<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, 1999
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, par value $1.00 per
share, outstanding as of August 6, 1999, the latest practicable date, was
291,143,216 shares.
<PAGE>
BAXTER INTERNATIONAL INC.
FORM 10-Q
For the quarterly period ended June 30, 1999
TABLE OF CONTENTS
Page Number
-----------
Part I. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements
Condensed Consolidated Statements of Income...................... 2
Condensed Consolidated Balance Sheets............................ 3
Condensed Consolidated Statements of Cash Flows.................. 4
Notes to Condensed Consolidated Financial Statements............. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................13
Review by Independent Public Accountants......................................22
Report of Independent Accountants.............................................23
Part II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings...................................................24
Item 4. Submission of Matters to a Vote of Security Holders.................27
Item 6. Exhibits and Reports on Form 8-K....................................27
Signature.....................................................................28
Exhibits......................................................................29
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Income (unaudited)
(in millions, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
------------------ ------------------
<S> <C> <C> <C> <C>
Operations
Net sales $1,560 $1,419 $3,022 $2,675
Costs and expenses
Cost of goods sold 870 765 1,707 1,458
Marketing and administrative expenses 319 306 623 563
Research and development expenses 84 84 159 158
In-process research and development -- 116 -- 116
Interest, net 22 33 46 64
Goodwill amortization 4 5 9 9
Other expense 6 6 6 4
- --------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,305 1,315 2,550 2,372
- --------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
and cumulative effect of accounting change 255 104 472 303
Income tax expense 66 52 121 103
- --------------------------------------------------------------------------------------------------------------
Income from continuing operations before cumulative
effect of accounting change 189 52 351 200
Income from discontinued operation, net of applicable
income tax expense of $6 and $10 in 1999 and
$4 and $8 in 1998 18 11 34 27
- --------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 207 63 385 227
Cumulative effect of accounting change, net of
income tax benefit of $7 -- -- (27) --
- --------------------------------------------------------------------------------------------------------------
Net income $ 207 $ 63 $ 358 $ 227
- --------------------------------------------------------------------------------------------------------------
Earnings per basic common share
Continuing operations, before cumulative effect of
accounting change $ .65 $ .18 $ 1.21 $ .71
Discontinued operation .06 .04 .12 .10
Cumulative effect of accounting change -- -- (.09) --
- --------------------------------------------------------------------------------------------------------------
Net income $ .71 $ .22 $ 1.24 $ .81
==============================================================================================================
Earnings per diluted common share
Continuing operations, before cumulative effect of
accounting change $ .64 $ .18 $ 1.19 $ .70
Discontinued operation .06 .04 .12 .09
Cumulative effect of accounting change -- -- (.09) --
- --------------------------------------------------------------------------------------------------------------
Net income $ .70 $ .22 $ 1.22 $ .79
==============================================================================================================
Weighted average number
of common shares outstanding:
Basic 290 283 289 282
==============================================================================================================
Diluted 295 288 294 287
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
Baxter International Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions, except shares)
<TABLE>
<CAPTION>
====================================================================================================================
June 30, December 31,
1999 1998
(unaudited)
-----------------------------------
<S> <C> <C> <C>
Current assets Cash and equivalents $ 723 $ 709
Accounts receivable 1,581 1,588
Notes and other current receivables 153 329
Inventories 1,397 1,324
Short-term deferred income taxes 387 467
Prepaid expenses 246 234
---------------------------------------------------------------------------------------------------
Total current assets 4,487 4,651
- --------------------------------------------------------------------------------------------------------------------
Property, At cost 4,945 4,989
plant and Accumulated depreciation and amortization (2,297) (2,316)
Equipment ---------------------------------------------------------------------------------------------------
Net property, plant and equipment 2,648 2,673
- --------------------------------------------------------------------------------------------------------------------
Other assets Goodwill and other intangibles 1,734 1,817
Insurance receivables 393 378
Other 637 566
---------------------------------------------------------------------------------------------------
Total other assets 2,764 2,761
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 9,899 $10,085
====================================================================================================================
Current Notes payable to banks $ 123 $ 156
liabilities Current maturities of long-term debt and lease obligations 110 115
Accounts payable and accrued liabilities 1,786 2,181
Income taxes payable 578 536
---------------------------------------------------------------------------------------------------
Total current liabilities 2,597 2,988
