<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, 1995
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---- ----
Commission file number 1-4448
BAXTER INTERNATIONAL INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-0781620
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Baxter Parkway, Deerfield, Illinois 60015-4633
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(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 31, 1995 the latest practicable date, was 276,750,835 shares.
<PAGE>
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Baxter International Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
(in millions, except per share data)
------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
<S> <C> <C> <C> <C>
1995 1994 1995 1994
Operations
Net sales $2,465 $2,316 $4,783 $4,509
Costs and expenses
Cost of goods sold 1,641 1,504 3,189 2,937
Marketing and administrative expenses 446 459 870 899
Research and development expenses 84 84 162 160
Special charge for litigation 0 0 40 0
Interest, net 45 49 88 96
Goodwill amortization 17 17 33 34
Other expense (income) 3 14 (28) 20
------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 2,236 2,127 4,354 4,146
------------------------------------------------------------------------------------------------------------------------
Income before income taxes 229 189 429 363
Income tax expense 64 45 119 88
------------------------------------------------------------------------------------------------------------------------
Net Income $165 $144 $310 $275
------------------------------------------------------------------------------------------------------------------------
Earnings per common share $0.59 $0.52 $1.11 $0.99
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Average number of common shares outstanding 278 278 280 278
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
-3-
<TABLE>
<CAPTION>
Baxter International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions)
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 30, December 31,
1995 1994
(Unaudited)
Current assets Cash and equivalents $385 $471
Accounts receivable 1,597 1,543
Notes and other current
receivables 165 373
Inventories 1,675 1,537
Short-term deferred income taxes 284 271
Prepaid expenses 181 145
--------------------------------------------------------------------------------
Total current assets 4,287 4,340
------------------------------------------------------------------------------------------------------------------------
Property, At cost 4,560 4,431
plant and Accumulated depreciation
equipment and amortization (1,965) (1,869)
---------------------------------------------------------------------------------
Net property, plant and equipment 2,595 2,562
-------------------------------------------------------------------------------------------------------------------------
Other assets Goodwill and other intangibles 2,273 2,290
Insurance receivables 714 446
Other 353 364
--------------------------------------------------------------------------------
Total other assets 3,340 3,100
------------------------------------------------------------------------------------------------------------------------
Total assets $10,222 $10,002
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Current
liabilities Notes payable to banks $144 $131
Current maturities of long-term debt and
lease obligations 163 400
Accounts payable and accrued liabilities 1,966 1,834
Income taxes payable 385 401
--------------------------------------------------------------------------------
Total current liabilities 2,658 2,766
------------------------------------------------------------------------------------------------------------------------
Long-term debt and lease obligations 2,508 2,341
------------------------------------------------------------------------------------------------------------------------
Long-term deferred income taxes 224 167
------------------------------------------------------------------------------------------------------------------------
Long-term litigation liabilities 675 458
------------------------------------------------------------------------------------------------------------------------
Other non-current liabilities 462 550
------------------------------------------------------------------------------------------------------------------------
Stockholders' Common stock, $1 par value,
equity authorized 350,000,000 shares,
issued 287,701,247 shares in
1995 and 1994 288 288
Additional contributed capital 1,817 1,810
Retained earnings 1,917 1,762
Common stock in treasury, at cost,
11,140,176 shares in 1995 and
5,391,092 shares in 1994 (338) (135)
Foreign currency adjustment 11 (5)
---------------------------------------------------------------------------------
Total stockholders' equity 3,695 3,720
---------------------------------------------------------------------------------
Total liabilities and stockholders' equity $10,222 $10,002
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
-4-
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in millions)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Six months ended June 30,
1995 1994
(Brackets denote cash outflows)
Cash flow provided Income from continuing operations $310 $275
by continuing Adjustments
operations Depreciation and amortization 255 254
Deferred income taxes 42 41
Gain on asset dispositions (19) (30)
Other 12 20
Changes in balance sheet items
Accounts receivable (14) 74
Inventories (129) (15)
Accounts payable and other
current liabilities (26) (160)
Restructuring program payments (48) (47)
Other (45) (32)
---------------------------------------------------------------------------------
Cash flow provided by continuing
operations 338 380
-------------------------------------------------------------------------------------------------------------------------
Investment Capital expenditures (202) (189)
transactions Acquisitions (net of cash received)
and investments in affiliates (13) (52)
Proceeds from asset dispositions 248 92
--------------------------------------------------------------------------------
Investment transactions, net 33 (149)
------------------------------------------------------------------------------------------------------------------------
Financing Issuances of debt and lease
transactions obligations 803 1,107
Redemption of debt and lease
obligations (345) (1,188)
Increase in debt with maturities
of three months or less, net (559) (343)
Stock issued under Shared
Investment Plan 0 121
Stock issued under employee
benefit plans 50 26
Common stock dividends (154) (139)
Purchase of treasury stock (255) 0
--------------------------------------------------------------------------------
Financing transactions, net (460) (416)
------------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash
and equivalents 3 2
-------------------------------------------------------------------------------------------------------------------------
Decrease in cash and equivalents (86) (183)
Cash and equivalents at beginning of period 471 479
------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $385 $296
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
-5-
Baxter International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
FINANCIAL INFORMATION
The unaudited interim 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 consolidated financial
statements and notes included in the Company's 1994 Annual Report to
Stockholders.
