deduction. The Committee has the
sole discretion to implement a deferred compensation agreement to the
extent necessary or desirable to achieve the intent of the preceding
sentence.
13. LOAN GUARANTEE. Baxter will guarantee repayment to the Banks of 100% of
all principal, interest, prepayment fees and other obligations of each
Participant under such Participant's loan described in Section 4. The
Baxter loan guarantee is a condition to the loan arrangement Baxter has
made with the Banks. The terms and conditions of the guarantee are as
agreed by Baxter and the Banks. Each Participant is fully obligated to
repay to the Banks all principal, interest, and other amounts on the loan
when due and payable. Baxter may take any action relating to the
Participant and her or his assets, which the Committee deems reasonable and
necessary, to obtain full reimbursement for amounts Baxter pays to the
Banks under its guarantee related to the Participant's loan, in excess of
the Risk Sharing Payment it is obligated to make under Section 12 ("Loan
Default").
<PAGE>
14. CHANGE IN CONTROL. In the event of a Change in Control, the restrictions
on the sale of the Purchased Shares specified in Section 7(a) will lapse
immediately, each Participant employed by the Company immediately before
the Change in Control will be deemed to have been employed by the Company
until the first anniversary of the Exercise Date (if the Change in Control
occurs before the first anniversary of the Exercise Date), and the
Participant will be deemed to have sold the Purchased Shares after the
third anniversary of the Exercise Date for purposes of Section 8(b) (if the
sale of the Purchased Shares occurs before the third anniversary of the
Exercise Date).
15. EFFECT OF PROGRAM. The Plan is governed by the provisions of the 1994
Program, except as otherwise expressly stated in the Plan.
16. AMENDMENT. The Committee may amend the Plan at any time subject to the
limitations in Section 11.9 of the 1994 Program.
<PAGE>
EXHIBIT 10.2
BAXTER INTERNATIONAL INC.
STOCK OPTION PLAN ADOPTED EFFECTIVE JUNE 15, 1994
TERMS AND CONDITIONS
1. PURPOSE
-------
This Stock Option Plan ("Plan") is adopted pursuant to the Baxter International
Inc. 1994 Incentive Compensation Program ("Program") for the purposes stated in
the Program.
2. PARTICIPANTS
------------
Participants in this Plan ("Optionee") shall be full-time, valued employees of
Baxter International Inc. or its subsidiaries ("Company") who have been selected
by the Committee, as defined in the Program ("Committee"), and to whom the
Committee makes an award of an option ("Option") under this Plan.
3. AWARDS
------
Each Option shall consist of a Stock Option as defined in the Program and is
granted under the terms and conditions contained in the Program and this Plan.
To the extent that any of the terms and conditions contained in this Plan are
inconsistent with the Program, the terms of the Program shall control. Terms
defined in the Program shall have the same meaning in these terms and
conditions. The Option is not intended to qualify as an Incentive Stock Option
within the meaning of section 422 of the United States Internal Revenue Code.
Residents of the United Kingdom are also subject to the Baxter International
Inc. Rules of the Baxter International United Kingdom Stock Option Plan
(including without limitation the terms of Rule 11).
4. VESTING, EXERCISE AND EXPIRATION
--------------------------------
The vesting, exercise and expiration provisions are different for the two groups
of Optionees identified on Exhibit 1 to the minutes of the Compensation
Committee meeting held on June 15, 1994. For the Group A participants, the
vesting, exercise and expiration provisions are as follows:
The Option becomes vested on the Date of Grant (as defined in the resolutions of
the committee pursuant to which the Option was granted). When vested and until
it expires, the Option may be exercised in whole or in part in the manner
specified by the Stockholder Services Department of Baxter International Inc.,
subject to the following limitations. No Option may be exercised for fewer than
5,000 shares, and to the extent
<PAGE>
an Option for more than 5,000 shares is exercised in part, it must be exercised
in multiples of 1,000 shares. The exercise price may be paid only in cash. Any
portion of the Option which is not exercised on the Date of Grant shall expire
on the Date of Grant.
