<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 March 31, 1996
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-4448
BAXTER INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-0781620
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE BAXTER PARKWAY, DEERFIELD, ILLINOIS 60015-4633
(Address of principal executive offices) (Zip Code)
(847) 948-2000
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares of the registrant's Common Stock, $1 par value, outstanding
as of April 30, 1996 the latest practicable date, was 271,831,863 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(In millions, except per share data)
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Operations
Net sales $1,299 $1,158
Costs and expenses
Cost of goods sold 721 652
Marketing and administrative expenses 276 243
Research and development expenses 82 76
Special charge for litigation, net - 40
Allocated interest, net 24 23
Goodwill amortization 8 7
Other - (34)
- - --------------------------------------------------------------------------------
Total costs and expenses 1,111 1,007
- - --------------------------------------------------------------------------------
Income from continuing operations before income taxes 188 151
Income tax expense 50 53
- - --------------------------------------------------------------------------------
Income from continuing operations 138 98
Discontinued operations
Income from discontinued operations, net of applicable
income tax expense of $8 in 1996 and $2 in 1995 20 47
- - --------------------------------------------------------------------------------
Net income $158 $145
- - --------------------------------------------------------------------------------
Earnings per common share
Continuing operations $0.51 $0.35
Discontinued operations 0.07 0.17
- - --------------------------------------------------------------------------------
Net Income $0.58 $0.52
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Average number of common shares outstanding 272 281
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
<PAGE>
Baxter International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions, except shares)
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------
March 31, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
Current assets Cash and equivalents $592 $476
Accounts receivable 968 973
Notes and other current receivables 266 236
Inventories 940 906
Short-term deferred income taxes 119 189
Prepaid expenses 140 131
---------------------------------------------------------------------
Total current assets 3,025 2,911
- - ----------------------------------------------------------------------------------------
Property, At cost 3,481 3,427
plant and Accumulated depreciation
equipment and amortization (1,735) (1,678)
---------------------------------------------------------------------
Net property, plant and equipment 1,746 1,749
- - ----------------------------------------------------------------------------------------
Other assets Net assets of discontinued operations 2,639 2,619
Goodwill and other intangibles 1,152 1,098
Insurance receivables 825 805
Other 213 255
---------------------------------------------------------------------
Total other assets 4,829 4,777
- - ----------------------------------------------------------------------------------------
Total assets $9,600 $9,437
- - ----------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------
Current Notes payable to banks $158 $59
liabilities Current maturities of long-term debt and
lease obligations 181 160
Accounts payable and accrued liabilities 1,308 1,548
Income taxes payable 377 387
---------------------------------------------------------------------
Total current liabilities 2,024 2,154
- - ----------------------------------------------------------------------------------------
Long-term debt and lease obligations 2,672 2,372
- - ----------------------------------------------------------------------------------------
Long-term deferred income taxes 144 173
- - ----------------------------------------------------------------------------------------
Long-term litigation liabilities 675 678
- - ----------------------------------------------------------------------------------------
Other non-current liabilities 353 356
- - ----------------------------------------------------------------------------------------
Stockholders' Common stock, $1 par value,
equity authorized 350,000,000 shares,
issued 287,701,247 shares in
1996 and 1995 288 288
Additional contributed capital 1,847 1,837
Retained earnings 2,184 2,105
Common stock in treasury, at cost,
16,044,552 shares in 1996 and
15,801,580 shares in 1995 (591) (550)
Foreign currency adjustment 4 24
---------------------------------------------------------------------
Total stockholders' equity 3,732 3,704
- - ----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $9,600 $9,437
- - ----------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in millions)
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------
Three months ended March 31,
1996 1995
(Brackets denote cash outflows)
<S> <C> <C>
Cash flow from Income from operations $138 $98
continuing Adjustments
operations Depreciation and amortization 84 88
Deferred income taxes 38 (49)
Gain on asset dispositions - (57)
Special charge for litigation, net - 40
Other 4 3
Changes in balance sheet items
Accounts receivable 3 24
Inventories (27) (47)
Accounts payable and other
accrued liabilities (250) (21)
Restructuring program payments (12) (10)
Other (4) (43)
------------------------------------------------------------------------------
Cash flow (used) provided by
continuing operations (26) 26
- - ---------------------------------------------------------------------------------------------------
Cash flow (used) provided by discontinued operations (5) 279
- - ---------------------------------------------------------------------------------------------------
Investment Capital expenditures (66) (63)
transactions Acquisitions (net of cash received)
and investments in affiliates (97) 5
Proceeds from asset dispositions (2) 72
------------------------------------------------------------------------------
Investment transactions, net (165) 14
- - ---------------------------------------------------------------------------------------------------
Financing Issuance of debt and lease
transactions obligations 413 87
Redemption of debt and lease
obligations (845) (172)
Increase (decrease) in debt with maturities
of three months or less, net 858 (258)
Common stock dividends (78) (76)
Stock issued under employee
benefit plans 48 25
Purchase of treasury stock (80) (138)
------------------------------------------------------------------------------
Financing transactions, net 316 (532)
- - ---------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash
and equivalents (4) 5
- - ---------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 116 (208)
Cash and equivalents at beginning of period 476 468
- - ---------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $592 $260
- - ---------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
Baxter International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. FINANCIAL INFORMATION
The unaudited interim condensed consolidated financial statements of Baxter
International Inc. and its subsidiaries (the "Company" or "Baxter") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These interim condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes included in the Company's 1995
Annual Report to Stockholders.
In the opinion of management, the interim condensed consolidated financial
statements reflect all adjustments necessary for a fair presentation of the
interim periods. All such adjustments 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.
Certain amounts in the prior year condensed consolidated financial statements
and the related notes thereto have been reclassified to conform to the current
year presentation.
