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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, 1997
--- 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-0781620
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE BAXTER PARKWAY, DEERFIELD, ILLINOIS 60015-4633
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(Address of principal executive offices) (Zip Code)
(847) 948-2000
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(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, 1997 the latest practicable date, was 277,949,485 shares.
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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,
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1997 1996
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<S> <C> <C>
Operations
Net sales $ 1,443 $ 1,299
Costs and expenses
Cost of goods sold 782 721
Marketing and administrative expenses 323 276
Research and development expenses 90 82
Interest, net 38 24
Goodwill amortization 10 8
Acquired research and development 352 --
Other income (2) --
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Total costs and expenses 1,593 1,111
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Income (loss) from continuing operations before income taxes (150) 188
Income tax expense 53 50
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Income (loss) from continuing operations (203) 138
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Discontinued operations
Income from discontinued operations, net of applicable income tax
expense of $8 -- 20
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Net income (loss) $ (203) $ 158
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Earnings (loss) per common share
Continuing operations $ (0.74) $ 0.51
Discontinued operations -- 0.07
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Net income (loss) $ (0.74) $ 0.58
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Average number of common shares outstanding 274 272
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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Baxter International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions, except shares)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
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(Unaudited)
<S> <C> <C>
Current assets
Cash and equivalents $ 588 $ 761
Accounts receivable 1,320 1,219
Notes and other current receivables 285 266
Inventories 1,202 883
Short-term deferred income taxes 229 212
Prepaid expenses 184 139
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Total current assets 3,808 3,480
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Property, plant and equipment, net 2,150 1,843
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Other assets
Goodwill and other intangibles 1,542 1,386
Insurance receivables 582 641
Other 256 246
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Total other assets 2,380 2,273
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Total assets $ 8,338 $ 7,596
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Current liabilities
Notes payable to banks $ 236 $ 121
Current maturities of long-term debt and lease obligations 210 225
Accounts payable and accrued liabilities 1,965 1,704
Income taxes payable 429 395
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Total current liabilities 2,840 2,445
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Long-term debt and lease obligations 2,174 1,695
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Long-term deferred income taxes 313 255
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Long-term litigation liabilities 293 365
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Other non-current liabilities 392 332
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Stockholders' equity
Common stock, $1 par value, authorized 350,000,000 shares,
issued 287,701,247 shares in 1997 and 1996 288 288
Additional contributed capital 1,877 1,825
Retained earnings 742 1,022
Common stock in treasury, at cost, 9,861,963 shares in 1997
and 15,261,100 shares in 1996 (411) (611)
Foreign currency adjustment (170) (20)
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Total stockholders' equity 2,326 2,504
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Total liabilities and stockholders' equity $ 8,338 $ 7,596
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in millions)
<TABLE>
<CAPTION>
Three months ended
March 31,
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1997 1996
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<S> <C> <C>
(Brackets denote cash outflows)
Cash flow from continuing operations
Income (loss) from continuing operations $ (203) $ 138
Adjustments
Depreciation and amortization 109 84
Deferred income taxes 4 38
Acquired research and development 352 --
Other 31 4
Changes in balance sheet items
Accounts receivable 8 3
Inventories (81) (27)
Accounts payable and other accrued liabilities (183) (250)
Restructuring program payments (6) (12)
Other (11) (4)
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Cash flow from continuing operations 20 (26)
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Cash flow from discontinued operations -- (5)
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Investment transactions
Capital expenditures (69) (66)
Acquisitions (net of cash received) and investments in affiliates (346) (97)
Proceeds from asset dispositions (4) (2)
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Investment transactions, net (419) (165)
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Financing transactions
Issuance of debt and lease obligations 508 413
Redemption of debt and lease obligations (142) (845)
Increase (decrease) in debt with maturities of three months or less, net (59) 858
Common stock dividends (77) (78)
Stock issued under employee benefit plans 29 48
Purchase of treasury stock -- (80)
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Financing transactions, net 259 316
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Effect of foreign exchange rate changes on cash and equivalents (33) (4)
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Increase (decrease) in cash and equivalents (173) 116
Cash and equivalents at beginning of period 761 476
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Cash and equivalents at end of period $ 588 $ 592
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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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 1996 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, except for the in-process research
and development charge relating to the acquisitions discussed below, 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.
2. ACQUISITIONS
All acquisitions during the three months ended March 31, 1997 and 1996, were
accounted for under the purchase method. The purchase price of an acquisition
is allocated to the net assets acquired based on estimates of their fair values
at the date of the acquisition. The excess of the purchase price over the net
tangible assets and liabilities acquired is allocated to intangible assets. The
initial purchase price allocation is preliminary and is subject to change during
the year following the acquisition as additional information concerning asset
and liability valuation is obtained. Therefore, the final allocation may differ
from the preliminary allocation. Results of operations of acquired companies
are included in the Company's results of operations as of the respective
acquisition dates. The pro forma information presented below is not necessarily
indicative of what operating results would have been had the acquisitions
occurred on the indicated dates, nor is it necessarily indicative of future
operating results.
IMMUNO INTERNATIONAL AG
In December 1996, the Company commenced the acquisition of Immuno International
AG ("Immuno"), a European manufacturer of biopharmaceutical products and
services for transfusion medicine. The acquisition of Immuno is being completed
in a three-part transaction and is valued at approximately $570 million. In
addition, the Company assumed approximately $280 million of Immuno's net debt.
The first and second parts of the transaction were completed during the first
fiscal quarter of 1997 with a $200 million payment to the private shareholders
and $170 million in payments relating to a tender offer for most of the publicly
traded shares of Immuno. After completing this second part, the Company has
acquired 68% of both the equity and the voting rights of Immuno. The final part
of the acquisition, the purchase of the remaining shares from private
shareholders, is expected to be completed by mid-1997.
Under the terms of the stock-purchase agreement with the private
shareholders, approximately 84 million Swiss francs (or approximately $57
million at quarter-end) will be held in escrow to cover legal contingencies.
See "Part II - Item 1.
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Legal Proceedings" for further discussion. The operations of Immuno are
included in the condensed consolidated financial statements on the basis of
fiscal years ending November 30, which is the same basis used for the
Company's other foreign operations. Therefore, the acquisition was recorded
in the Company's first fiscal quarter of 1997.