- --------------------------------------------------------------------------------------------------------------------
Long-term debt and lease obligations 2,907 3,096
- --------------------------------------------------------------------------------------------------------------------
Long-term deferred income taxes 440 505
- --------------------------------------------------------------------------------------------------------------------
Long-term litigation liabilities 334 246
- --------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 402 411
- --------------------------------------------------------------------------------------------------------------------
Stockholders' Common stock, $1 par value, authorized 350,000,000
equity shares, issued 294,363,251 shares in 1999 and
291,248,251 shares in 1998 294 291
Additional contributed capital 2,249 2,064
Retained earnings 1,145 990
Common stock in treasury, at cost, 2,479,526
shares in 1999 and 4,919,141 shares in 1998 (132) (210)
Accumulated other comprehensive income (337) (296)
---------------------------------------------------------------------------------------------------
Total stockholders' equity 3,219 2,839
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 9,899 $10,085
====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
Baxter International Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
(in millions)
<TABLE>
<CAPTION>
======================================================================================================================
Six months ended June 30,
(brackets denote cash outflows) 1999 1998
-------------------------------
<S> <C> <C> <C>
Cash flows Net income $ 358 $ 227
from Adjustments
operations Depreciation and amortization 227 211
Deferred income taxes 16 66
Cumulative effect of accounting change 34 --
In-process research and development -- 116
Other 8 3
Changes in balance sheet items
Accounts receivable 5 (116)
Inventories (104) (136)
Accounts payable and other accrued liabilities (143) (142)
Net litigation payments and other (155) (138)
-----------------------------------------------------------------------------------------------------
Cash flows from operations 246 91
- ----------------------------------------------------------------------------------------------------------------------
Cash flows Capital expenditures (248) (221)
from investing Acquisitions, net of cash received,
activities and investments in affiliates (57) (239)
Divestitures and other asset dispositions 6 --
-----------------------------------------------------------------------------------------------------
Investment activities, net (299) (460)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows Issuances of debt and lease obligations 268 879
from financing Redemptions of debt and lease obligations (375) (117)
activities Increase (decrease) in debt with maturities
of three months or less, net 122 (310)
Common stock cash dividends (169) (165)
Stock issued under Shared Investment Plan 198 --
Stock issued under employee benefit plans 67 57
-----------------------------------------------------------------------------------------------------
Financing activities, net 111 344
- ----------------------------------------------------------------------------------------------------------------------
Effect of currency exchange rate changes on cash and equivalents (44) (12)
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 14 (37)
Cash and equivalents at beginning of period 709 465
- ----------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 723 $ 428
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
Baxter International Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
1. FINANCIAL INFORMATION
- -------------------------
The unaudited interim condensed consolidated financial statements of Baxter
International Inc. and its subsidiaries (the company or Baxter) have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles (GAAP) 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 1998
Annual Report to Stockholders.
In the opinion of management, the interim condensed consolidated financial
statements reflect all adjustments necessary for a fair presentation of the
interim periods. All such adjustments are of a normal, recurring nature. The
results of operations for the interim period are not necessarily indicative of
the results of operations to be expected for the full year.
Certain reclassifications have been made to conform the 1998 financial
statements to the 1999 presentation.
Basis of consolidation
- ----------------------
Prior to fiscal 1999, all operations outside the United States and its
territories had been included in the consolidated financial statements on the
basis of fiscal years ending November 30 in order to facilitate timely
consolidation. In conjunction with the implementation of new financial systems,
this one-month lag was eliminated as of the beginning of fiscal 1999 for certain
of these international operations, and the December 1998 results of operations
for these entities were recorded directly to retained earnings. This change
does not have a material impact on the consolidated financial statements.
Start-up costs
- --------------
Effective at the beginning of 1999, the company adopted AICPA Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities." This SOP
requires that, at the date of adoption, costs of start-up and organization
activities previously capitalized be expensed and reported as a cumulative
effect of a change in accounting principle, and requires that such costs
subsequent to adoption be expensed as incurred. The after-tax cumulative effect
of this accounting change was $27 million. Excluding the initial effect of
adopting this standard, management does not anticipate that the new SOP will
have a material impact on future results of operations.
Comprehensive income
- --------------------
Total comprehensive income was $226 million and $49 million for the three months
ended June 30, 1999 and 1998, respectively, and was $283 million and $172
million for the six months ended June 30, 1999 and 1998, respectively.