2. DISCONTINUED OPERATIONS
On November 28, 1995, the board of directors of Baxter International Inc.
approved in principle a plan to distribute to Baxter stockholders all of the
outstanding stock of its health-care cost management business (the
"Distribution") in a spin-off transaction which is expected to be tax-free. The
creation of two independent companies will enable Baxter and the new company to
devote management time, attention and investments directly to the core
strategies of each business. The new health-care cost management business will
consist of Baxter's cost management services, U.S. distribution, surgical
products and respiratory-therapy operations. This new company will operate as a
medical supplier, focused on helping customers manage the total cost of
providing patient care. The Distribution is expected to occur in late 1996 and
will result in the health-care cost management business operating as an
independent entity with publicly traded common stock.
The following selected financial information for the new health-care cost
management business (including previously divested businesses) is presented for
informational purposes only and does not reflect what the results of operations
and financial position would have been had it operated as a stand-alone entity.
Income statement data for the health-care cost management business is as follows
(unaudited):
- - --------------------------------------------------------------------------------
Three months ended March 31,
(in millions) 1996 1995
- - --------------------------------------------------------------------------------
Net sales $1,047 $1,159
Income before income taxes $29 $49
- - --------------------------------------------------------------------------------
Net sales and income before income taxes in 1996 reflect the loss of revenues
and income related to the Company's divestiture of its Industrial and Life
Sciences division to VWR Corporation in September 1995.
5
<PAGE>
Information regarding the composition of the net assets of the health-care cost
management business at March 31, 1996 and December 31, 1995 is provided below:
- - --------------------------------------------------------------------------------
March 31, December 31,
1996 1995
(in millions) (unaudited)
- - --------------------------------------------------------------------------------
Net current assets $763 $722
Net noncurrent assets 1,876 1,897
- - --------------------------------------------------------------------------------
Net assets of the health-care cost
management business $2,639 $2,619
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
The Company has determined that, through an issuance of new third-party debt,
approximately $1.2 billion of Baxter's existing debt will be indirectly assumed
by the new health-care cost management business upon spin-off.
3. ACQUISITIONS AND DIVESTITURES
On November 22, 1995, Baxter Healthcare Corporation ("BHC"), a subsidiary of
Baxter International Inc. and PSICOR, Inc. ("PSICOR"), announced that they had
signed a definitive agreement under which BHC would acquire PSICOR (a perfusion
services business) for $17.50 per share, or approximately $80 million. The
acquisition was completed at the end of January, 1996.
On May 9, 1996, Nestle S.A. and Baxter Healthcare Corporation agreed to enter
into negotiations for the purpose of dissolving Clintec Nutrition Company.
Clintec is a 50-50 joint venture between Baxter and Nestle that develops,
markets and distributes clinical nutrition products internationally. A final
dissolution agreement is expected in the second quarter of 1996.
4. INVENTORIES
Inventories consisted of the following:
- - --------------------------------------------------------------------------------
March 31, December 31,
1996 1995
(in millions) (Unaudited)
- - --------------------------------------------------------------------------------
Raw materials $192 $165
Work in process 162 164
Finished products 586 577
- - --------------------------------------------------------------------------------
Total inventories $940 $906
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
5. STOCK REPURCHASE PROGRAM
In November 1995, the Company's board of directors authorized the repurchase of
$500 million of the Company's common stock over several years. As of March 31,
1996, the Company had repurchased $80 million (approximately 1.7 million shares)
of its common stock.
6
<PAGE>
6. RESTRUCTURING CHARGES
In November 1993, the Company announced that its board of directors approved a
series of strategic actions to improve shareholder value, to extend positions of
leadership in high-growth health-care markets and to reduce costs. These
actions were designed to accelerate growth and reduce costs in the Company's
businesses worldwide, including reorganizations and consolidations in the United
States, Europe, Japan and Canada. In November 1993, the Company recorded a $230
million pretax provision to cover costs associated with these restructuring
initiatives. Since the announcement of the 1993 restructuring program, the
Company has implemented, or is in the process of implementing, all of the major
strategic actions associated with the restructuring program, which is expected
to be completed in 1997.
The following table summarizes the Company's 1993 restructuring reserves as of
December 31, 1995 and March 31, 1996 (unaudited):
- - --------------------------------------------------------------------------------
Divestitures
Employee- and asset Other
(in millions) related costs write-downs costs Total
- - --------------------------------------------------------------------------------
December 31, 1995 balance $48 $22 $23 $93
- - --------------------------------------------------------------------------------
Utilization:
Cash 4 0 6 10
Non-cash 0 3 0 3
- - --------------------------------------------------------------------------------
March 31, 1996 balance $44 $19 $17 $80
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
In September 1995, the Company completed a global study of its manufacturing
capacity. As a result of the study, management approved a plan to consolidate
the Company's manufacturing operations in Puerto Rico in order to eliminate
excess capacity and reduce manufacturing costs. To effect this plan, management
recorded a restructuring charge of $93 million in the third quarter of 1995.
The charge is predominantly comprised of the estimated costs to close the
Company's intravenous solutions plant and warehouse in Carolina, Puerto Rico.
Production and warehousing will be transferred and consolidated into other
facilities in Puerto Rico and the United States. Implementation of the plan is
underway and completion is anticipated by the end of 1998. Employee related
costs consist primarily of severance for the approximately 1,450 positions that
will be eliminated in connection with the approved plan.
In addition to the consolidation of the Company's manufacturing operations in
Puerto Rico, the Company initiated plans for other organizational structure
changes which resulted in a $10 million provision for employee severance.
