<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
------- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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.
-------------------------
(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 July 31, 1997, the latest practicable date, was 279,491,483 shares.
<PAGE>
2
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 Six Months Ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Operations
Net sales $1,569 $1,335 $3,012 $2,634
Costs and expenses
Cost of goods sold 855 741 1,637 1,462
Marketing and administrative expenses 347 282 670 558
Research and development expenses 95 84 185 166
Interest, net 44 26 82 50
Goodwill amortization 11 9 21 17
Acquired research and development - - 352 -
Other income (1) (4) (3) (4)
- ----------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,351 1,138 2,944 2,249
- ----------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 218 197 68 385
Income tax expense 56 55 109 105
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 162 142 (41) 280
Discontinued operations
Income from discontinued operations, net
of applicable income tax expense of $10 and $18 in 1996 - 34 - 54
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $162 $176 ($41) $334
- ----------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share
Continuing operations $0.58 $0.52 ($0.15) $1.03
Discontinued operations - 0.13 - 0.20
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $0.58 $0.65 ($0.15) $1.23
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Average number of common shares outstanding 278 272 276 272
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
3
Baxter International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions, except shares)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
Current assets Cash and equivalents $831 $761
Accounts receivable 1,374 1,219
Notes and other current
receivables 308 266
Inventories 1,240 883
Short-term deferred income taxes 200 212
Prepaid expenses 216 139
--------------------------------------------------------------------------------
Total current assets 4,169 3,480
- --------------------------------------------------------------------------------------------------------------
Property, At cost 4,127 3,795
plant and Accumulated depreciation
equipment and amortization (1,982) (1,952)
---------------------------------------------------------------------------------
Net property, plant and equipment 2,145 1,843
- ---------------------------------------------------------------------------------------------------------------
Other assets Goodwill and other intangibles 1,526 1,386
Insurance receivables 544 641
Other 271 246
--------------------------------------------------------------------------------
Total other assets 2,341 2,273
- --------------------------------------------------------------------------------------------------------------
Total assets $8,655 $7,596
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Current Notes payable to banks $239 $121
liabilities Current maturities of long-term debt and
lease obligations 10 225
Accounts payable and accrued liabilities 1,951 1,704
Income taxes payable 387 395
--------------------------------------------------------------------------------
Total current liabilities 2,587 2,445
- --------------------------------------------------------------------------------------------------------------
Long-term debt and lease obligations 2,659 1,695
- --------------------------------------------------------------------------------------------------------------
Long-term deferred income taxes 317 255
- --------------------------------------------------------------------------------------------------------------
Long-term litigation liabilities 241 365
- --------------------------------------------------------------------------------------------------------------
Other non-current liabilities 401 332
- --------------------------------------------------------------------------------------------------------------
Stockholders' Common stock, $1 par value,
equity authorized 350,000,000 shares,
issued 287,701,247 shares in
1997 and 1996 288 288
Additional contributed capital 1,878 1,825
Retained earnings 824 1,022
Common stock in treasury, at cost,
8,643,897 shares in 1997 and
15,261,100 shares in 1996 (364) (611)
Foreign currency adjustment (176) (20)
---------------------------------------------------------------------------------
Total stockholders' equity 2,450 2,504
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $8,655 $7,596
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
4
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in millions)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Six months ended June 30,
1997 1996
<S> <C> <C>
(Brackets denote cash outflows)
Cash flow from Income (loss) from continuing operations ($41) $280
continuing Adjustments
operations Depreciation and amortization 202 171
Deferred income taxes 37 18
Acquired research and development 352 -
Other 29 2
Changes in balance sheet items
Accounts receivable (42) (5)
Inventories (123) (42)
Accounts payable and other
accrued liabilities (246) (196)
Restructuring program payments (9) (24)
Other (13) (12)
---------------------------------------------------------------------------------
Cash flow from continuing operations 146 192
- ---------------------------------------------------------------------------------------------------------------
Cash flow from discontinued operations - 55
- ---------------------------------------------------------------------------------------------------------------
Investment Capital expenditures (149) (162)
transactions Acquisitions (net of cash received)
and investments in affiliates (375) (143)
Proceeds from asset dispositions (18) 17
---------------------------------------------------------------------------------
Investment transactions, net (542) (288)
- ---------------------------------------------------------------------------------------------------------------
Financing Issuance of debt and lease
transactions obligations 491 619
Redemption of debt and lease
obligations (365) (1,341)
Increase in debt with maturities
of three months or less, net 449 1,141
Common stock dividends (156) (160)
Stock issued under employee
benefit plans 77 83
Purchase of treasury stock - (87)
---------------------------------------------------------------------------------
Financing transactions, net 496 255
- ---------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash
and equivalents (30) (20)
- ---------------------------------------------------------------------------------------------------------------
Increase in cash and equivalents 70 194
Cash and equivalents at beginning of period 761 476
- ---------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $831 $670
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<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 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.