5
<PAGE>
2. DISCONTINUED OPERATION
- --------------------------
On July 11, 1999, the board of directors of Baxter International Inc. approved a
plan to spin off its cardiovascular business to Baxter stockholders. Management
expects that shares of the new cardiovascular company will be distributed to
Baxter stockholders (the distribution) in the first six months of 2000 and that
the spin-off will be tax-free. The distribution will result in the
cardiovascular business operating as an independent entity with publicly traded
common stock. The creation of a separately traded, publicly held company will
enable Baxter and the new company to devote more management time, attention and
investments directly to the core strategies of each business. The spin-off is
expected to provide both companies with more financial flexibility and
accelerate the speed of innovation.
The new cardiovascular company will manufacture, market and sell a comprehensive
line of therapies and services to treat late-stage heart disease and vascular
disorders. Products manufactured by the company will include heart valve
replacement and repair products, critical-care monitoring devices,
cardiopulmonary products, heart-assist systems and other products. The company
will also provide services to hospitals for cardiovascular surgery and special
procedures.
The following unaudited selected income statement data for the cardiovascular
business is presented for informational purposes only and does not necessarily
reflect what the results of operations would have been had the business operated
as a stand-alone entity.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(in millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operations
Net sales $ 233 $ 227 $ 456 $ 439
Costs and expenses
Cost of goods sold 115 118 227 231
Marketing and administrative expenses 60 55 118 105
Research and development expenses 13 15 25 27
Interest, net 9 10 20 21
Goodwill amortization 9 9 17 17
Other expense 3 5 5 3
- ---------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 209 212 412 404
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 24 $ 15 $ 44 $ 35
===========================================================================================================================
Income before interest, taxes, depreciation and
amortization (EBITDA) $ 55 $ 47 $ 109 $ 100
===========================================================================================================================
</TABLE>
The following unaudited selected balance sheet data for the cardiovascular
business is presented for informational purposes only. The data is presented on
an historical management basis and does not reflect certain adjustments
necessary to present the financial position of the business on a stand-alone
basis.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
June 30, December 31,
(in millions, on a management basis) 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net current assets $ 221 $ 206
Net noncurrent assets 1,049 1,048
- ---------------------------------------------------------------------------------------------------
Total net assets $1,270 $1,254
===================================================================================================
</TABLE>
As a result of the board's approval of the distribution, the company's condensed
consolidated income statement and related notes have been adjusted and restated
to reflect the results of operations of the cardiovascular business as a
discontinued operation. Management is in the process of analyzing and making
decisions regarding assets and liabilities related to the cardiovascular
business as well as the capitalization of the business. Therefore, the
condensed consolidated balance sheet and condensed consolidated statement of
cash flows and related notes have not yet been adjusted and restated to reflect
the cardiovascular business as a discontinued operation. Such adjustments and
restatements are expected to be
6
<PAGE>
made in the latter part of 1999. It is expected that through the issuance of new
third-party debt, a portion of Baxter's existing debt will be indirectly assumed
by the new cardiovascular company. The amount of debt will be determined when
the capital structure for the new company is finalized.
3. EARNINGS PER SHARE
- ----------------------
The numerator for both basic and diluted earnings per share (EPS) is income from
continuing operations before cumulative effect of accounting change, income from
discontinued operation, cumulative effect of accounting change or net income,
as applicable. The denominator for basic EPS is the weighted-average number of
common shares outstanding during the period. The following is a reconciliation
of the shares (denominator) of the basic and diluted per-share computations:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(in millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic EPS shares 290 283 289 282
- ---------------------------------------------------------------------------------------------------------
Effect of dilutive securities
Employee stock options 4 4 5 4
Employee stock purchase plans and equity
forward agreements 1 1 0 1
- ---------------------------------------------------------------------------------------------------------
Diluted EPS shares 295 288 294 287
=========================================================================================================
</TABLE>
4. COMMON STOCK
- ----------------
Shared Investment Plan
- ----------------------
In connection with a newly implemented Shared Investment Plan, the company
received approximately $198 million in cash in May 1999 from 142 of Baxter's
senior managers, who in the aggregate voluntarily purchased approximately 3.1
million shares of the company's common stock. This plan, which is similar to
one implemented in 1994, directly aligns management and shareholder interests.
The Baxter managers used full-recourse personal bank loans to purchase the stock
at the May 3, 1999 closing price of $63.625. Baxter has agreed to guarantee
repayment to the banks in the event of default by a participant in the plan.