The following table summarizes the Company's 1995 restructuring reserves as of
December 31, 1995 and March 31, 1996 (unaudited):
- - --------------------------------------------------------------------------------
Employee- Asset Other
(in millions) related costs write-downs costs Total
- - --------------------------------------------------------------------------------
December 31, 1995 balance $26 $19 $9 $54
- - --------------------------------------------------------------------------------
Cash utilization 5 0 0 5
- - --------------------------------------------------------------------------------
March 31, 1996 balance $21 $19 $9 $49
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
7
<PAGE>
7. LEGAL PROCEEDINGS
In the first quarter of 1996, significant developments occurred, primarily in
Japan and the United States, relative to claims and litigation pertaining to the
Company's plasma-based therapies. On March 13, 1996, Baxter Ltd., the Japanese
subsidiary of the Company, announced that it had accepted the basic terms of a
court-imposed settlement of lawsuits filed by 400 Japanese with hemophilia who
are infected with the AIDS virus and who used blood-clotting factor
concentrates. The settlement anticipates a one-time payment by the Japanese
government and all members of the factor concentrate industry to each claimant
of 45 million yen, or approximately $420,000, and continuing monthly payments
during the recipients' lifetime. Based on the courts' established definition of
responsibility, the Company would be responsible for approximately 12.5 percent
of the producers' share. The Company has previously established accruals that
are adequate to fund the proposed settlement in Japan.
On April 18, 1996, the Company announced that it is participating with Bayer
Corporation, Armour Pharmaceutical Company/Rhone-Poulenc Rorer Inc. and Alpha
Therapeutic Corporation in a joint settlement proposal pertaining to U.S.
hemophilia claims and litigation. The proposal includes a $600 million fund to
be divided per capita by U.S. people with hemophilia who are infected with the
AIDS virus and who used non heat-treated blood-clotting therapies, and an
additional $40 million for legal fees and administration costs. The Company's
share of the settlement would be $128 million, which is within its previously
established accruals for all plasma-based therapy claims and litigation.
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 mammary implants manufactured by a division of
American Hospital Supply Corporation. That section also discusses the status of
lawsuits and claims involving the Company's plasma-based therapies and updates
the status of other legal proceedings involving the Company.
8. ALLOCATED INTEREST, NET
Net interest expense consisted of the following (unaudited):
- - --------------------------------------------------------------------------------
Three months ended March 31,
(in millions) 1996 1995
- - --------------------------------------------------------------------------------
Interest expense $57 $52
Interest income (11) (9)
- - --------------------------------------------------------------------------------
Interest, net $46 $43
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Allocated to continuing operations $24 $23
Allocated to discontinued operations $22 $20
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
8
<PAGE>
Item. 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company's 1995 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, 1995. In the ARS, management outlined its
key financial objectives for 1996. These objectives and the results achieved
through March 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------
FULL YEAR 1996 OBJECTIVES FIRST-QUARTER RESULTS
- - ------------------------------------------------------------------------------------------
<S> <C>
- Generate $500 million in "operational - The Company generated "operational
cash flow" in 1996. cash flow" of $74 million in the three
months ended March 31, 1996.
- - ------------------------------------------------------------------------------------------
- Achieve net income growth in the high - The Company's net income growth was
single digits. 9.0% for the first quarter of 1996.
- - ------------------------------------------------------------------------------------------
- Continue to reduce marketing and - The Company's marketing and
administrative expenses as a percent administrative expenses as a percent
of sales from 18.2% in 1995. of sales were 18.2% for the three
months ended March 31, 1996,
compared to 18.3% for the same period
in 1995.
- - ------------------------------------------------------------------------------------------
- Maintain a net-debt-to-net-capital ratio - The Company's net-debt-to-net-capital
between 35% to 40%. ratio was 39.3% at March 31, 1996.
- - ------------------------------------------------------------------------------------------
- Repurchase $500 million of Baxter - The Company repurchased
stock over several years as authorized approximately $80 million of its
by the Board of Directors in November common stock during the first three
1995. months of 1996.
- - ------------------------------------------------------------------------------------------
</TABLE>
The above objectives were established based on total company results and do not
take into account, or make any adjustment for, the planned spin-off of the
health-care cost management business as a distribution to stockholders, which is
expected to occur by the end of 1996. Accordingly, the results presented above
reflect the combined results of both continuing and discontinued operations.
See further discussion of the spin-off of the health-care cost management
business in Note 2 to the Condensed Consolidated Financial Statements.
9
<PAGE>
The following management discussion and analysis pertains to continuing
operations, unless otherwise noted, and describes material changes in the
Company's financial condition since December 31, 1995. Trends of a material
nature are discussed to the extent known and considered relevant. The analysis
of results compares the three months ended March 31, 1996 with the
corresponding period of 1995.
RESULTS OF OPERATIONS
The following table shows net sales growth by major geographic region
(unaudited):
- - --------------------------------------------------------------------------------
Three months ended
March 31, Percent
(in millions) 1996 1995 Increase
- - --------------------------------------------------------------------------------
Geographic regions
International $655 $564 16%
United States 644 594 8%
- - --------------------------------------------------------------------------------
Total net sales $1,299 $1,158 12%
- - --------------------------------------------------------------------------------
The Company's overall net sales increase of 12% for the three-month period ended
March 31, 1996 over the comparable period in 1995 was the composite of
international sales growing at twice the rate of domestic sales. International
sales increased 16% to $655 million in the first quarter of 1996 over the
comparable period in 1995. Foreign exchange had no net impact on sales growth
for the three months ended March 31, 1996. International sales growth was
primarily the result of strong worldwide demand for RecombinateTM therapeutic
blood products, greater penetration of renal products (particularly in Asia) and
International Hospital growth (particularly in Latin America and Pacific Rim).
Domestic sales for the first quarter of 1996 were approximately $644 million, an
increase of 8% over the comparable period in 1995. Domestic sales growth was
primarily the result of acquisitions related to the perfusion services business
(SETA, Inc. and PSICOR, Inc.) and the settlement of patent litigation which
resulted in proceeds received for past royalties. Strong demand for the
Company's RecombinateTM therapeutic blood products and tissue heart valves was
largely offset by the first quarter decline in intravenous ("IV") systems sales
from the unusually high level of sales in 1995. The higher level of sales in
1995 resulted from the Columbia/HCA Healthcare Corporation contract signed late
in 1994.