On the basis of an independent appraisal, approximately $220 million of the
Immuno purchase price was allocated to in-process research and development
("R&D") which, under generally accepted accounting principles ("GAAP"), was
immediately expensed by the Company. The technological feasibility of the in-
process R&D had not yet been established and, at present, the technology has no
alternative future use. A significant portion of the purchase price was
allocated to existing product technology and this amount, which was
approximately $95 million, is being amortized on a straight-line basis over 20
years.
Included in other income and expense in the first quarter of 1997 is a $29
million charge relating to the integration of certain of Baxter's operations
with those of Immuno. Also included in other income for the three months
ended March 31, 1997 is a $27 million foreign currency translation gain
relating to the Swiss Franc denominated acquisition liabilities to the former
shareholders of Immuno.
RESEARCH MEDICAL, INC.
In March 1997, Baxter acquired Research Medical Inc. ("RMI"), a provider of
specialized products used in open-heart surgery. The purchase price was
approximately $239 million and was settled with 4,801,711 shares of Baxter
International Inc. common stock, issued from treasury.
On the basis of an independent appraisal, approximately $132 million of the RMI
purchase price was allocated to in-process R&D which, under GAAP, was
immediately expensed by the Company. The technological feasibility of the in-
process R&D had not yet been established and, at present, the technology has no
alternative future use. Approximately $40 million of the excess of the purchase
price over the net tangible assets was allocated to existing product technology
and is being amortized on a straight-line basis over 14 years. The majority of
the remainder of the excess purchase price was allocated to goodwill in the
amount of approximately $29 million and is being amortized on a straight-line
basis over 20 years.
PSICOR, INC.
In January 1996, Baxter Healthcare Corporation, a subsidiary of the Company,
acquired PSICOR, Inc., a perfusion-services business, for $17.50 per share, or
$84 million.
PRO FORMA INFORMATION
Had the acquisitions of Immuno and RMI taken place at the beginning of the first
fiscal quarter of 1997, revenues, net income and earnings per share would not
have been materially different from the reported amounts and, therefore, pro
forma information is not presented. Had the acquisitions of Immuno, RMI and the
Clintec parenteral-nutrition business taken place at the beginning of the first
fiscal quarter of 1996, the Company's pro forma (unaudited) revenues for the
first fiscal quarter of 1996 would be approximately 13% higher than the reported
revenues. Excluding the effect of the R&D charge, pro
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forma net income and earnings per share would not have been materially
different from the reported results and, therefore, the pro forma amounts are
not presented. The R&D charge, had it been recorded in the first fiscal
quarter of 1996, would have reduced reported net income from $158 million to
a $194 million net loss, and would have reduced the reported earnings per share
from $.58 per share to a $.71 per share loss.
3. INVENTORIES
Inventories consisted of the following:
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March 31, December 31,
1997 1996
(in millions) (Unaudited)
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Raw materials $ 300 $190
Work in process 231 152
Finished products 671 541
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Total inventories $1,202 $883
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4. RESTRUCTURING RESERVES
In November 1993, the Company recorded a $216 million restructuring charge to
cover costs associated with strategic actions designed to accelerate growth and
reduce costs, including reorganizations and consolidations in the United States,
Europe, Japan and Canada. The restructuring program is expected to be completed
by the end of 1997.
Employee-related costs include provisions for severance, outplacement
assistance, relocation and retention payments. Since the inception of the
program, the Company has eliminated approximately 1,800 positions, which exceeds
the 1,640 positions originally targeted. Additional positions are expected to
be eliminated during 1997.
The following table summarizes the 1993 restructuring reserves as of
December 31, 1996 and March 31, 1997 (unaudited):
Divestures
Employee- and asset Other
(in millions) related costs write-downs costs Total
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December 31, 1996 balance $14 $16 $9 $39
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Utilization:
Cash 3 - 1 4
Non-cash - 4 - 4
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March 31, 1997 balance $11 $12 $8 $31
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In September 1995, the Company recorded a restructuring charge of $103 million
primarily to eliminate excess plant capacity and reduce manufacturing costs, as
well as to initiate certain organizational structure changes. The charge
predominantly relates to the closure of the intravenous solutions plant and
warehouse in Carolina, Puerto Rico. Production and warehousing will be
transferred and consolidated into other facilities. Employee-related costs
consist of severance for the approximately 1,450 positions that will be
eliminated. Approximately 340 positions have been eliminated to date and
completion of the plan is anticipated by the end of 1998.
The following table summarizes the 1995 restructuring reserves as of
December 31, 1996 and March 31, 1997 (unaudited):
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Employee- Asset Other
(in millions) related costs write-downs costs Total
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December 31, 1996 balance $16 $11 $8 $35
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Utilization - - - -
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March 31, 1997 balance $16 $11 $8 $35
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5. LEGAL PROCEEDINGS
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.
6. INTEREST, NET
Net interest expense consisted of the following (unaudited):
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Three months ended March 31,
(in millions) 1997 1996
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Interest expense $47 $57
Interest income (9) (11)
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Interest, net $38 $46
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Continuing operations $38 $24
Discontinued operations $0 $22
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7. AGREEMENT TO ACQUIRE BIEFFE MEDITAL S.P.A.
In April 1997, the Company signed an agreement to acquire Bieffe Medital S.P.A.,
a leading European manufacturer of dialysis and intravenous solutions and
containers, for $185 million, plus assumption of debt of approximately $50
million. The acquisition is subject to several customary conditions, including
satisfactory due diligence review and clearance from the European anti-trust
authorities. The closing is anticipated to occur by the end of 1997.
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ITEM. 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Baxter International Inc.'s ("Baxter" or the "company") 1996 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,
1996. In the ARS, management outlined its key financial objectives for 1997.
These objectives and the results achieved through March 31, 1997 are summarized
as follows:
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FULL YEAR 1997 OBJECTIVES RESULTS THROUGH MARCH 31, 1997
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Increase net sales approximately Net sales increased 4% before
10% before the impact of 1997 the impact of the 1997
acquisitions and 20% including 1997 acquisitions of Immuno
acquisitions. International AG ("Immuno")
and Research Medical, Inc.