In the opinion of management, the interim consolidated financial statements
reflect all adjustments necessary for a fair presentation of the interim
periods. All such adjustments are of a normal recurring nature. The results of
operations for the interim period are not necessarily indicative of the results
of operations to be expected for the full year.
DIVESTITURE OF THE INDUSTRIAL AND LIFE SCIENCES DIVISION
On May 24, 1995, Baxter signed a definitive agreement to sell its Industrial and
Life Sciences Division to VWR Corporation for approximately $400 million in
cash, subject to certain closing conditions. As part of the agreement, Baxter
will continue to supply its self-manufactured products and supplies sold in non-
health-care markets to VWR Corporation under a long-term distribution agreement.
The transaction is expected to close in 1995.
INVENTORIES
Inventories consisted of the following (in millions):
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, December 31,
1995 1994
(Unaudited)
Raw materials $ 226 $ 219
Work in process 232 191
Finished products 1,217 1,127
------ ------
Total inventories $1,675 $1,537
------ ------
------ ------
</TABLE>
STOCK REPURCHASE PROGRAM
In February 1995 the Company announced a two-year $500 million stock repurchase
program. As of June 30, 1995, the Company repurchased approximately $255
million (or approximately 7.7 million shares) of its common stock.
<PAGE>
-6-
CREDIT FACILITIES AND INTEREST EXPENSE
On June 27, 1995, the Company received confirmation that an amendment to combine
and increase its current $1.4 billion revolving credit facilities with a new
$1.5 billion facility with substantially similar covenants had been accepted by
the participating banks. This revolving credit facility, which is effective for
five years beginning July 11, 1995, is principally used to support commercial
paper and short-term note borrowings. At June 30, 1995 and December 31, 1994,
commercial paper and certain short-term notes together totaling $1,136 and $954
million, respectively, have been classified with long-term debt as they are
supported by long-term credit facilities and will continue to be refinanced.
Net interest expense consisted of the following (unaudited):
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
(in millions) Three months ended Six months ended
June 30, June 30,
<S> <C> <C> <C> <C>
1995 1994 1995 1994
Interest expense $52 $64 $104 $120
Interest income (7) (15) (16) (24)
-----------------------------------------------------------------------------------------------------------------------------------
Interest - net $45 $49 $88 $96
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SPECIAL CHARGE FOR LITIGATION AND LEGAL PROCEEDINGS
The number of opt-outs for the mammary implant global settlement against Baxter
was reduced by plaintiffs who chose to rescind their opt-out notices, a right
which ended on March 1, 1995. Based on its continuing evaluation of the
remaining opt-outs, the Company accrued an additional $298 million for its
estimated liability to litigate and/or settle cases and claims involving opt-
outs and recorded an additional receivable for estimated insurance recovery of
$258 million, resulting in an additional net charge of $40 million in the first
quarter of 1995.
Please refer to "Part II - Item 1. Legal Proceedings" of this document for the
status of cases and claims from individuals seeking damages for injuries
allegedly caused by silicone gel-filled mammary implants manufactured by a
division of American Hospital Supply Corporation. That section also discusses
the status of lawsuits and claims involving individuals 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 and updates the status of other legal proceedings
involving the Company.
<PAGE>
-7-
Item. 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Company's 1994 Annual Report to Stockholders ("ARS") contains management's
discussion and analysis of financial condition and results of operations as of
and for the year ended December 31, 1994. In the ARS, management outlined its
key financial objectives in 1995. These objectives and the results achieved
through June 30, 1995 are summarized as follows:
<TABLE>
<S> <C>
----------------------------------------------------------------------------------------------------------------------------
FULL YEAR 1995 OBJECTIVES MID-YEAR RESULTS
----------------------------------------------------------------------------------------------------------------------------
- Generate $500 million in "operational - The Company achieved "operational
cash flow" in 1995. cash flow" of $239 million in the six
months ended June 30, 1995.
----------------------------------------------------------------------------------------------------------------------------
- Maintain net-debt-to-net-capital ratio - The Company's net-debt-to-net-capital
between 35-40%. ratio was 39.7% at June 30, 1995.
----------------------------------------------------------------------------------------------------------------------------
- Repurchase $500 million of Baxter - The Company has repurchased
stock over the next 2 years as approximately $255 million of its
authorized by the Board of Directors in common stock during the first six
February 1995. months of 1995.
----------------------------------------------------------------------------------------------------------------------------
- Achieve net income growth in the high - The Company's net income growth of
single digits. 13% for the first half of 1995 exceeded
management's goal due primarily to
favorable foreign currency exchange
rates.
----------------------------------------------------------------------------------------------------------------------------
- Reduce marketing and administrative - The Company's marketing and
expenses as a percent of sales from administrative expenses as a percent of
19.9% in 1994 to 18% in 1995. sales were 18.2% for the six months
ended June 30, 1995.
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1994. 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, 1995 with the corresponding periods of
1994.