The following table gives key ratios of certain income statement items
(unaudited):
- - --------------------------------------------------------------------------------
Three months ended
March 31,
(as a percent of sales) 1996 1995 Increase
- - --------------------------------------------------------------------------------
Gross profit margin 44.5% 43.7% 0.8 pts
Marketing and administrative expenses 21.2% 21.0% 0.2 pts
- - --------------------------------------------------------------------------------
The increase in gross profit margin for the three months ended March 31, 1996 is
primarily attributable to favorable product mix (particularly related to
cardiovascular products), geographic mix and past royalties received in a patent
litigation settlement, partially offset by lower margin sales resulting from the
perfusion service acquisitions of SETA and PSICOR.
10
<PAGE>
Marketing and administrative expenses as a percent of sales remained relatively
stable for the three month period ended March 31, 1996. The slight increase is
the result of higher expenses associated with funding the Company's expansion
into developing markets.
The following table shows research and development expenses (unaudited):
- - --------------------------------------------------------------------------------
Three months ended
March 31, Percent
(in millions) 1996 1995 Increase
- - --------------------------------------------------------------------------------
Research and development expenses $82 $76 8%
- - --------------------------------------------------------------------------------
As a percent of sales 6% 7%
- - ---------------------------------------------------------
The increase in research and development expenses reflects the Company's
continued emphasis on strategic initiatives such as blood substitutes, renal
therapy and transplantation, immunotherapy, gene therapy and the
Novacor-Registered Trademark- left-ventricular assist system.
The decrease in other income for the first quarter of 1996 was primarily the
result of a lower level of net gains associated with the disposal or
discontinuance of minor, non-strategic businesses and investments. There were
no net gains in the first quarter of 1996. In 1995 other income of $34 million
primarily related net gains associated with the disposal of the Company's
investment in MediSense, Inc., partially offset by foreign exchange losses and
minor, non-recurring charges.
The following table shows pretax income from continuing operations (unaudited):
- - --------------------------------------------------------------------------------
Three months ended
March 31, Percent
(in millions) 1996 1995 Increase
- - --------------------------------------------------------------------------------
Pre tax income from continuing
operations $188 $151 25%
- - --------------------------------------------------------------------------------
Pretax income from continuing operations in 1996 benefited from the settlement
of patent litigation and the SETA and PSICOR acquisitions, discussed
previously. Additionally, the 1995 results for the three-month period benefited
from the gains associated with the disposition of the Company's investment in
MediSense Inc., offset by a litigation charge for mammary implants. Excluding
these and other minor, non-recurring items, the estimated growth in pretax
income from continuing operations for the three months ended March 31, 1996
would have been approximately 15% over the comparable period in 1995. The
growth of 15% was primarily the result of increased international revenues,
which generally have higher margins.
The effective income tax rate for the total company (continuing and discontinued
operations) was 26.9% for the first quarter of 1996 compared to 27.5% for the
similar period in 1995. The slight reduction in the tax rate in 1996 is
primarily due to a larger portion of the Company's earnings generated in lower
tax jurisdictions. The effective income tax rate for continuing operations was
26.6% for the three months ended March 31, 1996 compared to 35.1% for the
similar period in 1995. The difference in the effective tax rates in 1996 and
1995 was primarily the result of the Company's decision in early 1995 to
repatriate certain foreign earnings. This had the effect of increasing the
effective rate for continuing operations, and lowering the effective rate for
discontinued operations. Management expects that the tax rate for
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<PAGE>
continuing operations, with its anticipated domestic and international earnings
mix, will be in the 28%-30% range in 1997.
Net earnings from continuing operations was $138 million in the first quarter of
1996 compared with $98 million in 1995. Earnings per common share from
continuing operations was 51 cents in the first quarter of 1996 compared to 35
cents in 1995. The increase in 1996 primarily reflects international sales
growth, higher margins resulting from product and geographical mixes, the
favorable impact of a patent settlement and the decrease in the effective tax
rate discussed above.
Net income and earnings per share increased 9% and 12%, respectively, for the
first three months of 1996 over the comparable period in 1995. These increases
reflect general growth in the Company's operations (primarily international),
improved gross margins and expense control, the favorable impact of a patent
settlement, and a slight decrease in the Company's overall effective tax rate,
offset by the loss of revenue resulting from the Company's divestiture of the
Industrial and Life Sciences division, which is reflected in discontinued
operations. The weighted average shares outstanding for the first quarter of
1996 decreased compared to the first quarter of 1995 as a result of the
completion of the Company's first $500 million stock repurchase program in
September 1995 and 1996 repurchases under its second $500 million repurchase
program. This decrease in average shares outstanding caused earnings per share
to grow at a higher rate than net income for this period.
RESTRUCTURING PROGRAMS
Baxter currently has two restructuring programs in process. The 1993
restructuring program was designed to accelerate growth and reduce costs in the
Company's businesses worldwide, including reorganizations and consolidations in
the United States, Europe, Japan and Canada. The 1995 restructuring program was
initiated to consolidate the Company's manufacturing operations in Puerto Rico
in order to eliminate excess capacity and reduce manufacturing costs. See Note
6 to the Condensed Consolidated Financial Statements for discussions related to
the initial charges for the programs, components of the charges, and cash and
non-cash usage of the related liabilities.
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 therewith and is satisfied that such actions are generally
progressing on schedule and that the overall program will meet previously
established financial targets. In the first three months of 1996, the Company
utilized $13 million of restructuring reserves, including $10 million in cash
payments. Cash outflows pertain primarily to employee-related costs for
severance, outplacement assistance, relocation and retention. The Company has
eliminated approximately 1,300 positions of the approximately 1,640 positions
affected by the program. The majority of the remaining reductions will occur
throughout the remainder of 1996 and 1997 as facility closures and
consolidations are completed as planned. The Company currently anticipates that
it will achieve approximately $110 million of savings in 1996, which is
consistent with its original savings target. Management anticipates that these
savings will be partially invested in increased research and development and
expansion into growing international markets.
Management is in the early stages of implementing its 1995 restructuring
program. In the first three months of 1996, the Company utilized $5 million of
restructuring reserves. Utilization primarily related to cash payments for
severance. The Company has eliminated approximately 250 positions of the
approximately 1,450 positions affected by the program. The plant closure and
consolidations in Puerto Rico will lower the Company's manufacturing costs.