("RMI"), and increased 11%
including these acquisitions.
First quarter 1997 net sales
growth was unfavorably
impacted by changes in
foreign exchange rates and
royalties received in a
patent litigation settlement
in the prior year quarter.
In addition, as the
acquisitions of Immuno and
RMI occurred during the
quarter, less than three
months of net sales relating
to these entities was
reflected in the Company's
first quarter 1997 results.
Management expects to achieve
the full year objective.
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Achieve net income growth in the The Company's growth in
low double digits. income from continuing
operations for the three
months ended March 31, 1997,
excluding the in-process
research and development
charge relating to the
acquisitions of Immuno and
RMI discussed below, was 9%.
The growth rate was
unfavorably affected by the
1996 patent litigation
settlement discussed above.
Management expects to achieve
the full year objective.
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Generate $300 million in The Company generated $4
"operational cash flow", before million of "operational cash
litigation payments. flow" in the three months
ended March 31, 1997, before
litigation payments. First
quarter cash flows were
consistent with expectations
and management believes the
full year target will be
achieved.
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RESULTS OF OPERATIONS
In December 1996, Baxter commenced the acquisition of Immuno, a European
manufacturer of biopharmaceutical products and services for transfusion
medicine. In March 1997, the Company acquired RMI, a provider of specialized
products used in open-heart surgery. See Note 2 to the Condensed Consolidated
Financial Statements for further information regarding these acquisitions.
The following table shows net sales growth by major geographic region:
NET SALES TRENDS BY GEOGRAPHIC REGIONS
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THREE MONTHS ENDED MARCH 31 Percent
(IN MILLIONS) 1997 1996 Increase
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Geographic regions
International $765 $655 17%
United States 678 644 5%
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TOTAL NET SALES $1,443 $1,299 11%
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Without the effect of changes in foreign exchange rates, international sales
growth would have been 20% and total sales growth would have been 13%.
Included in international sales for the three months ended March 31, 1997 were
$84 million in sales as a result of the acquisition of Immuno. Growth in
international sales, excluding Immuno, was 4%, and without the effect of changes
in foreign exchange rates, was 8%. Such growth was primarily due to continued
penetration into the Asian and Latin American markets, particularly with respect
to the Company's renal products, as well as increased sales as a result of the
October 1996 acquisition of Clintec after the dissolution of the Company's joint
venture with Nestle S.A.
As discussed above, domestic sales growth in 1997 was affected by the 1996
settlement of patent litigation which resulted in proceeds received for past
royalties. Excluding this prior year settlement, growth in domestic sales in
the first quarter was 8%. Approximately half of such growth was due to the
acquisitions of Immuno, RMI and Clintec. Also contributing to the growth was
continued strong demand for the Company's tissue heart valves, Recombinate-TM-
Anti-hemophilic factor (Recombinant) and Gammagard-Registered Trademark- S/D
IGIV products, partially offset by continued competitive and pricing pressures,
particularly with respect to the Renal business.
The following table shows key ratios of certain income statement items as a
percent of sales:
GROSS MARGIN AND EXPENSE RATIOS
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THREE MONTHS ENDED MARCH 31 1997 1996 Increase
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Gross margin 45.8% 44.5% 1.3 pts
Marketing and administrative expenses 22.4% 21.2% 1.2 pts
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The increase in the gross margin ratio for the three months ended March 31, 1997
was primarily a result of the acquisitions of Immuno and Clintec and a more
favorable product mix, particularly with respect to the Cardiovascular and Renal
business products.
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Partially offsetting these increases was the effect of the 1996 patent
settlement discussed above and increased sales in the lower-margin
perfusion-services business.
Marketing and administrative expenses increased as a percent of sales primarily
as a result of the acquisition of Immuno and the effect of the patent settlement
in the prior period's net sales. This ratio is expected to continue to be
higher than the prior year primarily due to the acquisition of Immuno.
RESEARCH AND DEVELOPMENT
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THREE MONTHS ENDED MARCH 31 Percent
(IN MILLIONS) 1997 1996 Increase
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Total research and development expense $90 $82 10%
As a percent of sales 6% 6%
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R&D expense, excluding the in-process research and development charge, increased
primarily due to the acquisition of Immuno. The Company's R&D expenses are
focused on initiatives such as blood substitutes, renal therapy,
xenotransplantation, immunotherapy, gene therapy and the Novacor left-
ventricular assist system.
OTHER INCOME AND EXPENSE
Net interest expense increased in the first quarter of 1997 as compared to the
prior year quarter primarily due to increased net debt assumed and incurred due
to the acquisition of Immuno.
Included in other income and expense in the first quarter of 1997 is a $29
million charge relating to the integration of certain of Baxter's operations
with those of Immuno. Also included in other income for the three months
ended March 31, 1997 is a $27 million foreign currency translation gain
relating to swiss franc denominated acquisition liabilities to the former
shareholders of Immuno.
INCOME FROM CONTINUING OPERATIONS
Excluding the in-process R&D charge relating to the acquisitions of Immuno and
RMI, income from continuing operations increased 9%, and on a per-share basis,
increased 8%.
INCOME FROM DISCONTINUED OPERATIONS
Income from discontinued operations for the three months ended March 31, 1996
related to the Company's former health-care cost management and distribution
businesses. In September 1996, Baxter stockholders received all of the
outstanding stock of Allegiance Corporation, its health-care cost management and
distribution businesses, in a tax-free spin-off.
RESTRUCTURING PROGRAMS
The Company has two restructuring programs in process. See Note 4 to the
Condensed Consolidated Financial Statements for a discussion of the charges,
utilization of the
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reserves and headcount reductions to date. Management believes remaining
restructuring reserves are adequate to complete the actions contemplated by
the programs.
With respect to the 1993 program, the Company realized approximately $31 million
in pretax savings during the first three months of 1997 and expects to realize
approximately $130 million in pretax savings for the full year. Such savings
are consistent with the original targets. Future expected savings of
approximately $130 million annually are also in line with original projections.
Management anticipates restructuring savings will be partially invested in R&D
and expansion into growing international markets.