Equity Forward Agreements
- -------------------------
During the first and second quarters of 1999, the company entered into forward
agreements with independent third parties related to approximately 2.7 million
and 3.8 million shares, respectively, of its common stock. The purpose of the
agreements is to attempt to partially offset the dilutive effect of stock
issuances under the company's employee stock option plans. The forward
agreements require the company to purchase its common stock from the
counterparties on specified future dates and at specified prices. The company
can, at its option, require settlement of the agreements with shares of its
common stock or, in some cases, cash, in lieu of physical settlement.
Agreements related to approximately 2.8 million shares mature in 2000 at
exercise prices ranging from $68 to $71 per share. Agreements related to
approximately 3.7 million shares mature in 2002 at exercise prices ranging from
$74 to $81 per share. The company may, at its option, terminate these
agreements at any time before maturity.
7
<PAGE>
In conjunction with its stock repurchase program, during the third quarter of
1999 the company terminated one of the agreements prior to original maturity
date, delivering approximately $32.7 million in cash to the counterparty for
500,000 shares of Baxter common stock.
5. ACQUISITIONS
- -----------------
All acquisitions during the six months ended June 30, 1999 and 1998 were
accounted for under the purchase method. Results of operations of acquired
companies are included in the company's results of operations as of the
respective acquisition dates. The purchase price of each acquisition was
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 fair
values of the net tangible assets and liabilities acquired was allocated to
goodwill and other intangible assets, and is being amortized on a straight-line
basis over periods ranging from 10 to 40 years. As further discussed below, a
portion of the purchase price for one of the acquisitions was allocated to in-
process research and development (IPR&D) which, under GAAP, was immediately
expensed.
Excluding the IPR&D charge, had the 1999 and 1998 acquisitions taken place on
January 1 of 1999 or 1998, net sales, net income and earnings per share would
not have been materially different from the reported amounts.
Somatogen, Inc.
- ---------------
In May 1998, the company acquired Somatogen, Inc. (Somatogen), a developer of
recombinant hemoglobin-based technology. The purchase price was approximately
$206 million and was principally settled with approximately 3.5 million shares
of Baxter International Inc. common stock. In addition, Somatogen shareholders
are entitled to a contingent deferred cash payment of up to $2.00 per Somatogen
share, or approximately $42 million, based on a percentage of sales of certain
future products through the year 2007. Approximately $116 million of the
purchase price was allocated to IPR&D, and immediately expensed, as discussed
above.
The amount allocated to IPR&D was determined on the basis of an independent
appraisal using the income approach, which measures the value of an asset by the
present value of its future economic benefits. Estimated cash flows were
discounted to their present values at rates of return that incorporate the risk-
free rate, the expected rate of inflation, and risks associated with the
particular projects, including their stages of completion. Projected revenue
and cost assumptions were determined based upon the company's historical
experience and industry trends and averages. Somatogen was a development-stage
company, developing oxygen-carrying therapeutics. No revenue had ever been
generated from commercial product sales. The development of oxygen-carrying
therapeutics is a strategic priority to Baxter. At the time of the acquisition
of Somatogen, Baxter was in final-stage (Phase III) clinical trials with its
HemAssist(R) (DCLHb) product. Baxter acquired Somatogen to advance the
development of new generations of recombinant oxygen-carrying technology-based
products with enhanced attributes. Subsequent to the date of the acquisition,
Baxter decided to end its HemAssist (DCLHb) program and focus on Somatogen's
next-generation program. Material net cash inflows relating to Somatogen's IPR&D
were forecasted in the valuation to begin in 2004. Estimated research and
development costs to be incurred prior to 2004 total approximately $100 million.
A discount rate of 22 percent was used in the valuation.
8
<PAGE>
Pharmaceutical Products Division of the BOC Group
- -------------------------------------------------
In April 1998, the company acquired the Pharmaceutical Products Division of the
BOC Group's Ohmeda health-care business, a manufacturer of gases and drugs used
for general and local anesthesia, for approximately $91 million. The fair value
of the identifiable net assets acquired exceeded the purchase price by
approximately $149 million. Such excess was allocated to reduce the values
assigned to noncurrent assets in determining their fair values.
Bieffe Medital S.p.A.