<PAGE>
-8-
RESULTS OF OPERATIONS
The following table shows net sales trends for each industry segment
(unaudited):
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
(in millions) Three months ended Six months ended
June 30, Percent June 30, Percent
<S> <C> <C> <C> <C> <C> <C>
1995 1994 Increase 1995 1994 Increase
------------------------------------------------------------------------------------------------------------------------
Medical specialties $1,029 $892 15% $1,960 $1,685 16%
Medical/laboratory products
and distribution 1,436 1,424 1% 2,823 2,824 0%
------------------------------------------------------------------------------------------------------------------------
Total net sales $2,465 $2,316 6% $4,783 $4,509 6%
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's aggregate net sales increased 6% for the three-month and six-month
periods ended June 30, 1995 over the comparable periods in 1994. The majority
of the increases in net sales for the three-month and six-month periods were the
result of growth in the medical specialties segment. Without the effect of
favorable foreign exchange rates, growth in net sales for the segment was
approximately 10% and 11% for the three-month and six-month periods,
respectively. These increases, excluding the foreign exchange impact, were
primarily the result of higher unit sales in both foreign and domestic markets.
Net sales in the medical/laboratory products and distribution ("med/lab")
segment were generally flat for the three-month and six-month periods ended June
30, 1995 as compared to the same periods in 1994, and reflect the loss of sales
related to the divestiture of the diagnostics manufacturing businesses which
occurred in December 1994. The Company will continue to experience lower sales
growth in the med/lab segment in 1995 due to the loss of approximately $300
million in annual sales (primarily foreign) related to this divestiture.
Excluding the diagnostics divestiture, net sales growth in the segment was 6%
and 5% for the three-month and six-month periods.
Domestic sales for the second quarter of 1995 were approximately $1.8 billion,
an increase of 7% over the comparable period in 1994. Domestic sales for the
six months ended June 30, 1995 were approximately $3.5 billion, an increase of
6% over the comparable period in the prior year. International sales increased
4% to $691 million in the second quarter and 6% to $1.2 billion for the six-
month period, both over the comparable periods in 1994. International sales
growth was approximately 7% and 9% in the three and six months ended June 30,
1995, respectively, excluding the effects for foreign exchange rates and the
diagnostics divestiture discussed above.
The following table gives key ratios of certain income statement items (as a
percent of sales):
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
<S> <C> <C> <C> <C> <C> <C>
1995 1994 Decrease 1995 1994 Decrease
------------------------------------------------------------------------------------------------------------------------
Gross profit margin 33.4% 35.1% 1.7 pts 33.3% 34.9% 1.6 pts
Marketing and administrative
expenses 18.1% 19.8% 1.7 pts 18.2% 19.9% 1.7 pts
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
-9-
The decline in gross profit margin for both the three and six months ended June
30, 1995 is directly attributable to the diagnostics divestiture discussed
above. As part of the divestiture, Baxter retained distribution rights for the
diagnostics products in the U.S. but does not distribute products
internationally. This has resulted in an overall lower gross profit margin for
the Company.
Management's overall objective is to decrease marketing and administrative
expenses as a percent of sales to 18% by the end of 1995. In line with this
goal, the anticipated decline in marketing and administrative expenses for the
three and six months ended June 30, 1995 is a result of the diagnostics
divestiture and initiatives implemented in connection with the 1993
restructuring and downsizing programs. Overall, savings in marketing and
administrative expenses for the Company completely offset margin erosion in both
the three-month and six-month periods ended June 30, 1995.
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
<S> <C> <C> <C> <C> <C> <C>
1995 1994 (Decrease) 1995 1994 (Decrease)
-------------------------------------------------------------------------------------------------------------------------
Medical specialties $70 $63 11% $134 $119 13%
Medical/laboratory products
and distribution 14 21 (33%) 28 41 (32%)
-------------------------------------------------------------------------------------------------------------------------
Total research and
development expenses $84 $84 0% $162 $160 1%
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
In line with the Company's strategy to invest more in the high-growth medical
specialties segment, overall spending in this segment increased 11% and 13% for
the three-month and six-month periods, respectively. This increase reflects the
Company's continued emphasis on strategic initiatives such as renal therapy and
transplantation, immunotherapy, gene therapy and Blood Substitutes. Research
and development spending in the med/lab segment declined by 33% and 32% in the
quarter and six-month periods ended June 30, 1995 as compared to the same
periods in 1994. The research and development decline in med/lab is primarily
the result of the divestiture of the diagnostics business. The Company's
aggregateresearch and development expenses were generally flat for the three and
six months ended June 30, 1995 over the comparable periods in 1994.
The number of opt-outs for the mammary-implant global settlement against Baxter
was reduced by plaintiffs who chose to rescind their opt-out notices, a right
which ended on March 1, 1995. Based on its continuing evaluation of the
remaining opt-outs, the Company accrued an additional $298 million for its
estimated liability to litigate and/or settle cases and claims involving opt-
outs and recorded an additional receivable for estimated insurance recovery of
$258 million, resulting in an additional net charge of $40 million in the first
quarter of 1995. See "Part II - Item 1. Legal Proceedings" for further
information.
Both interest expense and interest income declined for the three-month and six-
month periods ended June 30, 1995 over the comparable periods in 1994 as a
result of lower debt and investment levels, partially offset by increases in
average rates.
<PAGE>
-10-
The decrease in other expense of $48 million for the six-month period ended June
30, 1995 is primarily due to net gains associated with the disposal or
discontinuance of minor, non-strategic businesses and investments, including the
disposal of the Company's remaining investment in MediSense, Inc. These net
gains were $58 million and $29 million for the six months ended June 30, 1995
and 1994, respectively. The remaining decrease in other expense is primarily a
result of lower equity losses related to a number of the Company's minor joint
venture operations.