Earnings per share amounts for each quarter are required to be computed
independently and therefore do not equal the amount computed for the total year
to date.
Certain reclassifications have been made to the prior period financial
statements to conform to the current presentation.
2. ACQUISITIONS
All acquisitions during the six months ended June 30, 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 was completed in a
three-part transaction and is valued at approximately $600 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. The third part of the acquisition, the purchase of the
remaining
<PAGE>
6
shares from private shareholders for approximately $161 million, was
completed in the third fiscal quarter of 1997. The remaining portion of the
total purchase price, approximately $59 million, is being held back to cover
certain legal contingencies, as further discussed in "Part II - Item 1. Legal
Proceedings".
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 during the first quarter of 1997. 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 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 in 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 during the first quarter of 1997. 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, net sales, 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
<PAGE>
7
beginning of the first fiscal quarter of 1996, the Company's unaudited pro
forma net sales would have been approximately $1,549 million and $3,023
million for the three and six months ended June 30, 1996, respectively.
Excluding the in-process R&D charge relating to the acquisitions of Immuno
and RMI, unaudited pro forma net income and earnings per share for the three
and six months ended June 30, 1996 would have been $196 million and $353
million, respectively, and $0.71 per share and $1.28 per share, respectively.
3. INVENTORIES
Inventories consisted of the following:
- ------------------------------------------------------------------------------
June 30, December 31,
1997 1996
(in millions) (Unaudited)
- ------------------------------------------------------------------------------
Raw materials $ 312 $190
Work in process 231 152
Finished products 697 541
- ------------------------------------------------------------------------------
Total inventories $1,240 $883
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
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 June 30, 1997 (unaudited):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Divestitures
Employee- and asset Other
(in millions) related costs write-downs costs Total
- -------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
December 31, 1996 balance $14 $16 $9 $39
- -------------------------------------------------------------------------------------------------------------------
Utilization:
Cash 5 - 1 6
Non-cash - 5 - 5
- -------------------------------------------------------------------------------------------------------------------
June 30, 1997 balance $9 $11 $8 $28
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
8
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 original
timetable for the 1995 program has been affected by delays in the receipt of
certain required regulatory approvals.
The following table summarizes the 1995 restructuring reserves as of December
31, 1996 and June 30, 1997 (unaudited):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Employee- Asset Other
(in millions) related costs write-downs costs Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1996 balance $16 $11 $8 $35
- ------------------------------------------------------------------------------------------------------------------
Utilization - - - -
- ------------------------------------------------------------------------------------------------------------------
June 30, 1997 balance $16 $11 $8 $35
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
- ------------------------------------------------------------------------------------------------------------------
(in millions) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense $52 $59 $98 $116
Interest income (8) (11) (16) (22)
- ------------------------------------------------------------------------------------------------------------------
Interest, net $44 $48 $82 $94
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Continuing operations $44 $26 $82 $50
Discontinued operations $0 $22 $0 $44
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
9
7. AGREEMENT TO ACQUIRE BIEFFE MEDITAL S.P.A.
On July 31, 1997, the Company signed a definitive agreement to acquire Bieffe
Medital S.P.A., a leading European manufacturer of dialysis and intravenous
solutions and containers, for approximately $175 million, plus assumption
of debt of approximately $60 million. The acquisition is subject to
customary review and clearance from the Italian anti-trust authorities.
8. AGREEMENT TO FORM NEW CELL THERAPIES BUSINESS
In June 1997, the Company signed a letter of intent with VIMRx Pharmaceuticals
Inc. ("VIMRx") to form a new cell therapy company to develop innovative
treatments for cancer and other life-threatening diseases. The Company will
transfer the assets of its Immunotherapy division into the new company and hold
a minority ownership position. VIMRx will obtain a majority interest in the new
company in exchange for 11 million shares of VIMRx common stock and convertible
preferred shares with a nominal value of $40 million. To the extent the 11
million common shares are worth less than $50 million at the closing, the
Company will receive additional convertible preferred shares. In addition, the
Company will provide $20 million and VIMRx will provide $10 million to the new
company in initial operating funds. The terms included in the letter of intent
are subject to the signing of a definitive agreement and the approval by the
board of directors of both companies and the VIMRx shareholders, all of which is
currently expected to occur before year-end 1997.