Management
12
<PAGE>
believes these actions will help mitigate the Company's exposure to future
gross margin erosion arising from pricing pressure primarily in the United
States.
Management anticipates that future cash expenditures related to both the 1993
and 1995 restructuring programs will be funded from cash generated from
operations. Management further believes that its remaining restructuring
reserves are adequate to complete the actions contemplated by both restructuring
programs.
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 used by continuing operations (which includes working capital
components) was $26 million for the three months ended March 31, 1996 as
compared to $26 million provided by continuing operations for the corresponding
period in 1995. The difference primarily reflects net cash outflows for working
capital components, including a payment of $125 million in connection with the
mammary implant revised global settlement. Management believes that the
Company's cash flow is sufficient to support normal ongoing business
requirements.
As a result of the Company's continued emphasis on cash flow, management
monitors an internal performance measure called "operational cash flow" which
evaluates each operating business on all aspects of cash flow under its direct
control. The incentive compensation programs for the Company's senior
management 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):
- - --------------------------------------------------------------------------------
Three months ended
(in millions) March 31,
(brackets denote cash outflows) 1996 1995
- - --------------------------------------------------------------------------------
Cash flow provided by continuing operations
per the Company's condensed
consolidated statements of cash flows $(26) $26
Capital expenditures (66) (63)
Net interest after tax 14 13
Mammary implant litigation, net 121 10
Other 0 23
- - --------------------------------------------------------------------------------
"Operational cash flow" - continuing operations 43 9
- - --------------------------------------------------------------------------------
"Operational cash flow" - discontinued operations 31 101
- - --------------------------------------------------------------------------------
Total "operational cash flow" $74 $110
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Total "operational cash flow" of $74 million is consistent with the Company's
objective to generate "operational cash flow" of $500 million in 1996.
The Company's current assets exceeded current liabilities by $1,001 million at
March 31, 1996 and $757 million at December 31, 1995. Current assets include
accounts and notes receivable of $1,234 million and inventories of $940 million
at March 31, 1996.
13
<PAGE>
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.
The following table shows the components of net investment transactions
(unaudited):
- - --------------------------------------------------------------------------------
Three months ended
(in millions) March 31, Percent
(brackets denote cash outflows) 1996 1995 Increase
- - --------------------------------------------------------------------------------
Capital expenditures $(66) $(63) 5%
Acquisitions (97) 5 n/a
Proceeds from asset dispositions (2) 72 n/a
- - --------------------------------------------------------------------------------
Total investment transactions, net $(165) $14
- - --------------------------------------------------------
Capital investments are being made for the expansion of manufacturing capacity
for renal, cardiovascular and biotech products, renal leased equipment and
construction of a manufacturing facility for blood substitutes in Switzerland.
Consistent with Baxter's global expansion strategy, on May 6, 1996, the
Company's board of directors approved up to $30 million in capital expenditures
for two new IV products manufacturing facilities in China.
The increase in acquisitions primarily relates to the acquisition of PSICOR,
Inc. in January 1996. See Note 3 to the Condensed Consolidated Financial
Statements for additional information.
As of March 31, 1996, the Company's net-debt-to-net-capital ratio was 39.3% as
compared to 36.3% at December 31, 1995. These results are consistent with the
Company's stated goal of maintaining a net-debt-to-net-capital ratio of between
35% to 40%.
The Company has determined that, through an issuance of new third-party debt,
approximately $1.2 billion of Baxter's existing debt will be indirectly assumed
by the new health-care cost management business upon spin-off. Management
expects that the debt of both companies will be investment grade. See further
discussion of the spin-off of the health-care cost management business in Note 2
to the Condensed Consolidated Financial Statements.
The Company intends to fund its short-term and long-term obligations as they
mature by issuing additional debt or through cash flow from operations. The
Company believes it has lines of credit adequate to support ongoing operational,
restructuring and litigation requirements. Beyond that, the Company believes it
has sufficient financial flexibility to attract long-term capital on acceptable
terms as may be needed to support its obligations and growth objectives.
In November 1995, the Company's board of directors authorized the repurchase of
$500 million of the Company's common stock over a period of several years. As
of March 31, 1996, the Company had repurchased $80 million (or approximately 1.7
million shares) of its common stock.
On May 6, 1996, the board of directors declared a quarterly dividend on the
Company's common stock of 30.25 cents per share (annualized rate of $1.21 per
share). As a result of the planned spin-off of the health-care cost management
business, the Company is reviewing its current dividend policy. However, it is
management's present intent that the
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current annual dividend be allocated between Baxter's continuing operations and
the health-care cost management business subsequent to the spin-off.
LITIGATION
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 mammary implants manufactured by a division of American
Hospital Supply Corporation. That section also discusses the status of lawsuits
and claims involving the Company's plasma-based therapies.
Upon resolution of any of the uncertainties described in "Part II - Item 1.
Legal Proceedings" in this document, 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, individually or
in the aggregate, will not have a material adverse effect on the Company's cash
flow or consolidated financial position.
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REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
A review of the interim condensed consolidated financial information included in
this Quarterly Report on Form 10-Q for the three months ended March 31, 1996 has
been performed by Price Waterhouse LLP, the Company's independent public
accountants. Their report on the interim condensed consolidated financial
information follows. There have been no adjustments or disclosures proposed by
Price Waterhouse LLP which have not been reflected in the interim condensed
consolidated financial information. Their report is not considered a report
within the meaning of Sections 7 and 11 of the Securities Act of 1933 and
therefore, the independent accountants' liability under Section 11 does not
extend to it.
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REPORT OF INDEPENDENT ACCOUNTANTS
May 14, 1996
Board of Directors and Stockholders of
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
March 31, 1996 and for the three-month periods ended March 31, 1996 and 1995.