- ---------------------
In early 1998, the company acquired Bieffe Medital S.p.A., a manufacturer of
dialysis and intravenous solutions and containers, for approximately $188
million. Approximately $124 million and $15 million of the purchase price was
allocated to goodwill and other intangibles, respectively.
6. INVENTORIES
- ---------------
Inventories consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
(in millions) (unaudited)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 329 $ 315
Work in process 272 262
Finished products 796 747
- --------------------------------------------------------------------------------------
Total inventories $1,397 $1,324
======================================================================================
</TABLE>
7. EXIT AND OTHER REORGANIZATION PROGRAMS
- ------------------------------------------
In September 1998, the company decided to end the clinical development of the
Blood Therapies' segment's first-generation oxygen-carrying therapeutic called
HemAssist(R) (DCLHb) and focus on the next-generation program. While the first-
generation program was based on human hemoglobin, the next-generation program is
based on genetically engineered hemoglobin molecules. The company also decided
to exit certain non-strategic investments, primarily in Asia, and reorganize
certain other activities, principally in the Blood Therapies and I.V.
Systems/Medical Products segments. As a result of these decisions, the company
recorded a $131 million pretax charge primarily for asset writedowns and
employee severance, of which approximately $38 million related to employee
severance resulting from the elimination of approximately 400 positions
worldwide. Approximately 330 positions have been eliminated to date and
approximately $19 million of reserves are remaining at June 30, 1999, of which
approximately $6 million pertain to employee-related costs. The majority of the
asset writedowns relate to assets located in a manufacturing facility in
Neuchatel, Switzerland, that were used solely in the development and manufacture
of HemAssist(R) (DCLHb), and have no alternative future use. In 1999, the
company has begun modifications to this manufacturing facility, which was
designed to manufacture a human hemoglobin product, to produce another
biopharmaceutical product. Such alternate production is expected to commence at
the Neuchatel facility in the next two to four years.
In September 1995, the company recorded a restructuring charge of $103 million
primarily to eliminate excess plant capacity and reduce manufacturing costs.
The charge predominantly
9
<PAGE>
related to the closure of the intravenous-solutions plant and warehouse in
Carolina, Puerto Rico. As of year-end 1998, production and warehousing had been
consolidated into other facilities. The remaining reserves were utilized during
the first quarter of 1999 as employee severance was paid and other wind-down
activities were completed. Approximately 1,200 positions were eliminated in
Puerto Rico. Certain positions, primarily direct labor, were added to other
facilities to support the increased production levels at those sites.
8. LEGAL PROCEEDINGS
- --------------------
Refer to "Part II - Item 1. Legal Proceedings" below for the status of lawsuits
and claims involving the company.
9. INTEREST, NET
- ----------------
Net interest expense consisted of the following (unaudited):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(in millions) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense $39 $49 $80 $102
Interest income (8) (6) (14) (17)
- -----------------------------------------------------------------------------------------------------------
Interest, net $31 $43 $66 $85
===========================================================================================================
Allocated to discontinued operation $ 9 $10 $20 $21
===========================================================================================================
Allocated to continuing operations $22 $33 $46 $64
===========================================================================================================
</TABLE>
The allocation of interest to continuing operations and the discontinued
operation was based on estimated relative net assets of these operations.
10. SEGMENT INFORMATION
- -----------------------
The company operates in three segments, each of which are strategic businesses
that are managed separately because each business develops, manufactures and
sells distinct products and services. The segments and a description of their
businesses are as follows: I.V. Systems/Medical Products: technologies and
systems to provide intravenous fluid and drug delivery; Blood Therapies:
biopharmaceutical and blood-collection and separation products and technologies;
and Renal: products and services to treat end-stage kidney disease. As discussed
in Note 2 above, the company plans to spin off its cardiovascular business to
Baxter stockholders. Income statement information for the cardiovascular
business, which is substantially the same as the former CardioVascular segment,
is now being reflected in the condensed consolidated income statement as a
discontinued operation.
Certain items are maintained at corporate headquarters (Corporate) and are not
allocated to the segments. They primarily include most of the company's debt and
cash and equivalents and related net interest expense, corporate headquarters
costs, certain non-strategic investments and nonrecurring gains and losses,
deferred income taxes, hedging activities, and certain litigation liabilities
and related insurance receivables.