The following table shows income before income taxes for each industry segment
(unaudited):
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
(in millions) Three months ended Percent Six months ended Percent
June 30, Increase June 30, Increase
<S> <C> <C> <C> <C> <C> <C>
1995 1994 (Decrease) 1995 1994 (Decrease)
-------------------------------------------------------------------------------------------------------------------------
Medical specialties $203 $145 40% $359 $276 30%
-------------------------------------------------------------------------------------------------------------------------
Medical/laboratory products
and distribution 103 120 (15%) 203 234 (13%)
-------------------------------------------------------------------------------------------------------------------------
General corporate and other
General corporate expenses (31) (29) (63) (60)
Special charge for litigation 0 0 (40) 0
Other, net (1) 2 58 9
-------------------------------------------------------------------------------------------------------------------------
Total general corporate and other (32) (27) (45) (51)
-------------------------------------------------------------------------------------------------------------------------
Interest - net (45) (49) 8% (88) (96) 8%
-------------------------------------------------------------------------------------------------------------------------
Total income before income taxes $229 $189 21% $429 $363 18%
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's income before income taxes increased 21% and 18% for the three and
six months ended June 30, 1995 versus the comparable periods in the prior year.
The increase in income before income taxes in the medical specialties segment in
the three-month and six month periods in 1995 over the comparable periods in
1994 is a result of increased sales and favorable foreign currency rates in
1995. Additionally, the 1994 results were adversely impacted by the voluntary
market withdrawal of Gammagard -Registered Trademark- IGIV, an immune globulin
intravenous product, which occurred in February 1994. A new product, Gammagard
-Registered Trademark- S/D was introduced in the second quarter of 1994, but had
little impact on reported results for the second quarter of 1994.
Income before income taxes for the med/lab segment decreased in the three-month
and six-month periods of 1995 as compared to the same periods in 1994 as a
result of the sales loss and margin erosion related to the diagnostics
divestiture. Additionally, there was a lower level of net gains from
divestitures of minor, non-strategic businesses in 1995 over the comparable
periods in 1994. Excluding the effects of the diagnostics divestiture and
gains associated with the disposal of other minor, non-strategic businesses,
income before income taxes for the segment would have increased by 6% for the
quarter ended June 30, 1995 and decreased by 3% for the six months ended June
30, 1995. This 3% decrease in income before income taxes for the six month
period is a result of strong operational performance in the first quarter of
1994. Additionally, the 1995 second quarter income before income taxes for the
med/lab segment reflects the benefit of some expense leverage related to
initiatives implemented as part of the 1993 restructuring and downsizing
discussed below.
<PAGE>
-11-
The net increase in income before income taxes for "other, net" in the general
corporate and other component for the six months ended June 30, 1995 is
primarily attributable to net gains associated with the disposal of investments,
including the disposal of the Company's remaining investment in MediSense, Inc.
The effective income tax rate was 27.9% and 27.7% for the three and six months
ended June 30, 1995, respectively, versus 23.8% and 24.2% for the similar
periods in 1994. These increases are primarily due to a larger portion of
earnings generated in the U.S. and less income in Puerto Rico due to the
diagnostics divestiture.
The Company's net income increased 15% in the second quarter of 1995 over the
comparable period of 1994 and earnings per common share increased 13%. For the
six months ended June 30, 1995, total net income increased 13% and earnings per
common share increased 12%. These increases reflect general growth in the
Company's operations, the favorable impact of foreign exchange rates and
improved expense control.
RESTRUCTURING PROGRAM
Since the announcement of its 1993 restructuring program the Company has
implemented, or is in the process of implementing, all of the major strategic
actions associated with the program. Management is satisfied that such actions
are generally progressing on schedule and that the overall program will meet
previously established financial targets.
In the first six months of 1995, the Company utilized $101 million of
restructuring reserves, including $80 million in cash payments. Cash outflows
pertain primarily to employee-related costs for severance, outplacement
assistance, relocation and retention payments. The Company currently
anticipates that it will achieve its goal of approximately $200 million in
savings for 1995. Management anticipates that these savings will be invested in
increased research and development spending in the medical specialties segment,
the Company's expansion into growing international markets, and managed care and
alternate site sales and distribution initiatives in the U.S. market.
Since the inception of the restructuring program, the Company has eliminated
approximately 2,700 positions of the approximately 4,500 positions affected by
the program. The majority of the remaining reductions will occur throughout the
remainder of 1995 and 1996 as facility closures and consolidations are completed
as planned.
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) decreased to $338 million for the six months ended June 30, 1995
from a level of $380 million for the corresponding period in 1994. This
decrease primarily reflects net cash outflows for working capital components,
offset by approximately $25 million in proceeds from the sale of certain lease
receivables under a revolving agreement. 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
monitors an internal performance measure called "operational cash flow" which
evaluates each
<PAGE>
-12-
operating business on all aspects of cash flow under its direct control. The
incentive compensation programs for the Company's senior management in each
business include significant emphasis on the attainment of both "operational
cash flow" as well as earnings objectives.
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,
<S> <C> <C>
1995 1994
---------------------------------------------------------------------------------------------------------
Cash flow provided by operations per the Company's
condensed consolidated statements of cash flows $338 $380
Capital expenditures (202) (189)
Net interest after tax 53 57
Other 50 44
---------------------------------------------------------------------------------------------------------
Total operational cash flow $239 $292
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
</TABLE>
"Operational cash flow" of $239 million is consistent with the Company's
objective to generate "operational cash flow" of $500 million in 1995.