The Company is in the process of implementing the 1995 program. Management
expects that the plant closures and consolidations in Puerto Rico will be
substantially completed by year-end 1998 and will lower manufacturing costs and
help mitigate future exposure to gross margin erosion arising from pricing
pressures, primarily in the United States.
Future cash expenditures related to both the 1993 and 1995 programs will be
funded by cash generated from operations.
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.
Management uses 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 include significant emphasis on the attainment of both "operational
cash flow" and earnings objectives.
The following table reconciles cash flow provided by continuing operations, as
determined by generally accepted accounting principles, to "operational cash
flow":
THREE MONTHS ENDED MARCH 31 (IN MILLIONS)
1997 1996
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Cash flow from continuing operations per the
Company's condensed consolidated statements
of cash flows $20 $(26)
Capital expenditures (69) (66)
Net interest after tax 23 14
Mammary implant litigation, net 7 121
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"Operational cash flow" - continuing operations (19) 43
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"Operational cash flow" - discontinued operations. 0 31
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TOTAL "OPERATIONAL CASH FLOW" $(19) $74
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"Operational cash flow", as defined, is net of all litigation payments except
for those relating to mammary implants, which the Company never manufactured or
sold. If all net litigation payments were excluded, including those relating to
the Company's plasma-based therapies, the amount generated from continuing
operations would be $4 million and $48 million during the three months ended
March 31, 1997 and 1996, respectively. Cash flows in the first quarter of 1997
were consistent with expectations and the Company expects to achieve the
targeted $300 million in "operational cash flow" for the full year, exclusive of
net litigation payments.
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Approximately $324 million of the total net cash flows used for acquisitions
and investments in affiliates for the three months ended March 31,1997
related to the acquisition of Immuno, and represented approximately $370
million in payments to shareholders less $46 million in acquired cash. Net
cash flows used for acquisitions and investments in affiliates for the three
months ended March 31, 1996 related primarily to the acquisition of PSICOR,
Inc. See Note 2 to the Condensed Consolidated Financial Statements for
additional information regarding these acquisitions.
The Company's net-debt-to-net-capital ratio was 46.6% and 33.8% at March
31,1997 and December 31,1996, respectively. The increase in the ratio was
primarily due to increased net debt as a result of the acquisition of Immuno.
Management expects the net-debt-to-capital ratio to decline to the targeted
35% to 40% range over time as a result of ongoing operations.
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 issued $450 million of term debt during the first quarter of 1997 and
used the proceeds to retire commercial paper. The Company's current assets
exceeded current liabilities by $968 million and $1,035 million at March 31,
1997 and December 31, 1996, respectively. Such working capital can be used
to satisfy normal operating cash requirements. Increases in certain asset
and liability balances during the first quarter of 1997 relate primarily to
the acquisitions discussed above. The Company believes it has lines of
credit adequate to support ongoing operational 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 growth
objectives.
As authorized by the board of directors, the Company repurchases its stock to
optimize its capital structure depending upon its operational cash flows, net
debt level and current market conditions. In November 1995, the board of
directors authorized the repurchase of up to $500 million over a period of
several years, of which $267 million was repurchased as of December 31, 1996.
As discussed above, the Company's net-debt-to-net-capital ratio is currently
above the targeted 35% to 40% range due to the acquisition of Immuno. Also,
refer to Note 7 regarding the agreement to acquire Bieffe Medital S.P.A.
Management does not presently intend to repurchase shares until the ratio
returns to the targeted range.
See "Part II - Item 1. Legal Proceedings" for a discussion of the Company's
legal contingencies and related insurance coverage with respect to cases and
claims relating to the Company's plasma-based therapies and mammary implants
manufactured by the Heyer-Schulte division of American Hospital Supply
Corporation, as well as other matters. Upon resolution of any of these
uncertainties, 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 or cash flows in the period in
which it is recorded or paid, based on the advice of counsel, management
believes that any outcome of these actions, individually or in the aggregate,
will not have a material adverse effect on the Company's consolidated
financial position.
The matters discussed in this section that are not historical facts include
forward-looking statements. These statements are based on the Company's
current expectations and involve numerous risks and uncertainties. Some of
these risks and uncertainties are
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factors that affect all international businesses, while some are specific to
the Company and the health-care arenas in which it operates.
The factors below in some cases have affected and could affect the Company's
actual results, causing results to differ, and possibly differ materially,
from those expressed in any such forward-looking statements. These factors
include technological advances in the medical field, economic conditions,
demand and market acceptance risks for new and existing products,
technologies and health-care services, the impact of competitive products and
pricing, manufacturing capacity, new plant start-ups, the United States and
global regulatory and trade environment, continued price competition related
to the Company's United States operations, product development risks,
including technological difficulties, ability to enforce patents, and unforeseen
foreign commercialization and regulatory factors. Additionally, as discussed
in "Part II - Item 1. Legal Proceedings," upon the resolution of certain legal
matters, the Company may incur charges in excess of its presently established
reserves. Any such charge could have a material adverse effect on the
Company's results of operations or cash flows in the period in which it is
recorded.
Currency fluctuations are also a significant variable for global companies,
especially fluctuations in local currencies where hedging opportunities are
unreasonably expensive, or altogether unavailable. If the United States
dollar continues to strengthen against most foreign currencies, the Company's
ability to realize projected growth rates in its sales outside the United
States (expressed in United States dollars) could be negatively impacted.
However, a continued weakening in such non-United States currencies may
correspondingly reduce costs (which are denominated in local currencies)
associated with Company product manufactured in these countries.
Management believes that its expectations with respect to forward-looking
statements are based upon reasonable assumptions within the bounds of its
knowledge of the Company's business and operations, but there can be no
assurance that the actual results or performance of the Company will conform
to any future results or performance expressed or implied by such
forward-looking statements.
NEW ACCOUNTING STANDARD
- -----------------------
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share", which is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods.
The Statement replaces the presentation of primary earnings per share
("EPS") with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement and requires a
reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. There is an
immaterial difference between the Company's basic and diluted EPS as
calculated pursuant to the Statement and EPS as currently presented in
accordance with existing accounting rules, and therefore the Company's pro
forma EPS information is not presented.
<PAGE>
- 15 -
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,
1997 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.