<PAGE>
10
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 ("Annual Report") 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 Annual Report, management outlined its key financial
objectives for 1997. These objectives and the results achieved through June 30,
1997 are summarized as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
| FULL YEAR 1997 OBJECTIVES | RESULTS THROUGH JUNE 30, 1997 |
--------------------------------------------------------------------------------------
| <S> | <C> |
| Increase net sales approximately 10% | Net sales for the first half of the year |
| before the impact of 1997 | increased 4% before the impact of the |
| acquisitions and 20% including 1997 | 1997 acquisitions of Immuno |
| acquisitions. | International AG ("Immuno") and Research |
| | Medical, Inc. ("RMI"), and increased 14% |
| | including these acquisitions. Excluding |
| | the effect of the strengthening U.S. |
| | dollar, net sales for the six-month |
| | period increased 7% before the impact of |
| | the 1997 acquisitions and 17% including |
| | the 1997 acquisitions. Excluding the |
| | effects of changes in foreign exchange |
| | rates, management expects to achieve the |
| | full year objective. |
| | |
| Achieve growth in income from | The Company's growth in income from |
| continuing operations in the low | continuing operations for the six months |
| double digits. | ended June 30, 1997, excluding the in- |
| | process research and development charge |
| | relating to the acquisitions of Immuno |
| | and RMI discussed below, was 11%. |
| | Management expects to achieve the full |
| | year objective. |
| | |
| Generate $300 million in "operational | The Company generated $112 million of |
| cash flow", before litigation | "operational cash flow" in the six |
| payments. | months ended June 30, 1997, before |
| | litigation payments. Cash flows were |
| | consistent with expectations and |
| | management expects to achieve the full |
| | year objective. |
--------------------------------------------------------------------------------------
</TABLE>
<PAGE>
11
RESULTS OF OPERATIONS
In December 1996, Baxter acquired 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
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, Percent June 30, Percent
(in millions) 1997 1996 Increase 1997 1996 Increase
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Geographic regions
International $ 832 $ 684 22% $1,597 $1,339 19%
United States 737 651 13% 1,415 1,295 9%
- -----------------------------------------------------------------------------------------------------------------------
Total net sales $1,569 $1,335 18% $3,012 $2,634 14%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Without the effect of changes in foreign exchange rates, international sales
growth would have been 29% and 25% for the three- and six-month periods ended
June 30, 1997, respectively.
Included in international sales for the three- and six-month periods ended June
30, 1997 were $136 million and $220 million in sales, respectively, as a result
of the acquisition of Immuno. Growth in international sales for the three and
six months ended June 30, 1997, excluding Immuno, was 2% and 3%, respectively,
and without the effect of changes in foreign exchange rates, was 9% for both
periods. 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 the Clintec parenteral-nutrition business ("Clintec") after the dissolution
of the Company's joint venture with Nestle S.A.
Continued strong demand for the Company's tissue heart valves and Recombinate-
TM- Anti-hemophilic factor (Recombinant) products were significant contributors
to domestic sales growth during the first six months of 1997, partially offset
by continued competitive and pricing pressures across various product lines,
particularly with respect to the Renal business. Also contributing to 1997
domestic sales growth was the acquisition of Clintec discussed above and a
favorable patent settlement.
<PAGE>
12
The following table shows key ratios of certain income statement items as a
percent of sales:
GROSS MARGIN AND EXPENSE RATIOS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
1997 1996 Increase 1997 1996 Increase
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross profit margin 45.5% 44.5% 1.0 pt 45.7% 44.5% 1.2 pts
Marketing and administrative
expenses 22.1% 21.1% 1.0 pt 22.2% 21.2% 1.0 pts
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The increase in the gross profit margin for the three and six months ended June
30, 1997 was primarily a result of the acquisitions of Immuno and Clintec,
favorable manufacturing variances and a more favorable product mix,
particularly with respect to the Cardiovascular and Renal business products.
Partially offsetting these increases in the six-month period ended June 30, 1997
was increased sales in the lower-margin perfusion-services business.