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, 1995, 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 14,
1996 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, 1995, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
Price Waterhouse LLP
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PART II. OTHER INFORMATION
Baxter International Inc. and Subsidiaries
Item 1. Legal Proceedings
As of March 31, 1996, the Company was a defendant or co-defendant in 6,986
lawsuits and had 1,761 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 8,725 as of
December 31, 1995. In the first quarter of 1996, 37 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 Louisiana women with mammary implants filed against all manufacturers
of such implants 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 10 other purported additional class actions, none of which is
currently certified. 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.
Three other suits seeking class certification on behalf of all women in the
Provinces of Ontario, Quebec and British Columbia, 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; HARRINGTON V. DOW CORNING CORPORATION, ET AL., Supreme Court,
British Columbia, C954330). On April 11, 1996, the HARRINGTON court certified
the proceeding as a class action on one issue only: whether silicone gel breast
implants are reasonably fit for their intended purpose. The Company is
vigorously defending this action.
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 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
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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. The Company has consummated a
"Coverage-in-Place" Agreement with certain London Market Insurers which it
believes collectively subscribed the majority of the Company's solvent London
occurrence coverage for the period 1979 to 1985. The Agreement resolves the
signatory insurers' coverage defenses and specifies rules and procedures for
their allocation and payment of defense and indemnity costs. The amounts the
signatory insurers will pay the Company depends upon how much loss the Company
incurs in connection with breast implant claims, subject to policy limits.
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 from the claims-made insurers and others exceeds $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 LINDSEY, ET AL., V. DOW CORNING, ET AL., U.S.D.C. N. Dist. Ala., CV 94-P-
11558-S. 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 30 years following final approval of the settlement by the courts,
was $4.255 billion. The Company's share of this settlement was 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 funding for current
claims. The Court indicated that it expected that there would be a
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substantial ratchet downward in the amounts payable, and this expectation
resulted in further negotiations among the parties. As a result of the
anticipated substantial ratchet, on October 9, 1995, the Court in the LINDSEY
case reopened the right for individual plaintiffs and claimants to remove
themselves from the settlement ("opt-out"). On October 20, 1995, Baxter,
Bristol-Myers Squibb Company and Minnesota Mining and Manufacturing Company
presented a draft proposal to the Court modifying, among other things, the
compensation program under the current settlement. The settlement continues to
provide compensation for all present and future plaintiffs and claimants who
have, or had at any time, one or more mammary implants manufactured by any of
the settling defendants; however, current claims would be paid substantially
through a claims-made program and all compensation amounts have been
substantially reduced. On November 13, 1995, the Company's Board of Directors
authorized the Company to participate in the revised settlement. Subsequently,
Union Carbide Corporation and McGhan Medical Corporation joined the revised
settlement. On December 22, 1995, the Court approved the revised settlement
program. On January 16, 1996, the Company, Bristol-Myers Squibb Company and
Minnesota Mining and Manufacturing Company each paid $125 million into the
Court-established fund as an initial reserve to pay claims under the revised
settlement.
Under the revised settlement, plaintiffs and claimants will receive letters from
the Court's claims administration office notifying them of the status of their
claim, at which time they will have the option of accepting the settlement or
opting out of the settlement. The "Notification of Status" letters are expected
to be sent out beginning in May, 1996.
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 moved to transfer all of those cases to the federal district
court in Michigan in which the Dow Corning bankruptcy is pending. The Court
denied transfer of these cases. Baxter appealed the Court's denial, and on
April 9, 1996, the 6th Circuit Court of Appeals reversed the District Court's
ruling and remanded the cases back to the district court. The District Court
must now decide whether to grant transfer of these cases or abstain (in essence,
refuse to transfer).
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.
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Upon resolution of any of the uncertainties concerning these cases, the Company
may 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 March 31, 1996, the Company was a defendant, or co-defendant, in 430
lawsuits, and had 905 pending claims in the United States, Canada, Ireland,
Italy, Spain, Japan and the Netherlands, involving individuals who have
hemophilia, or their representatives. Those cases and claims 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 stayed enforcement of the writ pending a
petition for certiorari by the plaintiffs to the U.S. Supreme Court. On October
2, 1995, the U.S. Supreme Court denied the plaintiffs petition for certiorari.
On January 16, 1996, the District Court decertified the class. Baxter has also
been named in five other purported class actions, none of which have been
certified and three of which have been transferred to the MDL for discovery
purposes.
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,
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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 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 Insurance Co., one
of the Company's comprehensive general liability insurance carriers, 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. 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 had
been stayed pending resolution of the Company's California case. Zurich
appealed that stay and the Illinois Appellate Court reversed and issued a
certificate of importance ensuring the Illinois Supreme Court will hear the
Company's appeal. In January 1996, the Illinois Supreme Court issued an interim
order precluding the company from prosecuting the California action during the
pendency of the appeal before the Illinois Supreme Court. Thus, the California
action is currently stayed.
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 an assistance
fund for approximately 1,900 individuals, and their families, who contracted HIV
from blood and blood products in the early 1980s. The fund of approximately
$180 million will be established by contributions 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
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four-year period of time. Claims against the German federal and state
governments, the German Red Cross and fractionators contributing to the fund
are, by law, extinguished.
In Japan, the Company is a defendant, along with the Japanese government and
four other codefendants, in multiple-plaintiff Factor Concentrate cases in Osaka
and Tokyo. Both cases currently involve 374 plaintiffs, at least 166 of whom
allegedly used Baxter Factor Concentrates. The Japanese Ministry of Health and
Welfare ("MHW") estimates that there are approximately 1,400 hemophiliacs who
are HIV-positive or AIDS-manifested, and approximately 400 who have died.
In October 1995, the Osaka and Tokyo court issued interim opinions setting forth
a first proposal for settlement. In general, the settlement recommendations
provided for payment of an up-front, lump sum amount of approximately $450,000
per plaintiff, 40% funded by the Japanese government and 60% funded by the
corporate defendants. The proposal foresees limited credits to be applied to
the corporate defendants' share of the settlement for prior payments made under
the "Yuai Zaidan" (a government-administered program, funded almost entirely by
the corporate defendants, which pays monthly amounts to HIV-infected and AIDS-
manifested hemophiliacs and their survivors). The courts also raised the
possibility of additional payments of unspecified amounts supplemental to the
lump-sum, which will be paid during the life of an infected hemophiliac. The
courts directed the parties to commence settlement negotiations under the
framework outlined above.