The following table shows capital expenditures for each industry segment
(unaudited):
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
(in millions) Six months ended Percent
June 30, Increase
<S> <C> <C> <C>
1995 1994 (Decrease)
---------------------------------------------------------------------------------------------------------
Medical specialties $126 $109 16%
Medical/laboratory products and
distribution 70 76 (8%)
General corporate 6 4 50%
---------------------------------------------------------------------------------------------------------
Total capital expenditures $202 $189 7%
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
</TABLE>
The 16% increase in the medical specialties segment is consistent with the
Company's strategy to increase its investment in its higher growth businesses.
Incremental capital investments are being made in the medical specialties
segment for the expansion of manufacturing capacity for renal, cardiovascular
and biotech products. The Company has made significant investments in recent
years in its U.S. Distribution and manufacturing infrastructure. As a
consequence of these investments and the diagnostics divestiture, the level of
capital expenditures in the med/lab segment has declined as compared to 1994
levels.
The Company's current assets exceeded current liabilities by $1.6 billion at
June 30, 1995 and December 31, 1994. Current assets include accounts receivable
of $1.6 billion and inventories of $1.7 billion at June 30, 1995. 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.
<PAGE>
-13-
The increase in long-term insurance receivables and litigation liabilities was
primarily due to the special charge for litigation discussed earlier.
Proceeds from asset dispositions of $248 million in the first half of 1995
primarily relate to cash received from notes receivable related to the
divestiture of the diagnostics manufacturing business and the sale of common
stock in MediSense, Inc. These proceeds have been used for general operating
requirements and to help fund the Company's stock repurchase program discussed
below. The decrease in current maturities of long-term debt and lease
obligations and corresponding increase in long-term debt and lease obligations
primarily relate to the classification of commercial paper and short-term notes
supported by the Company's new credit facility. As of June 30, 1995, the
Company's net-debt-to-net-capital ratio was 39.7% as compared to 39.2% at
December 31, 1994. These results are consistent with the goal of maintaining a
net-debt-to-net-capital ratio of between 35-40%.
During the first quarter of 1995, the Company announced a two-year $500 million
stock repurchase program. During the first six months of 1995, the Company has
repurchased approximately $255 million (or approximately 7.7 million shares) of
its common stock.
On April 26, 1995, the Company's debt rating of "A" by Duff & Phelps ("D&P") was
reaffirmed. The Company continues to remain on Rating Watch--Down as
developments will be monitored by D&P in product liability litigation and
progress in restructuring initiatives. On March 23, 1995, Standard & Poor's
reaffirmed its "A-" rating and changed its rating outlook to "stable" from
"negative" citing the Company's reduction in leverage and improvement in
operating margins.
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.
Refer to "Part II - Item 1. Legal Proceedings" in 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 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 litigation related uncertainties, or if the
Company should, along with the other defendants, enter into a comprehensive
settlement of the related purported class actions, the Company may incur charges
in excess of presently established reserves. While such future charges could
have a material adverse impact on the Company's net income 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>
-14-
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,
1995 has been performed by Price Waterhouse LLP, 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 LLP 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>
-15-
REPORT OF INDEPENDENT ACCOUNTANTS
August 11, 1995
Board of Directors and Stockholders
Baxter International Inc.
We have reviewed the accompanying condensed consolidated balance sheet and the
related consolidated statements of income and condensed consolidated statements
of cash flows of Baxter International Inc. and its subsidiaries as of June 30,
1995 and for the three and six-month periods ended June 30, 1995 and 1994. 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, 1994, 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 13,
1995 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, 1994, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
Yours very truly,
Price Waterhouse LLP
<PAGE>
-16-
PART II. OTHER INFORMATION
Baxter International Inc. and Subsidiaries
Item 1. Legal Proceedings
As of June 30, 1995, the Company was a defendant, together with other
defendants, in 6,343 lawsuits and had 1,756 pending claims from individuals, all
of which seek damages for injuries allegedly caused by silicone mammary implants
manufactured by the American Heyer-Schulte division of American Hospital Supply
Corporation ("American"). The comparable number of cases and claims was 8,030
as of March 31, 1995. In the second quarter of 1995, 7 cases and claims were
disposed of.
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.
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)(now held in abeyance pending
settlement proceedings in LINDSEY, ET AL., V. DOW CORNING ET AL., U.S.D.C., N.
Dist. Ala., CV 94-P-11558-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 was dismissed as to Baxter (BURKE, V. AMERICAN HEYER-SCHULTE, ET AL.,
Ontario Prov. Court, Gen. Div., 15981/93). That case currently is on appeal.
Two other suits seeking class certification on behalf of all women in the
Provinces of Ontario and Quebec, respectively, who received Heyer-Schulte
mammary implants have been filed (BENNETT V. AMERICAN HEYER-SCHULTE, ET AL.,
Ontario Prov. Court, Gen. Div., 18169/94; PELLETIER V. BAXTER HEALTHCARE
CORPORATION, ET AL., Quebec Prov. Court, Dist. of Montreal, 500-06-000005-955).