Marketing and administrative expenses increased as a percent of sales in the
three- and six-month periods ended June 30, 1997 primarily as a result of the
acquisition of Immuno. The expense ratio is expected to continue to be higher
than the prior year primarily due to the acquisition of Immuno.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, Percent June 30, Percent
(in millions) 1997 1996 Increase 1997 1996 Increase
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Research and development
expenses $95 $84 13% $185 $166 11%
- -----------------------------------------------------------------------------------------------------------------------
As a percent of sales 6.1% 6.3% 6.1% 6.3%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Research and development ("R&D") expenses, excluding the in-process research and
development charge recorded in the first quarter of 1997, 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 and
the Novacor left-ventricular assist system.
OTHER INCOME AND EXPENSE
Net interest expense increased in the first and second quarters of 1997 as
compared to the prior year quarters primarily due to increased net debt assumed
and incurred due to the acquisition of Immuno.
Goodwill amortization increased in 1997 primarily due to the acquisition of
Clintec.
<PAGE>
13
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations increased 14% in the three months ended
June 30, 1997, and on a per share basis, increased 12%. Excluding the first
quarter 1997 in-process R&D charge relating to the acquisitions of Immuno and
RMI, income from continuing operations increased 11% in the six-month period
ended June 30, 1997, and on a per-share basis, increased 10%.
INCOME FROM DISCONTINUED OPERATIONS
Income from discontinued operations in 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 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 $63
million in pretax savings during the first six 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. The original timetable for the 1995
program has been affected by delays in the receipt of certain required
regulatory approvals.
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.
<PAGE>
14
The following table reconciles cash flow provided by continuing operations,
as determined by generally accepted accounting principles, to "operational
cash flow":
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 (IN MILLIONS)
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash flow from continuing operations per the
Company's condensed consolidated statements
of cash flows . . . . . . . . . . . . . . . . . . . . . . $146 $192
Capital expenditures . . . . . . . . . . . . . . . . . . . (149) (162)
Net interest after tax. . . . . . . . . . . . . . . . . . . 49 29
Mammary implant litigation, net . . . . . . . . . . . . . . 30 107
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . - 4
- -------------------------------------------------------------------------------
"Operational cash flow" - continuing operations . . . . . . $76 $170
"Operational cash flow" - discontinued operations . . . . . - $114
- -------------------------------------------------------------------------------
TOTAL "OPERATIONAL CASH FLOW". . . . . . . . . . . . . . . . $76 $284
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
"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 of the Company's net litigation payments were excluded from
"operational cash flow" (including those relating to plasma-based therapies),
the amount generated from continuing operations would be $112 million and
$185 million during the six months ended June 30, 1997 and 1996,
respectively. Cash flows in the first half 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.
Approximately $324 million of the total net cash flows used for acquisitions
and investments in affiliates for the six months ended June 30, 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 six months ended
June 30, 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 45.9% and 33.8% at June 30,
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 half of 1997 and
used the proceeds to retire commercial paper. The Company's current assets
exceeded current liabilities by $1,582 million and $1,035 million at June 30,
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 half of 1997 relate primarily to the
acquisitions discussed above. The Company believes it has lines of credit
adequate to support ongoing operational requirements. Beyond
<PAGE>
15
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.
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 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. In particular,
the Company, as well as other companies in its industry, is experiencing
increased regulatory activity by the U.S. Food and Drug Administration with
respect to its plasma-based biologicals and its complaint-handling systems.
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 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.
<PAGE>
16
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 STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") 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.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" and Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information". Both Statements are effective for fiscal years
beginning after December 15, 1997 and require reclassification of
prior-period financial statements for comparative purposes. Statement No.
130 requires the presentation of comprehensive income and its components in a
full set of financial statements. Statement No. 131 establishes standards
for reporting information about operating segments and related disclosures
about products and services, geographic areas and major customers in annual
financial statements and interim financial reports. The Company is currently
evaluating both of the new Statements and plans to adopt the standards during
the year ended December 31, 1998.
<PAGE>
17
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 and six months
ended June 30, 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>
18
REPORT OF INDEPENDENT ACCOUNTANTS
August 7, 1997
Board of Directors and Stockholders of
Baxter International Inc.