<PAGE>
- 16 -
REPORT OF INDEPENDENT ACCOUNTANTS
May 10, 1997
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, 1997 and for the three-month periods ended March
31, 1997 and 1996. 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, 1996, and the
related consolidated statements of income, cash flows and stockholders'
equity for the year then ended (not presented herein), and in our report
dated February 10, 1997 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,
1996, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
Price Waterhouse LLP
<PAGE>
- 17 -
PART II. OTHER INFORMATION
Baxter International Inc. and Subsidiaries
Item 1. Legal Proceedings
As of March 31, 1997, the Company (defined in this note only as Baxter
International Inc. (the parent company), Baxter Healthcare Corporation, or
collectively, the parent company and one or more subsidiaries or one or more
subsidiaries of the parent company) was a defendant or co-defendant in 6,918
lawsuits and had 1,777 pending claims from individuals, all of which seek
damages for injuries allegedly caused by silicone mammary implants
manufactured by the Heyer-Schulte division of American Hospital Supply
Corporation. In the first quarter of 1997, 180 cases and claims were disposed
of. Information concerning the number of plaintiffs constituting these cases
is discussed below.
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, Sj"gren'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). Currently, a trial of SPITZFADDEN plaintiffs is proceeding
solely against the Dow Chemical Company. A class action in British Columbia
has been certified on one issue only: whether silicone gel breast implants
are reasonably fit for their intended purpose (HARRINGTON V. DOW CORNING
CORPORATION, ET AL., Supreme Court, British Columbia, C954330). The Company
also has been named in 11 other purported class actions, none of which are
currently certified.
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
preliminary stages and the Company has not been able to obtain information
sufficient to evaluate each one.
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. The Company has entered into "coverage-in-place"
agreements with a large number of insurers, each of which issued or
subscribed to policies of insurance during the 1974 to 1985 period. These
agreements resolve the signatory insurers' coverage defenses and specify
rules and procedures for allocation and payment of defense and indemnity
costs pursuant to which signatories will reimburse the Company for
mammary-implant losses. Five of the Company's claims-made insurers which
issued policies subsequent to 1985 have agreed to pay under their policies
with respect to mammary-implant claims. The combined total of the amount thus
far paid by insurers, committed for payment, and projected by the Company to
be paid under signed coverage agreements, is in excess of $525 million, based
on the Company's current estimate of the loss. The
<PAGE>
- 18 -
insurers with which the Company has not reached coverage agreements have
generally 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 certain of these insurers concerning insurance coverage,
and active litigation with each of them.
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 (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.
On May 15, 1995, Dow Corning Corporation, one of the defendants in the
mammary-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). The full impact of these proceedings on the settlement is
unclear.
In October 1995, the Company, Bristol-Myers Squibb Company and Minnesota
Mining and Manufacturing Company proposed a revised settlement to provide,
among other things, current claims to be paid substantially through a
claims-made program and all compensation amounts were substantially reduced.
On December 22, 1995, the Court approved the revised settlement. 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. Union
Carbide Corporation and McGhan Medical Corporation are also parties to the
revised settlement. Under the revised settlement, plaintiffs and claimants
have a second opportunity to opt-out of the revised settlement, once they
receive a "Notification of Status" letter from the claims-administration
office. As of April 11, 1997, the claims-administration office has sent out
approximately 277,000 "Notification of Status" letters, and continues to send
out these letters.
As of March 31, 1997, the number of implant plaintiffs with lawsuits against
the Company was 17,120. Of this amount, 12,163 are currently in the revised
settlement, which accounts for 5,507 of the pending cases against the
Company. Additionally, 2,572 have opted-out of the revised settlement
(representing 1,101 pending cases), and the remaining 2,385 (representing 294
pending cases) plaintiffs' status is unknown. Some of the opt-out plaintiffs
filed their cases naming multiple defendants and without product
identification; thus, not all of the opt-out plaintiffs will have viable
claims against the Company. Furthermore, during the first quarter of 1997,
the Company obtained dismissals, or agreements for dismissals, of 2,280
plaintiffs with cases against the Company that did not involve Heyer-Schulte
mammary implants.
<PAGE>
- 19 -
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.
As of March 31, 1997, the Company was a defendant, or co-defendant, in 544
lawsuits and had 460 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. None of
these cases involves the Company's currently processed anti-hemophilic factor
concentrates.
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. Baxter also has been named in eight
purported class actions; none have been certified, and five have been
transferred to the MDL for discovery.
Many of the cases and claims are at preliminary stages and the Company has
not been able to obtain information sufficient to evaluate each one. 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 must prove that his or her injuries
were caused by the Company's negligence. Most cases allege that the Company
was negligent in failing to: use available purification technology; promote
research and development for product safety; withdraw Factor Concentrates
once it knew or should have known of viral-contamination of such
concentrates; screen plasma donors properly; recall contaminated Factor
Concentrates; and warn of risks known at the time the Factor Concentrates
were used.
The plaintiffs' steering committee for the MDL, the Company, Alpha
Therapeutic Corporation, Armour Pharmaceutical and Bayer Corporation
submitted a settlement proposal to the court on August 14, 1996. The
essential terms of the settlement would provide payments of $100,000 per
person to each HIV-positive person with hemophilia in the United States who
can demonstrate use of Factor Concentrates produced by one of the settling
defendants between 1978 and 1985. Additionally, the defendants would
establish a $40 million fund for payment of attorneys' fees, costs and
court-administration expenses. The settlement also requires insurance-carrier
approval, the signing of general and joint tortfeasor releases and the
resolution of potential subrogation, reimbursement and eligibility issues.
Baxter's agreed contribution to the proposed settlement is 20%. On August 14,
1996, Judge John Grady, who oversees the MDL, indicated that he would
conditionally certify a settlement class subject to a fairness hearing and
final approval under the case, WALKER V. BAYER CORP., ET AL., U.S.D.C., N.