On February 9, 1996, the MHW announced that it had recently discovered several
files of documents which confirmed that the Ministry was aware, at the time the
heat-treated Factor Concentrates were available, the non heat-treated Factor
Concentrates could transmit the AIDS virus. On February 16, 1996, the MHW
admitted the responsibility on the part of the government as indicated in the
courts' interim opinions and presented a public apology.
On March 7, 1996, the Osaka and Tokyo courts issued their second interim
opinions concerning a proposal of settlement. The second proposal did not alter
the basic terms of the first proposal and included additional clarifications and
provisions concerning supplemental on-going payments, attorneys fees,
continuation of the Yuai Zaidan, contributions of the corporate defendants, and
additional burdens on the Japanese government. With respect to the corporate
defendants' contributions, the courts determined that each such defendant's
share of the settlement should be in accordance with it's respective market
share as it existed in 1983. Thus, the Company's share would be approximately
12.50% (of the 60% portion of the total settlement to be funded by the corporate
defendants). On March 29, 1996, the courts announced that each party, including
the Company, had accepted the court-directed settlement. A number of issues and
details remain to be resolved which may alter some of the terms discussed above.
On April 18, 1996, Alpha Therapeutic Corporation, Armour Pharmaceutical Company,
Baxter Healthcare Corporation, and Bayer Corporation made a settlement proposal
to all plaintiffs' counsel of record in the U.S. hemophilia Factor Concentrate
litigation. The proposal essentially provides for $600 million in payments to
HIV-positive people with hemophilia in the U.S., per capita, with an additional
$40 million for legal fees and administration costs. Included in the terms of
the settlement proposal are proposed restrictions on the number of persons who
can opt-out, a requirement for insurance carrier approval, and a requirement
that each participant execute general releases for present and future claims.
Negotiations concerning the defendants' proposal are continuing.
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The Company has been notified that approximately 1,354 HIV positive hemophiliacs
in Spain are investigating the possibility of filing suit both in the United
States and in Spain against the Company and other fractionators which sold
factor concentrate in Spain in the early 1980s. As of this time, no formal
suits have been filed against the Company either in Spain or the United States.
Approximately 800 of these individuals have taken Baxter factor concentrates.
On February 21, 1994, the Company began the voluntary withdrawal worldwide 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-Registered Trademark-, produced with an additional
viral inactivation process was introduced by the Company after licensure in the
United States and certain other countries.
As of March 31, 1996, the Company had received reports of alleged Hepatitis C
transmission from 352 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 March 31, 1996, the Company was a defendant in 110 lawsuits and had 88
pending claims in United States, Denmark, France, Germany, Italy, Spain, Sweden
and the United Kingdom resulting from this incident. Seven suits in the United
States 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; KELLEY V.
BAXTER, U.S.D.C., M.D., NC, 6:95CV00178; and LOGAN, ET AL. V. BAXTER, U.S.D.C.,
Central Dist., CA, 95-3584). On December 18, 1995, the LOWE class action
allegations were voluntarily dismissed with prejudice by the plaintiffs. 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. 95-1060. Of the 104 pending suits in the United States, 80 are filed
in federal court (including the 6 class actions), and all are expected to be
transferred to Judge Real. On February 21, 1996, Judge Real certified a
nationwide class of all recipients and their spouses, representatives, etc., who
had infused Gammagard. The Company sought an immediate stay of the class notice
from the 9th Circuit Court of Appeals and subsequently filed a Writ of Mandamus
seeking class decertification. The 9th Circuit Court of Appeals granted the
stay of the class notice on March 19, 1996 and on April 12, 1996, granted a stay
of the class certification pending final determination on the writ. Judge Real
has scheduled a trial for September 18, 1996. The Company is vigorously
defending these cases.
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.
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In the third quarter of 1995, significant developments occurred, primarily in
the United States, Europe and Japan relative to claims and litigation pertaining
to the Company's plasma-based therapies, including Factor Concentrates. After
analyzing circumstances in light of recent developments and considering various
factors and issues unique to each geography, the Company revised its estimated
exposure from the $131 million previously recorded for Factor Concentrates to
$378 million for all plasma based therapies. Related estimated insurance
recoveries were revised from $83 million for Factor Concentrates to $274 million
for all plasma based therapies. This resulted in a net charge of $56 million in
the third quarter of 1995.
Upon resolution of any of the uncertainties concerning these cases, or if the
Company, along with the other defendants, enters into comprehensive settlements
of the litigations 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.
Baxter Healthcare Corporation ("BHC") was one of 10 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 allegedly suffered allergic
reactions to natural rubber latex gloves and other protective equipment or who
allegedly 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. On February 29, 1996, the California Appellate
Court upheld the trial court's ruling. In April 1994, a similar purported
class action, GREEN, ET AL. V. BAXTER HEALTHCARE 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. As of March 31, 1996, 24 additional
lawsuits and two claims have been served on the Company containing similar
allegations of sensitization to natural rubber latex products. 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.
25
<PAGE>
Under the U.S. Superfund statute and many state laws, generators of hazardous
waste which is sent to a disposal or recycling site are liable for cleanup of
the site if contaminants from that property later leak into the environment.
The law provides that potentially responsible parties may be held jointly and
severally liable for the costs of investigating and remediating a site. This
liability applies to the generator even if the waste was handled by a contractor
in full compliance with the law.
As of March 31, 1996, Baxter has been named as a potentially responsible party
for cleanup costs at 18 hazardous waste sites. The Company's largest exposure
is at 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. The estimated exposure for the remaining 17
sites is approximately $7 million, which 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.