We have reviewed the accompanying condensed consolidated balance sheet as of
June 30, 1997 and the related condensed consolidated statements of income for
the three- and six-month periods ended June 30, 1997 and 1996, and condensed
consolidated statements of cash flows for the six-month period ended June 30,
1997 and 1996 of Baxter International Inc. and its subsidiaries. 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>
19
PART II. OTHER INFORMATION
Baxter International Inc. and Subsidiaries
Item 1. Legal Proceedings
As of June 30, 1997, the Company (defined in this Legal Proceedings section
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 7,001 lawsuits and had 1,736 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 second quarter of 1997, 110 cases and claims were
disposed of as more fully 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, Sjo"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
<PAGE>
20
estimate of the loss. The 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.
On December 22, 1995, the court approved a 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 July 1997, virtually all domestic claimants have received
"Notification of Status" letters. The opt-out period for most claimants will
expire on September 1, 1997.
As of June 30, 1997, the number of implant plaintiffs with lawsuits against
the Company was 16,862. Of those plaintiffs, 9,380 are currently in the
revised settlement, which accounts for 4,011 of the pending cases against the
Company. Additionally, 6,490 have opted-out of the revised settlement
(representing 2,858 pending cases), and the remaining 992 (representing 101
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. Currently, 1,508 of the opt-outs have confirmed
Heyer-Schulte mammary implant product identification. Furthermore, during
the second quarter of 1997, the Company obtained dismissals, or agreements
for dismissals, of 1,762 plaintiffs with cases against the Company that did
not involve Heyer-Schulte mammary implants.
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
<PAGE>
21
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 June 30, 1997, the Company was a defendant, or co-defendant, in 547
lawsuits and had 458 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
United States District Court for the Northern District of Illinois for case
management under Multi District Litigation ("MDL") rules. The Company also
has been named in eight purported class actions. None of these class actions
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 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 of the 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. The Company's agreed contribution to the proposed
settlement is 20%. On May 6, 1997, the Court determined that the settlement
was fair. The defendants have also reached agreement to settle potential
subrogation and reimbursement claims with most private insurers, the federal
government and 35 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 June 30, 1997 is 533 and the
approximate number of eligible claimants at the end of June is 5,239,
although the final numbers will probably increase in both categories. Two
appeals to the order approving the class were filed challenging the
settlement, but the appeals were both dismissed on July 29, 1997. Payments
to eligible claimants are expected to begin in the third quarter of 1997.
<PAGE>
22
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 its
insurance carriers with potential coverage responsibilities in this matter.
Subsequently, most of the insurers were dismissed without prejudice by the
Company, and the Company filed an Amended Complaint which sought a
declaratory judgment as to the potential for indemnity under certain primary
liability policies issued by Zurich American Company ("Zurich"). Zurich had
previously filed an action against the Company in Illinois state court
seeking a declaration of noncoverage. The Company's California action was
thereafter stayed in favor of Zurich's Illinois action. The Illinois action
has since been expanded to include all of the Company's excess liability
carriers as defendants, and one of those excess carriers has removed the
entire action to the Northern District Federal Court in Chicago pursuant to
the Foreign Sovereign Immunities Act. In the meantime, the Company has
appealed the stay of its California action.
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.
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 June 30, 1997, the
cases involved 1,217 plaintiffs, at least 1,090 of whom allegedly used Factor
Concentrates manufactured by the Company. The Japanese Ministry of Health
and Welfare estimates that approximately 1,900 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.
<PAGE>
23
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 June
30, 1997, the Company settled with 1300 claimants. The Company hopes to
settle with many of the remaining claimants by December 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 June 30, 1997, the Company had received reports of alleged Hepatitis C
transmission from 399 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 June 30, 1997, the Company was a defendant in 163 lawsuits and had 71
pending claims in the United States, Denmark, France, Germany, Italy, Spain,
Sweden and the United Kingdom resulting from this incident. Eleven 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
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 three
cases for October 14, 1997. 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.
<PAGE>
24
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 acquired Immuno International AG
("Immuno") in fiscal year 1997. 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 $59 million at
quarter-end) of the purchase price will be held back to cover these
contingent liabilities. Based on management's estimates, the amount of these
contingencies, net of insurance recoveries, is not expected to exceed the
negotiated contingent payment 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 June 30, 1997,
there were 109 pending lawsuits naming the Company, among others, as a
defendant, including the following purported class actions: WOLF V. BAXTER
HEALTHCARE CORP., ET AL., Circuit Court, Wayne County, MI, 96-617844NP;
MURRAY, ET AL., V. BAXTER HEALTHCARE CORP., ET AL., U.S.D.C., S. Dist. Ind.,
IP96-1889C, COWART, ALMA M. V. BAXTER INTERNATIONAL INC., U.S.D.C. Orleans
Cty, LA, 97-7237 and DELPIT, ANGELA C. V. BAXTER HEALTHCARE CORP., ET AL.,
U.S.D.C., Eastern District, LA, 97-1112. 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.