Dist., Ill. 96C 5024. Additionally, Judge Grady approved notice being sent to
class members. Sending of the notices commenced on August 20, 1996, with a
period to opt-out of the settlement
<PAGE>
- 20 -
terminating October 15, 1996. A fairness hearing proceeded on November 25,
1996. On May 6, 1997, the Court determined that the settlement was fair. The
defendants will begin paying opt-in claimants 30 days after the judgment of
fairness becomes final and non-appealable. The defendants have also reached
agreement to settle potential subrogation and reimbursement claims with most
private insurers, the federal government and 15 states. The Company expects
most, if not all, remaining states to sign subrogation agreements by year-end
1997. Although not final, the approximate number of eligible opt-outs at
March 31, 1997 is 533. The approximate number of eligible claimants at the
end of March is 5,239. The Company believes that the total number of
eligible claimants who will participate in the settlement will be
approximately 6,000.
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.The Company has
entered into "coverage in place" agreements with certain of its carriers,
each of which issued or subscribed to policies of insurance during the 1978
to 1985 period. These agreements resolve the signatory insurer's coverage
defenses and specify rules and procedures for allocation and payment of
defense and indemnity costs pursuant to which the signatories will reimburse
the Company for hemophilia/AIDS related losses. 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 is engaged in active negotiations with certain of these insurers
concerning insurance coverage.
In February 1994, the Company filed suit in California against all of the
insurance companies that issued comprehensive general liability and excess
liability policies for a declaratory judgment that the policies of all of the
carriers provide coverage. Zurich Insurance Co., a comprehensive general
liability insurance carrier, also was sued for failure to defend the Company.
Subsequently, all carriers except Zurich and Columbia Casualty Company were
dismissed without prejudice. 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. The
trial court held that this suit should be stayed pending the resolution of
the Zurich Illinois action. The Company is appealing this decision.
Zurich Insurance Co.'s lawsuit in Illinois against the Company and its excess
carriers seeks 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 Concentrate therapies 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 has notified its insurers concerning coverages and the status of
the cases. Also, some of the anti-hemophilic Factor Concentrate 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.
<PAGE>
- 21 -
In Japan, the Company is a defendant, along with the Japanese government and
four other co-defendants, in Factor Concentrate cases in Osaka, Tokyo,
Nagoya, Tohoku, Fukuoka, Sapporo and Kumamoto. As of March 31, 1997, the
cases involved 1,169 plaintiffs, at least 461 of whom allegedly used Baxter
Factor Concentrates. The Japanese Ministry of Health and Welfare estimates
that approximately 1,800 hemophiliacs are HIV-positive or AIDS-manifested, of
whom 456 are deceased.
Based upon the Osaka and Tokyo courts' recommendations, the parties agreed to
settle all currently pending and future filed cases. In general, the
settlement recommendations provided for payment of an up-front, lump sum
amount of approximately $360,000 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-positive and AIDS-manifested
hemophiliacs and their survivors). Additionally, monthly payments will be
made to each plaintiff according to a set schedule.
With respect to the corporate defendants' contributions, the courts
determined that each such defendant's share of the settlement should be in
accordance with its respective market share, resulting in a contribution by
the Company of approximately 15.36%.
The Company was notified in 1995 that approximately 1,350 HIV-positive people
with hemophilia in Spain wished to explore settlement possibilities with the
Company in lieu of filing suit in both Spain and the United States. The
claimants allege exposure to HIV through the use of the Company's clotting
Factor Concentrates in the early 1980s. The parties have reached agreement on
the terms of settlement whereby each claimant (or his estate) will receive
$25,000 (including attorneys' fees and costs) in return for a general release
and protection against contribution claims by other defendants. As of
March 31, 1997, the Company settled with 1300 claimants. The Company hopes to
settle with many of the remaining claimants by June 1997 and estimates that
the cost for this proposed settlement should not exceed $34 million.
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.
As of March 31, 1997, the Company had received reports of alleged Hepatitis C
transmission from 388 patients. The exact cause for these reported infections
has not been determined; however, many of the reports have been associated
with Gammagard injections produced from plasma that 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, 1997, the Company was a defendant in 150 lawsuits and had 79
pending claims in the United States, Denmark, France, Germany, Italy, Spain,
Sweden and the United Kingdom resulting from this incident. Ten suits in the
United States have been filed as purported class actions and are pending but
not certified. The suits allege infection with the Hepatitis C virus from
the use of Gammagard. On June 9, 1995, the judicial panel on the Multi
District Litigation ordered all federal cases involving Gammagard to be
<PAGE>
- 22 -
transferred to the Central District of California for coordinated pretrial
proceedings before Judge Manuel L. Real, MDL docket no. 95-1060. On February
21, 1996, Judge Real certified a nationwide class of all recipients and their
spouses, representatives, etc., who had infused Gammagard (FAYNE, ET AL., V.
BAXTER HEALTHCARE CORPORATION, U.S.D.C., C.D., CA, ML-95-160-R). 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. The 9th Circuit
Court of Appeals heard oral argument on these matters on October 9, 1996, but
has not issued any decisions. Judge Real has scheduled a trial of four cases,
but the date is unknown at this time. 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.
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.
As described in Note 2, the Company commenced the acquisition of Immuno
International AG ("Immuno") in December 1996. Immuno has unsettled claims for
damages for injuries allegedly caused by its plasma-based therapies. The
typical claim alleges that the individual with hemophilia was infected with
HIV by infusing Factor VIII or Factor IX or Factor inhibitor concentrates
containing HIV. Additionally, Immuno faces multiple claims stemming from its
vaccines and other biologically derived therapies. A portion of the liability
and defense costs related to these claims will be covered by insurance,
subject to exclusions, conditions, policy limits and other factors. In
addition, the stock-purchase agreement between the Company and Immuno
provides that approximately 84 million Swiss francs (or approximately $57
million at quarter-end) of the purchase price will be held back to cover
these contingent liabilities. Based on management's due diligence related to
the Immuno acquisition, the amount of these contingencies, net of insurance
recoveries, is not expected to exceed the negotiated contingent payment to be
held back from the total purchase amount.