26
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1996 annual meeting of stockholders was held on May 6, 1996 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:
Number of Votes
----------------------------------------
In favor Abstained/Withheld
----------- ------------------
Silas S. Cathcart 230,182,393 3,752,007
David W. Grainger 230,220,908 3,713,492
Martha R. Ingram 230,274,187 3,660,213
Harry M. Jansen Kraemer, Jr. 230,293,507 3,640,893
Reed V. Tuckson, M.D. 230,115,233 3,819,167
Fred L. Turner 230,246,679 3,687,721
The results of other matters voted upon at the annual meeting are as follows:
Number of Votes
---------------------------------------
In favor Against Abstained
----------- ----------- -----------
Approval of Price Waterhouse LLP
as independent accountants for
the Company for 1996. 232,829,666 610,215 494,519
Defeat of the stockholder proposal
relating to cumulative voting in the
election of directors. 64,489,379 131,509,942 14,388,892
27
<PAGE>
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
A report on Form 8-K, dated April 19, 1996, was filed with the SEC under
Item 5, Other Events, to file a press release which announced participation in a
joint settlement proposal for U.S. hemophilia litigation.
28
<PAGE>
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: May 14, 1996 By:/s/ Harry M. Jansen Kraemer, Jr.
------------------------------------
Harry M. Jansen Kraemer, Jr.
Senior Vice President and
Chief Financial Officer
29
<PAGE>
Exhibits Filed with Securities and Exchange Commission
Number Description of Exhibit Page Number
- - ------ ---------------------- -----------
11.1 Computation of Primary
Earnings Per Common Share 31
11.2 Computation of Fully Diluted
Earnings Per Common Share 32
12 Computation of Ratio of
Earnings to Fixed Charges 33
15 Letter Re Unaudited Interim
Financial Information *
27 Financial Data Schedule *
(All other exhibits are inapplicable.)
* Shown only in the original filed with the Securities and Exchange Commission
30
<PAGE>
Baxter International Inc. and Subsidiaries
Exhibit 11.1 - Computation of Primary Earnings Per Common Share
- - --------------------------------------------------------------------------------
(Unaudited) (in millions, except per share data) Three Months Ended
March 31,
1996 1995
- - --------------------------------------------------------------------------------
EARNINGS
Income from continuing operations applicable
to common stock $138 $98
Income from discontinued operations 20 47
- - --------------------------------------------------------------------------------
Net income available for common stock $158 $145
- - --------------------------------------------------------------------------------
SHARES
Weighted average number of common
shares outstanding 272 281
- - --------------------------------------------------------------------------------
PRIMARY EARNINGS PER COMMON SHARE
Income from continuing operations $0.51 $0.35
Income from discontinued operations 0.07 0.17
- - --------------------------------------------------------------------------------
Net income $0.58 $0.52
- - --------------------------------------------------------------------------------
31
<PAGE>
Baxter International Inc. and Subsidiaries
Exhibit 11.2 - Computation of Fully Diluted Earnings Per Common Share
- - --------------------------------------------------------------------------------
(Unaudited) (in millions, except per share data) Three Months Ended
March 31,
1996 1995
- - --------------------------------------------------------------------------------
EARNINGS
Income from continuing operations applicable
to common stock $138 $98
Income from discontinued operations 20 47
- - --------------------------------------------------------------------------------
Net income available for common stock $158 $145
- - --------------------------------------------------------------------------------
SHARES
Weighted average number of common shares
outstanding 272 281
Additional shares assuming exercise of
stock options, performance share awards and stock
purchase plan subscriptions 5 3
- - --------------------------------------------------------------------------------
Average common shares and equivalents outstanding 277 284
- - --------------------------------------------------------------------------------
FULLY DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations $0.50 $0.34
Income from discontinued operations 0.07 0.17
- - --------------------------------------------------------------------------------
Net income $0.57 $0.51
- - --------------------------------------------------------------------------------
32
<PAGE>
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 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing operations
before income tax expense (benefit) $524 $559 $(74) $510 $431
Add:
Interest costs 117 120 109 100 110
Estimated interest included
in rentals (1) 29 31 31 29 24
- - -------------------------------------------------------------------------------------------
Fixed charges as defined 146 151 140 129 134
Interest costs capitalized (3) (2) (5) (5) (4)
Losses of less than majority owned
affiliates, net of dividends 10 18 27 34 32
- - -------------------------------------------------------------------------------------------
Income (loss) as adjusted $677 $726 $88 $668 $593
- - -------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 4.64 4.80 0.63 5.18 4.42
- - -------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------
Three months ended March 31 1996
Income from continuing operations before
income tax expense $188
Add:
Interest costs 30
Estimated interest included in rentals (1) 7
- - -------------------------------------------------------------------------------------------
Fixed charges as defined 37
Interest costs capitalized (1)
Losses of less than majority
owned affiliates, net of dividends 1
- - -------------------------------------------------------------------------------------------
Income as adjusted $226
- - -------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 6.09
- - -------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the estimated interest portion of rents.
33
<PAGE>
EXHIBIT 15
May 14, 1996
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
May 14, 1996 (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
34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1996 AND CONSOLIDATED STATEMENT OF
INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 592
<SECURITIES> 0
<RECEIVABLES> 987
<ALLOWANCES> 19
<INVENTORY> 940
<CURRENT-ASSETS> 3,025
<PP&E> 3,481
<DEPRECIATION> 1,735
<TOTAL-ASSETS> 9,600
<CURRENT-LIABILITIES> 2,024
<BONDS> 2,672
0
0
<COMMON> 288
<OTHER-SE> 3,444
<TOTAL-LIABILITY-AND-EQUITY> 9,600
<SALES> 1,299
<TOTAL-REVENUES> 1,299
<CGS> 721
<TOTAL-COSTS> 721
<OTHER-EXPENSES> 90<F1>
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> 188
<INCOME-TAX> 50
<INCOME-CONTINUING> 138
<DISCONTINUED> 20
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 158
<EPS-PRIMARY> .58
<EPS-DILUTED> .57
<FN>
<F1>For "Other costs and expenses" - Ref #5-03(b)3 - Includes R & D & Goodwill
amortization.
</FN>
</TABLE>