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. NY, 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 differences
in applicable law. Many of the cases and
<PAGE>
-17-
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 are
responsible for covering each matter and the extent of the Company's claims for
contribution against third parties. The Company believes that a substantial
portion of 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 is engaged in active
negotiations with its insurers concerning coverages and the settlement described
below. Three of the Company's claims-made insurers have tendered the full
amounts of their policies to the Company and a fourth has tendered the full
amounts of its policy ratably as claims are paid. Additionally, the Company
received certain funds in settlement of claims pending against a carrier in
liquidation. The total amount tendered is $100 million.
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 that 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. In both cases, the parties have entered into a "stand-still"
agreement while negotiations continue.
In 1994, representatives of the plaintiffs and certain defendants in these
cases negotiated a global settlement of the issues under the jurisdiction of the
Court in the LINDSEY V. DOW CORNING, ET AL. case. The monetary provisions of
the settlement, providing compensation for all present and future plaintiffs and
claimants through a series of specific funds and a disease compensation program
involving scheduled medical conditions, were agreed upon by most of the
significant defendants and representatives of the plaintiffs. The total of all
of the specific funds and the disease compensation program, which would be paid-
in and made available over approximately thirty years following final approval
of the settlement by the courts, is $4.255 billion. The Company's share of this
settlement has been established by the settlement negotiations at $556 million.
Appeals have been filed challenging the global settlement.
The time to file current claims against the fund ended on September 16,
1994. Since that date, the Court's claims administration office has been
evaluating the current claims filed against the scheduled medical conditions.
If those claims exceed the funds available, the settlement agreement provides
for reductions of the amounts payable for scheduled medical conditions (a
"ratchet"), and for negotiations among the representatives of the plaintiffs and
the settling defendants with respect to the shortfall in
<PAGE>
-18-
funding for current claims. The Court has indicated that it expects that there
will be a substantial ratchet downward in the amounts payable, and this
expectation has resulted in further negotiations among the parties, which are
ongoing. The Court has set August 30, 1995, as the deadline for the parties to
submit a statement of principles for a renegotiated agreement. If the parties
do not reach agreement on a new statement of principles, the Court has indicated
that, based on the Court's preliminary evaluations of the current claims, the
Court will decide if a second notice to class members to opt-out of the
settlement is warranted, or whether the settlement should go forward at all. If
a second opt-out notice is sent, it will result in an opportunity for each
settling defendant to withdraw from the settlement.
The global settlement gave individual plaintiffs and claimants the
opportunity to remove themselves from the settlement ("opt-out"). The initial
opt-out period ended July 1, 1994. As of March 1995, approximately 11,360
individuals have opted out of the global settlement, of which approximately
2,960 allege claims against Baxter. Of the opt-outs who filed claims against
Baxter, 1,883 represent U.S. claimants and 1,077 represent foreign claimants.
The claims of 587 foreign claimants were dismissed during the second quarter of
1995, but some of those claims may be able to be refiled in the claimant's home
countries. The number of opt-outs against Baxter will change as some claimants
are found to not have valid claims against Baxter, and others are identified as
having claims against Baxter. The Company believes that a substantial number of
the suits filed in the second, third and fourth quarters of 1994 against Baxter
will ultimately be dismissed because it will be determined that no Heyer-Schulte
mammary implant is involved.
On May 15, 1995, Dow Corning Corporation, one of the defendants in the
breast implant cases declared bankruptcy and filed for protection under Chapter
11. IN RE DOW CORNING CORPORATION, U.S.D.C., E.D. Mich. 95-20512, 95CV72397-DT.
("Dow Corning Bankruptcy"). The full impact of these proceedings on the global
settlement is unclear. As a result of the Dow Corning bankruptcy, Baxter was
able to remove a substantial number of opt-out claims from state to federal
courts. As of June 30, 1995, Baxter had removed the claims of 2,361
individuals and has moved to transfer all of those cases to the federal district
court in Michigan in which the Dow Corning bankruptcy is pending. The court has
not ruled on that motion.
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. Based on its continuing
evaluation of the remaining opt-outs, the Company accrued an additional $298
million for its estimated liability to litigate and/or settle cases and claims
involving opt-outs and recorded an additional receivable for estimated insurance
recovery of $258 million, resulting in an additional net charge of $40 million
in the first quarter of 1995.
At present, the Company is not able to estimate the nature and extent of
its further potential future liability with respect to mammary implants. The
Company believes that most of its potential future liability with respect to
mammary implant cases is covered by insurance. The Company intends to continue
to litigate pending mammary implant cases.
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
<PAGE>
-19-
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, 1995, the Company was a defendant, together with other
defendants, in 334 lawsuits, and had 14 pending claims in the United States,
Canada, Ireland, Italy and Japan, involving individuals who have hemophilia, or
their representatives. Those cases and the 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.
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.
All Federal Court Factor Concentrate 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). On November 3,
1994, the court certified the class only for the purpose of determining whether
the defendants' actions were negligent. The defendants in this case filed a
petition for a Writ of Mandamus with the 7th Circuit Court of Appeals seeking an
order directing the district court judge to vacate that certification. On March
16, 1995, the Court of Appeals granted the petition and stated that it would
issue a Writ of Mandamus directing the District Court to vacate its
certification. On April 28, 1995, the Court of Appeals denied the plaintiffs
request for a rehearing EN BANC, but has stayed enforcement of the writ pending
a petition for certiorari by the plaintiffs to the U.S. Supreme Court. Baxter
has also been named in three other purported class actions, none of which have
been certified and all of which have been transferred to the MDL for discovery
purposes. The Company denies these allegations.
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
that 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
Factor Concentrates were used.