As of September 30, 1996, Allegiance and/or its affiliates assumed the
defense of litigation involving claims related to Allegiance's businesses,
including certain claims of alleged personal injuries as a result of exposure
to natural rubber latex gloves. Allegiance has not been named in most of this
litigation but will be defending and indemnifying the Company pursuant to
certain contractual obligations for all expenses and potential liabilities
associated with claims pertaining to latex gloves. As of March 31, 1997,
there were 86 pending lawsuits naming the Company, among others, as a
defendant, including two purported class actions: WOLF V. BAXTER HEALTHCARE
CORP., ET AL., Circuit Court, Wayne County, MI, 96-617844NP and MURRAY, ET
AL., V. BAXTER HEALTHCARE CORP., ET AL., U.S.D.C.,
<PAGE>
- 23 -
S. Dist. Ind., IP96-1889C (purported nationwide class action). On February
26, 1997, the judicial panel on Multi-District Litigation ordered all federal
cases involving latex gloves to be transferred to the Eastern District of
Pennsylvania for coordinated or consolidated pretrial proceedings before
Judge Edmund Ludwig, MDL docket no. 1148.
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 former 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). On
March 26, 1997, the Court dismissed the action against the Company
essentially on the ground that plaintiffs lacked standing to bring this
action. On April 24, 1997, plaintiffs filed a notice of appeal.
Additionally, in February, 1997, the plaintiffs served a separate state court
action, styled as a class action, against Piccolo, Vernon R. Loucks Jr.,
William H. Gantz, William B. Graham and James R. Tobin, alleging violations
of various state laws pertaining to the Caremark spin-off (ISQUITH, ET AL. V.
C. A. (LANCE) PICCOLO, ET AL; Circuit Court, Cook County, IL, Chancery
Civision, 96CH0013652). The defendants are vigorously defending this action.
The Company has been named a potentially responsible party ("PRP") for
environmental cleanup costs at 16 hazardous-waste sites. Under the U.S.
Superfund statute and many state laws, generators of hazardous waste that 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 laws
generally provide that PRP's may be held jointly and severally liable for the
costs of investigating and remediating the site. Allegiance has assumed
responsibility for 10 of these sites, the largest of which is the Thermo-Chem
site in Muskegan, Michigan. The estimated exposure for the Company's
remaining six sites is approximately $2 million, which has been accrued (and
not discounted) in the Company's consolidated financial statements.
Upon resolution of any of the legal matters discussed 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 and net cash flows in the period in which it is recorded or paid,
management believes that any such charge will not have a material adverse
effect on the Company's consolidated financial position.
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,
individually or in the aggregate, they will have a material adverse effect on
the Company's operations, cash flows or consolidated financial position.
<PAGE>
- 24 -
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1996 annual meeting of stockholders was held on May 5, 1997 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
----------- -------------------
Walter E. Boomer 228,086,375 3,201,017
John W. Colloton 228,109,708 3,177,892
Susan Crown 228,070,813 3,217,216
Vernon R. Loucks Jr. 227,995,510 3,293,556
Geroges C. St. Laurent, Jr. 228,216,287 3,071,502
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 230,516,454 288,583 483,242
as independent accountants for
the Company for 1997.
Approval of proposal to adopt the
Officer Incentive Compensation Plan 223,158,167 6,296,411 1,833,701
Defeat of the stockholder proposal
relating to cumulative voting in the
election of directors. 67,079,054 139,336,449 2,852,094
<PAGE>
- 25 -
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 January 19, 1997, was filed with the SEC under
Item 5, Other Events, to file amended exhibits and amended undertakings to
Part II of its presently-effective debt securities shelf registration
statement on Form S-3 (SEC File No. 333-190225) (the "registration
statement").
A report on Form 8-K, dated March 18, 1997, was filed with the SEC under
Item 5, Other Events, to file a press release which announced the Company's
acquisition of Research Medical, Inc. and planned completion of acquisition
of Immuno International AG.
<PAGE>
- 26 -
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 10, 1997 By: /s/ Brian P. Anderson
------------------------------------
Brian P. Anderson
Corporate Vice President, Finance
<PAGE>
- 27 -
Exhibits Filed with Securities and Exchange Commission
Number Description of Exhibit
------ ----------------------
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
21 Subsidiaries of the Company
27 Financial Data Schedule
(All other exhibits are inapplicable.)
<PAGE>
Baxter International Inc. and Subsidiaries
Exhibit 11.1 - Computation of Primary Earnings Per Common Share
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
(Unaudited) (in millions, except per share data) Three Months Ended
March 31,
1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
EARNINGS
Income (loss) from continuing operations applicable
to common stock $(203) $138
Income from discontinued operations 0 20
- ---------------------------------------------------------------------------------------------------------
Net income (loss) available for common stock $(203) $158
- ---------------------------------------------------------------------------------------------------------
SHARES
Weighted average number of common shares
outstanding 274 272
- ---------------------------------------------------------------------------------------------------------
PRIMARY EARNINGS PER COMMON SHARE
Income (loss) from continuing operations $(0.74) $0.51
Income from discontinued operations 0 0.07
- ---------------------------------------------------------------------------------------------------------
Net income (loss) $(0.74) $0.58
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Baxter International Inc. and Subsidiaries
Exhibit 11.2 - Computation of Fully Diluted Earnings Per Common Share
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
(Unaudited) (in millions, except per share data) Three Months Ended
March 31,
1997(a) 1997(a) 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EARNINGS
Income (loss) from continuing operations applicable
to common stock $(203) $(203) $138
Income from discontinued operations 0 0 20
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) available for common stock $(203) $(203) $158
- ------------------------------------------------------------------------------------------------------------------
SHARES
Weighted average number of common shares
outstanding 274 274 272
Additional shares assuming exercise of
stock options, performance share awards and
stock purchase plan subscriptions -- 8 5
- ------------------------------------------------------------------------------------------------------------------
Average common shares and equivalents outstanding 274 282 277
- ------------------------------------------------------------------------------------------------------------------
FULLY DILUTED EARNINGS PER COMMON SHARE
Income (loss) from continuing operations $(0.74) $(0.72) $0.50
Income from discontinued operations 0 0 0.07
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) $(0.74) $(0.72) $0.57
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For the three months ended March 31, 1997, fully diluted earnings (loss) per
common share has been computed with and without anti-dilutive common stock
equivalents.