In addition, the Group A participants are subject to the provisions of the
Baxter International Inc. Shared Investment Plan.
For the Group B participants, the vesting, exercise and expiration provisions
are as follows:
4.1 The Option becomes vested five years from the date of grant, subject to
acceleration in accordance with the following. Fifty percent of the Option
shall become vested on the first Business Day (as defined in section 4.4) after
the ninetieth consecutive calendar day during which the average Fair Market
Value (as defined in the Program) of the Common Stock (as defined in the
Program) equals or exceeds $40.00 per share. The remaining fifty percent of the
Option shall become vested on the first Business Day after the ninetieth
consecutive calendar day during which the average Fair Market Value of the
Common Stock equals or exceeds $50.00 per share. The Option shall not vest more
than one year after the Optionee's employment is terminated by retirement at or
after age 55 but shall otherwise continue to vest until the Option expires
pursuant to section 4.4.
4.2 When vested and until it expires, the Option may be exercised in whole or
in part in the manner specified by the Stockholder Services Department of Baxter
International Inc. If exercised in part, the Option must be exercised in
installments consisting of at least 100 shares or, if options for less than 100
shares are then exercisable, for the number of shares then exercisable. Shares
of Common Stock may not be used to pay the exercise price of the Option unless
certificates representing such shares have been issued and are delivered by the
Optionee in accordance with the requirements specified by the Stockholder
Services Department. Residents of the United Kingdom may not use shares of
Common Stock to pay the exercise price of the Option in any circumstances.
4.3 If the Optionee's employment by the Company is terminated by death or
disability more than 12 months after the date on which the Option is granted,
the Optionee or the Optionee's legal representative or the person or persons to
whom the Optionee's rights under the Option are transferred by will or the laws
of descent and distribution shall have the right to exercise the Option until it
expires in accordance with its terms with respect to all or any part of the
shares remaining subject to the Option (whether or not such shares were
purchasable by the Optionee under section 4.1 at the time of death.)
4.4 The Option shall expire at the close of business on the earlier of a date
determined as follows or, if such date is not a Business Day, then the last
Business
<PAGE>
Day preceding such date: i) one year after the date on which employment of the
Optionee by the Company shall have been terminated by his death or disability;
(ii) five years after the date on which employment of the Optionee by the
Company shall have been terminated by retirement at or after age 55; (iii) three
months after the date on which employment of the Optionee by the Company shall
have terminated except as provided in subsection 4.4(i) and (ii), unless the
Optionee dies or becomes disabled during said three-month period, in which case
the relevant date shall be one year after the termination; or (iv) ten years
from the date on which the Option was granted. "Business Day" shall mean any
day, other than Saturday or Sunday, when the corporate headquarters of the
Company is open for the transaction of business and when the Common Stock is
traded on the New York Stock Exchange. A transfer of an Optionee from
employment by one corporation to another among Baxter International Inc. and its
subsidiaries, or a transfer of an Optionee to employment by another corporation
which assumes the Option or issues a substitute option in a transaction to which
section 424 of the Internal Revenue Code applies, shall not be considered a
termination of employment for purposes of the Option.