The Company believes that a substantial portion of the liability and
defense costs related to anti-hemophilic Factor Concentrate 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 their rights (i.e., neither admitted nor denied
coverage), and may attempt to reserve in the
<PAGE>
-20-
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 filed suit in California, against all of the insurance
companies that issued comprehensive general liability and excess liability
policies to the Company for a declaratory judgment that the policies of all of
the carriers provide coverage. In that suit, the Company also sued Zurich for
failure to defend it. The Company subsequently dismissed without prejudice its
claims against all of the excess insurance carriers except Columbia Casualty
Company (one of the Company's excess insurers during part of the relevant time
period). The Company has filed an Amended Complaint in the California action
seeking a declaration that Zurich has a duty to defend the Company in connection
with the Factor Concentrate cases and claims.
Zurich Insurance Co., one of the Company's comprehensive general liability
insurance carriers has filed a suit in Illinois, 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 notice, and the like under the policies.
The Company's excess liability insurance carriers also brought suit in
Illinois for a declaratory judgment as to the parties' respective liabilities.
That suit has been dismissed without prejudice. The suit filed by Zurich in
Illinois has been stayed pending resolution of the Company's California case.
Zurich has appealed that stay.
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. The Company will continue to seek ways to resolve pending and threatened
litigation concerning these issues through a negotiated resolution.
On June 29, 1995, the German parliament approved the creation of a pension
fund for approximately 1,900 individuals, and their families, who contracted HIV
from blood and blood products in the early 1980's. The fund of approximately
$180 million will be established by contibutions from the German federal and
state governments, the German Red Cross and fractionators who sold Factor
Concentrate during the relevant period of time. The Company has agreed to
contribute approximately $12 million over a four year period of time. Claims
against the Federal Republic of Germany, the German Red Cross and fractionators
contributing to the fund are, by law, extinguished.
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 associated with the German settlement is covered by this accrual.
<PAGE>
-21-
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 putative 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 -Registered Trademark- IGIV (intravenous immune globulin)
because of indications that it might be implicated in Hepatitis C infections
occurring in users of Gammagard. Gammagard is a concentration of antibodies
derived from human plasma and is used to treat immune-suppressed patients. A
new immune globulin, Gammagard 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 June 30, 1995, the Company had received reports of Hepatitis C
transmission from 307 patients. The exact cause for these reports has not been
determined; however, many of the 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 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 June 30, 1995, 56 suits resulting from this incident have been served
on the Company. Six suits have been filed as purported class actions, LOWE V.
BAXTER, U.S.D.C., W.D. KY, C94-0125; MOCK V. BAXTER, ET AL., U.S.D.C., ID, CIV-
94-0524-S-LMV; FAYNE V. BAXTER, U.S.D.C., S.D., NY, 95CIV1129, GUTTERMAN V.
BAXTER, U.S.D.C., S.D., IL, 95-198-WDS, GEARY V. BAXTER, U.S.D.C., W.D., PA, 95
0457, and KELLEY V. BAXTER, U.S.D.C., M.D., NC, 6:95CV00178. The suits allege
infection with the Hepatitis C virus from the use of Gammagard. On June 9,
1995, the judicial panel on multi-district litigation ordered all federal cases
involving Gammagard to be transferred to the Central District of California for
coordinated pretrial proceedings before Judge Manuel L. Real, MDL docket no.
1060. Of the 56 pending suits, 38 are filed in federal court (including the 6
class actions), and all are expected to be transferred to Judge Real. The
Company is defending 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.
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
<PAGE>
-22-
CORPORATION, ET AL., (Cir. Ct., Milwaukee Co., WI, 94CV004977) was filed against
Baxter and three other defendants. The class action allegations have been
withdrawn, but additional plaintiffs added individual claims. 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.
A purported class action has been filed against the Company, Caremark
International, Inc. ("Caremark"), C.A. (Lance) Piccolo, James G. Connelly and
Thomas W. Hodson (all current officers of Caremark) alleging securities law
disclosure violations in connection with the November 30, 1992, spin-off of
Caremark in the Registration and Information Statement ("Registration
Statement") and subsequent SEC filings submitted by Caremark (ISQUITH V.
CAREMARK INTERNATIONAL, INC., ET AL., U.S.D.C., N. Dist. Ill., 94C 5534). The
plaintiffs allege, among other things, that the Registration Statement and
subsequent SEC filings contained false and misleading statements regarding the
scope of the Office of Inspector General for the Department of Health and Human
Services' investigation of Caremark's business and Medicare/Medicaid patient-
referral practices. The Company has responded to the complaint and is
vigorously defending this action. Management believes that the outcome of this
matter will not have a material adverse effect on the Company's results of
operations or consolidated financial position.
As of June 30, 1995, the Company has been named as a potentially
responsible party for cleanup costs at 18 hazardous waste sites. The Company
was a significant contributor to waste disposed of at 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 $44 million and $65 million, of
which the Company's share will be approximately $5 million. This amount, net of
payments of approximately $1 million, has been accrued and is reflected in the
Company's financial statements.