<PAGE>
25
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>
26
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) Reports on Form 8-K
None.
<PAGE>
27
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAXTER INTERNATIONAL INC.
--------------------------
(Registrant)
Date: August 7, 1997 By:/s/ Brian P. Anderson
--------------------------
Brian P. Anderson
Corporate Vice President, Finance
<PAGE>
28
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
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 Six months ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
EARNINGS
Income (loss) from continuing operations applicable
to common stock $162 $142 ($41) $280
Income from discontinued operations 0 34 0 54
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) available for common stock $162 $176 ($41) $334
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
SHARES
Weighted average number of common
shares outstanding 278 272 276 272
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
PRIMARY EARNINGS PER COMMON SHARE
Income (loss) from continuing operations $0.58 $0.52 ($0.15) $1.03
Income from discontinued operations 0.00 0.13 0.00 0.20
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $0.58 $0.65 ($0.15) $1.23
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Baxter International Inc. and Subsidiaries
Exhibit 11.2 - Computation of Fully Diluted Earnings per Common Share
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(Unaudited - in millions, except per share data) Three months ended Six months ended
June 30, June 30,
1997 1996 1997 (a) 1996
<S> <C> <C> <C> <C>
EARNINGS
Income (loss) from continuing operations applicable
to common stock $162 $142 ($41) $280
Income from discontinued operations 0 34 0 54
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) available for common stock $162 $176 ($41) $334
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Shares
Weighted average number of common shares
outstanding 278 272 276 272
Additional shares assuming exercise of
stock options, performance share awards and stock
purchase plan subscriptions 5 5 0 6
- ----------------------------------------------------------------------------------------------------------------------
Average common shares and equivalents outstanding 283 277 276 278
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
FULLY DILUTED EARNINGS PER COMMON SHARE
Income (loss) from continuing operations $0.57 $0.51 ($0.15) $1.01
Income from discontinued operations 0.00 0.12 0.00 0.19
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $0.57 $0.63 ($0.15) $1.20
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Fully diluted earnings per share for the six months ended June 30, 1997 has
been calculated without common stock equivalents as the effect would be
anti-dilutive.
<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 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 (A) 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
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Six months ended June 30 1997 1997 (C)
Income from continuing operations before
income tax expense $68 $420
Add:
Interest costs 53 53
Estimated interest included in rentals (A) 7 7
- -----------------------------------------------------------------------------------------------------------------------
Fixed charges as defined 60 60
Interest costs capitalized (1) (1)
Losses of less than majority owned affiliates,
net of dividends 0 0
- -----------------------------------------------------------------------------------------------------------------------
Income as adjusted $127 $479
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 2.11 7.98
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Represents the estimated interest portion of rents.
(B) As a result of the loss incurred during this period, the Company's earnings
did not fully cover the indicated fixed charges. The earnings required to
attain a ratio of one-to-one are $52 million.
(C) Included in this exhibit 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 net litigation
charge.
1995: $103 million restructuring charge and $96 million net litigation
charge.
1997: $352 million in-process research and development charge.
<PAGE>
August 7, 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 August
7, 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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 831
<SECURITIES> 0
<RECEIVABLES> 1,715
<ALLOWANCES> 33
<INVENTORY> 1,240
<CURRENT-ASSETS> 4,169
<PP&E> 4,127
<DEPRECIATION> 1,982
<TOTAL-ASSETS> 8,655
<CURRENT-LIABILITIES> 2,587
<BONDS> 2,659
0
0
<COMMON> 288
<OTHER-SE> 2,162
<TOTAL-LIABILITY-AND-EQUITY> 8,655
<SALES> 3,012
<TOTAL-REVENUES> 3,012
<CGS> 1,637
<TOTAL-COSTS> 1,637
<OTHER-EXPENSES> 206<F1>
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 98
<INCOME-PRETAX> 68
<INCOME-TAX> 109
<INCOME-CONTINUING> (41)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
<FN>
<F1>FOR "OTHER EXPENSES" - REF # 5-03(b)3 - INCLUDES R & D EXPENSE AND
GOODWILL AMORTIZATION.
</FN>
</TABLE>