<PAGE>
Baxter International Inc. and Subsidiaries
Exhibit 11.1 - Computation of Primary Earnings Per Common Share
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------
(Unaudited - in millions, except per share data) Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Earnings
Income before cumulative effect of accounting changes $144 $132 $275 $189
Cumulative effect of change in accounting for:
Income taxes 0 0 0 81
Other postemployment benefits 0 0 0 (11)
- - ---------------------------------------------------------------------------------------------------------
Net income available for common stock $144 $132 $275 $259
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
Shares
Weighted average number of common
shares outstanding 278 277 278 278
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
Primary earnings (loss) per common share
Income before cumulative effect of accounting changes $0.52 $0.48 $0.99 $0.68
Cumulative effect of change in accounting for:
Income taxes 0.00 0.00 0.00 0.29
Other postemployment benefits 0.00 0.00 0.00 (0.04)
- - ---------------------------------------------------------------------------------------------------------
Net income $0.52 $0.48 $0.99 $0.93
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Baxter International Inc. and Subsidiaries
Exhibit 11.2 - Computation of Fully Diluted Earnings Per Common Share
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------
(Unaudited - in millions, except per share data) Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Earnings
Income before cumulative effect of accounting
changes $144 $132 $275 $189
Cumulative effect of change in accounting for:
Income taxes 0 0 0 81
Other postemployment benefits 0 0 0 (11)
- - ---------------------------------------------------------------------------------------------------------
Pro forma net income available for common stock $144 $132 $275 $259
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
Shares
Weighted average number of common shares
outstanding 278 277 278 278
Additional shares assuming exercise of stock
options, performance share awards and stock 1 1 1 1
purchase plan subscriptions
- - ---------------------------------------------------------------------------------------------------------
Average common shares and equivalents outstanding 279 278 279 279
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
Fully diluted earnings (loss) per common share
Income before cumulative effect of accounting changes $0.52 $0.48 $0.99 $0.68
Cumulative effect of change in accounting for:
Income taxes 0.00 0.00 0.00 0.29
Other postemployment benefits 0.00 0.00 0.00 (0.04)
- - ---------------------------------------------------------------------------------------------------------
Net income $0.52 $0.48 $0.99 $0.93
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Baxter International Inc. and Subsidiaries
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
(Unaudited - in millions, except ratios)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------
Year ended December 31 1993 1992 1991 1990 1989
Income (loss) from continuing operations
before income tax expense (benefit) $(330) $753 $688 $ 16 $578
Add:
Interest costs 232 221 231 264 291
Estimated interest included
in rentals (1) 44 43 36 35 30
- - ----------------------------------------------------------------------------------------
Fixed charges as defined 276 264 267 299 321
Interest costs capitalized (10) (10) (9) (5) (7)
Losses of less than majority owned
affiliates, net of dividends 27 34 32 22 15
- - ----------------------------------------------------------------------------------------
Income (loss) as adjusted $(37) $1,041 $978 $332 $907
- - ----------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------
Ratio of earnings to fixed charges (0.13) 3.94 3.66 1.11 2.83
- - ----------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------
Six months ended June 30 1994
Income before income taxes and
cumulative effect of accounting changes $363
Add:
Interest costs 124
Estimated interest included in rentals (1) 22
- - ----------------------------------------------------------------------------------------
Fixed charges as defined 146
Interest costs capitalized (4)
Losses of less than majority
owned affiliates, net of dividends 9
- - ----------------------------------------------------------------------------------------
Income as adjusted $514
- - ----------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 3.52
- - ----------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------
</TABLE>
(1) Represents the estimated interest portion of rents.
(2) Earnings were inadequate to cover fixed charges for the year-ended
December 31, 1993, due to the provision for the restructuring program
costs. The amount of the coverage deficiency is $313 million.
<PAGE>
EXHIBIT 15
August 9, 1994
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sirs:
We are aware that Baxter International Inc. has included our report dated August
9, 1994 (issued pursuant to the provisions of Statement on Auditing Standards
No. 71) in the Prospectus constituting part of its Registration Statements on
Form S-8 (Nos. 2-82667, 2-86993, 2-97607, 33-8812, 33-15523, 33-15787, 33-28428,
33-33750 and 33-54069), on Form S-3 (Nos. 33-5044, 33-23450, 33-27505, 33-31388
and 33-49820) and on Form S-4 (Nos. 33-808, 33-15357 and 33-53937). We are also
aware of our responsibilities under the Securities Act of 1933.
Yours very truly,
Price Waterhouse