In all of the other sites, the Company was a minor contributor and 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 $7 million. This amount has been accrued 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>
-23-
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1995 annual meeting of stockholders was held on May 8, 1995 for
the purpose of electing directors, approving the appointment of auditors, and
voting on the proposals listed below. Proxies for the meeting were solicited
pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was
no solicitation in opposition to management's solicitation. All of
management's nominees for directors as listed in the proxy statement were
elected with the following vote:
<TABLE>
<CAPTION>
Number of Votes
----------------------------------------------------
In favor Abstained/Withheld
----------- --------------------
<S> <C> <C>
Mary Johnston Evans 236,929,961 1,375,172
Frank R. Frame 236,845,126 1,460,007
William B. Graham 236,502,576 1,802,617
Arnold J. Levine 236,749,417 1,555,716
Monroe E. Trout 236,985,576 1,319,557
</TABLE>
The results of other matters voted upon at the annual meeting are as follows:
<TABLE>
<CAPTION>
Number of Votes
-------------------------------------------------------
In favor Against Abstained
-------------- --------------- --------------
<S> <C> <C> <C>
Approval of Price Waterhouse LLP
as independent accountants for
the Company for 1995. 237,355,706 533,670 415,707
Approval of the issuance of
10,000,000 additional shares of
the Company's common stock for
sale under the Company's
Employee Stock Purchase Plan. 222,250,606 14,348,578 1,705,899
Defeat of the stockholder proposal
relating to cumulative voting in the
election of directors. 74,219,235 124,374,500 18,246,927
</TABLE>
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits thereto.
(b) Report on Form 8-K
A current report on Form 8-K was filed on May 30, 1995 disclosing a
press release which announced the Company's agreement, subject to
customary regulatory approvals, to divest its Industrial and Life Sciences
Division to VWR Corporation for approximately $400 million in cash.
<PAGE>
-25-
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Baxter International Inc.
-------------------------
(Registrant)
Date: August 11, 1995 By: /s/Harry M. Jansen Kraemer, Jr.
-------------------------------
Harry M. Jansen Kraemer, Jr.
Senior Vice President and
Chief Financial Officer
<PAGE>
-26-
Number Description of Exhibit Page Number
------ ---------------------- -----------
11.1 Computation of Primary
Earnings Per Common Share
11.2 Computation of Fully Diluted
Earnings Per Common Share
12 Computation of Ratio of
Earnings to Fixed Charges
15 Letter Re Unaudited Interim
Financial Information
27 Financial Data Schedule
(All other exhibits are inapplicable.)
<PAGE>
-27-
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,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net income available for common stock $165 $144 $310 $275
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Shares
Weighted average number of common
shares outstanding 278 278 280 278
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Primary earnings per common share $0.59 $0.52 $1.11 $0.99
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
-28-
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,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net income available for common stock $165 $144 $310 $275
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Shares
Weighted average number of common shares
outstanding 278 278 280 278
Additional shares assuming conversion of cumulative
convertible exchangeable preferred stock, exercise of
stock options, performance share awards and stock
purchase plan subscriptions 3 1 3 1
-----------------------------------------------------------------------------------------------------------------------------
Average common shares and equivalents outstanding 281 279 283 279
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Fully diluted earnings per common share $0.59 $0.52 $1.09 $0.99
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
-29-
Baxter International Inc. and Subsidiaries
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
(Unaudited - in millions, except ratios)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1994 1993(2) 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Income from continuing operations
before income tax expense and
cumulative effect of accounting change $801 $(330) $753 $688 $16
Add:
Interest costs 242 232 221 231 264
Estimated interest included
in rentals (1) 43 44 43 36 35
----------------------------------------------------------------------------------------------------------------------------------
Fixed charges as defined 285 276 264 267 299
Interest costs capitalized (5) (10) (10) (9) (5)
Losses of less than majority owned
affiliates, net of dividends 18 27 34 32 22
----------------------------------------------------------------------------------------------------------------------------------
Income as adjusted $1,099 $(37) $1,041 $978 $332
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 3.86 (.13) 3.94 3.66 1.11
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30 1995
Income before income taxes $429
Add:
Interest costs 107
Estimated interest included in rentals(1) 22
----------------------------------------------------------------------------------------------------------------------------------
Fixed charges as defined 129
Interest costs capitalized (3)
Losses of less than majority
owned affiliates, net of dividends 3
----------------------------------------------------------------------------------------------------------------------------------
Income as adjusted $558
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 4.32
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
<FN>
--------------------------------
(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.
</TABLE>
<PAGE>
-30-
EXHIBIT 15
August 11, 1995
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
11, 1995 (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 LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1995 AND CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 385
<SECURITIES> 0
<RECEIVABLES> 1,802
<ALLOWANCES> 40
<INVENTORY> 1,675
<CURRENT-ASSETS> 4,287
<PP&E> 4,560
<DEPRECIATION> 1,965
<TOTAL-ASSETS> 10,222
<CURRENT-LIABILITIES> 2,658
<BONDS> 2,508
<COMMON> 288
0
0
<OTHER-SE> 3,407
<TOTAL-LIABILITY-AND-EQUITY> 10,222
<SALES> 4,783
<TOTAL-REVENUES> 4,783
<CGS> 3,189
<TOTAL-COSTS> 3,189
<OTHER-EXPENSES> 1,054<F1>
<LOSS-PROVISION> 4
<INTEREST-EXPENSE> 107
<INCOME-PRETAX> 429
<INCOME-TAX> 119
<INCOME-CONTINUING> 310
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 310
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.09
<FN>
<F1>For "other costs and expenses" - Ref #5-03(b)3 - Includes R&D & Goodwill
Amor.
</FN>
</TABLE>