<PAGE>
- 30 -
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 1996 1995 1995(C) 1994 1993 1993(C) 1992
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing operations
before income tax expense (benefit) $793 $524 $723 $559 $(74) $472 $510
Add:
Interest costs 133 117 117 120 109 109 100
Estimated interest included
in rentals(1) 27 29 29 31 31 31 29
- -------------------------------------------------------------------------------------------------------
Fixed charges as defined 160 146 146 151 140 140 129
Interest costs capitalized (3) (3) (3) (2) (5) (5) (5)
Losses of less than majority owned
affiliates, net of dividends 8 10 10 18 27 27 34
- -------------------------------------------------------------------------------------------------------
Income as adjusted $958 $677 $876 $726 $88 $634 $668
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 5.99 4.64 6.00 4.80 (B) 4.53 5.18
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Three months ended March 31 1997 1997(C)
Loss from continuing operations before
income tax expense $(150) $202
Add:
Interest costs 47 47
Estimated interest included in rentals (A) 7 7
- -------------------------------------------------------------------------------------------------------
Fixed charges as defined 54 54
Interest costs capitalized (1) (1)
Losses of less than majority owned affiliates, net of dividends 0 0
- -------------------------------------------------------------------------------------------------------
Loss as adjusted $(97) $255
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Ratio of losses to fixed charges (B) 4.72
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
(A) Represents the estimated interest portion of rents.
(B) As a result of the loss incurred during these periods, the Company's
earnings did not fully cover the indicated fixed charges. The earnings
required to attain a ratio of one-to-one is as follows:
For the year ended 12/31/93: $52 million
For the three months ended 3/31/97: $151 million
(C) Included below is a supplemental presentation of the ratio of earnings to
fixed charges, excluding the following significant unusual charges:
1993: $216 million restructuring charge and $330 million litigation charge.
1995: $103 million restructuring charge and $96 million litigation charge.
1997: $352 million in-process research and development charge.
<PAGE>
EXHIBIT 15
May 10, 1997
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 10, 1997 (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
<PAGE>
EXHIBIT 21
- --------------------------------------------------------------------------------
SUBSIDIARIES OF THE COMPANY, AS OF MARCH 14, 1997
<TABLE>
<CAPTION>
% OWNED BY
ORGANIZED UNDER IMMEDIATE
SUBSIDIARY LAWS OF PARENT (1)(2)
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Baxter International Inc. Delaware
Perfusion Services of Baxter Healthcare Corporation Delaware 100
Baxter CVG Sub Inc Delaware 100
Baxter Healthcare Corporation Delaware 100
Nextran, Inc. Delaware 100
Medication Delivery Devices Inc California 100
Baxter World Trade Corporation Delaware 100
Baxter Foreign Sales Corporation Barbados 100
Baxter Export Corporation Nevada 100
Baxter Argentina SA Argentina 100
Industrial y Comercial Baxter de Chile Ltda Chile 99 (4)
Baxter Representacoes Ltda Brazil 100
Baxter Hospitalar Ltda Brazil 85.21 (4)
Baxter SA Belgium 98.44 (4)
Baxter SA France 64.57 (4)
Baxter Deutschland GmbH Germany 100
Baxter SpA Italy 98.74 (4)
Baxter B.V. (Uden) Netherlands 50.83 (4)
Baxter SA Spain 99.99 (4)
Baxter A/S Denmark 100
Baxter Pharmacy Services Corporation Delaware 100 (5)
Baxter Sales and Distribution Corp Delaware 100
Baxter Healthcare Corporation of Puerto Rico Alaska 100
Baxter Healthcare (Holdings) Ltd United Kingdom 99.99 (4)
Baxter Healthcare Limited United Kingdom 99.99 (4)
Baxter Limited Malta 50 (3)
Baxter Healthcare S.A. Panama 100
Baxter Healthcare Pte Ltd Singapore 100
Baxter World Trade Belgium 51.74 (4)
Baxter Limited Japan 100
Baxter Healthcare Pty Ltd Australia 99.99 (4)
Baxter Healthcare Limited New Zealand 100
Baxter Edwards A.G. Switzerland 99.6 (4)
Baxter A.G. Switzerland 99.9 (4)
Baxter A/O Russia 100
Xenomedica A.G. Switzerland 99.94 (4)
Baxter S.A. de C.V. Mexico 99.9 (4)
Laboratorios Baxter SA (Colombia) Delaware 100
Baxter Corporation Canada 100
Baxter Biotech Worldwide Ltd Delaware 100
Baxter Biotech Holding AG Switzerland 100
Immuno International AG Switzerland 100
Immuno - US, Inc. Michigan 100
Immuno AG Austria 99.99(4)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Subsidiaries omitted from this list, considered in aggregate as a single
subsidiary, would not constitute a significant subsidiary.
* * * * *
(1) Including director's qualifying and other nominee shares.
(2) All subsidiaries set forth herein are reported in the Company's financial
statements through consolidations or under the equity method of accounting.
(3) 50% owned by Baxter World Trade Corporation and 50% owned by Baxter SA
(France).
(4) Remaining shares owned by the Company, its subsidiaries or employees.
(5) Of common stock.
<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, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 588
<SECURITIES> 0
<RECEIVABLES> 1,637
<ALLOWANCES> 32
<INVENTORY> 1,202
<CURRENT-ASSETS> 3,808
<PP&E> 4,075
<DEPRECIATION> 1,925
<TOTAL-ASSETS> 8,338
<CURRENT-LIABILITIES> 2,840
<BONDS> 2,174
0
0
<COMMON> 288
<OTHER-SE> 2,038
<TOTAL-LIABILITY-AND-EQUITY> 8,338
<SALES> 1,443
<TOTAL-REVENUES> 1,443
<CGS> 782
<TOTAL-COSTS> 782
<OTHER-EXPENSES> 100<F1>
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 47
<INCOME-PRETAX> (150)
<INCOME-TAX> 53
<INCOME-CONTINUING> (203)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (203)
<EPS-PRIMARY> (.74)
<EPS-DILUTED> (.74)<F2>
<FN>
<F1> For "Other-Expenses" - Ref #5-03(0)3 -
Includes R&D expense and goodwill amortization.
<F2> For the three months ended 3/31/97, common stock
equivalents were anti-dilutive. Consequently,
"EPS, fully diluted" is shown without those
common stock equivalents.
</FN>
</TABLE>