10
<PAGE>
Financial information for the company's segments for the three and six months
ended June 30 is as follows:
<TABLE>
<CAPTION>
I.V. Systems/
Medical Blood
Products Therapies Renal Other Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the three months ended
- --------------------------
June 30,
- --------
1999
- ----
Net sales $ 604 $ 543 $413 -- $1,560
Pretax income 99 117 79 ($40) 255
1998
- ----
Net sales $ 572 $ 477 $370 -- $1,419
Pretax income 98 109 65 ($168) 104
For the six months ended
- ------------------------
June 30,
- --------
1999
- ----
Net sales $1,154 $1,055 $813 -- $3,022
Pretax income 169 217 149 ($63) 472
1998
- ----
Net sales $1,073 $ 887 $715 -- $2,675
Pretax income 169 195 133 ($194) 303
- --------------------------------------------------------------------------------
</TABLE>
The following are reconciliations of total segment amounts to amounts per the
condensed consolidated financial statements:
<TABLE>
<CAPTION>
Three Months
Ended June 30,
---------------
1999 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
Pretax income
- ------------
Total pretax income from segments $295 $ 272
Unallocated amounts
Interest expense, net (22) (33)
In-process research and development -- (116)
Other Corporate items (18) (19)
---- -----
Income from continuing operations before income
taxes and cumulative effect of accounting change $255 $ 104
- ---------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended June 30,
---------------
1999 1998
- --------------------------------------------------------------------------
Pretax income
- -------------
<S> <C> <C>
Total pretax income from segments $ 535 $ 497
Unallocated amounts
Interest expense, net (46) (64)
In-process research and development -- (116)
Other Corporate items (17) (14)
---------------
Income from continuing operations before income
taxes and cumulative effect of accounting change $ 472 $ 303
- --------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Baxter International Inc.'s (the company or Baxter) 1998 Annual Report to
Stockholders ("Annual Report") contains management's discussion and analysis of
financial condition and results of operations for the year ended December 31,
1998. In the Annual Report, management outlined its key financial objectives for
1999. The objectives, which are summarized below, were established based on
total company results prior to the July 1999 announcement of the plan to spin
off the cardiovascular business as a distribution to stockholders. Refer to Note
2 to the Condensed Consolidated Financial Statements for further information
regarding the planned spin-off. Accordingly, the results presented below reflect
the combined results of both continuing and discontinued operations.
<TABLE>
<CAPTION>
RESULTS THROUGH
FULL YEAR 1999 OBJECTIVES JUNE 30, 1999
- --------------------------------------------------------------------------------------------------------------
<S> <C>
. Increase net sales approximately 10 . Net sales during the six months ended
percent. June 30, 1999 increased 12 percent.
- --------------------------------------------------------------------------------------------------------------
. Grow net earnings in the low double . Excluding the cumulative effect of a change in
digits. accounting principle in 1999 and the in-process
research and development charge in 1998, net income
for the first half of the year increased
approximately 12 percent.
- --------------------------------------------------------------------------------------------------------------
. Generate $500 million in operational cash . The company generated operational cash flow of
flow, after investing approximately $1 $144 million during the six months ended June 30,
billion in capital improvements and 1999. The total of capital expenditures and research
research and development. and development expenses for the six months ended
June 30, 1999 was $432 million.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
The following management discussion and analysis pertains to continuing
operations, unless otherwise noted.
NET SALES TRENDS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, Percent June 30, Percent
(in millions) 1999 1998 Increase 1999 1998 Increase
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International $ 858 $ 793 8% $1,663 $1,475 13%
United States 702 626 12% 1,359 1,200 13%
- ---------------------------------------------------------------------------------------------------------
Total net sales $1,560 $1,419 10% $3,022 $2,675 13%
=========================================================================================================
</TABLE>
Refer to Note 10 to the Condensed Consolidated Financial Statements for a
summary of net sales by segment.
Blood Therapies
Sales in the Blood Therapies segment increased 14 percent and 19 percent for the
three- and six-month periods ended June 30, 1999, respectively. Strong demand
for the segment's therapeutic proteins, especially Recombinate Antihemophilic
Factor (recombinant), generated significant worldwide growth. Due to the
company's recent increase in manufacturing capacity and the strong demand for
Recombinate, sales growth for this product was unusually strong in 1999,
especially during the first quarter. While sales for the rest of the year are
expected to continue to remain strong, management expects that growth rates in
the third and fourth quarters of 1999 will be lower than in the first half of
the year. Domestic sales of the segment's plasma-based products also contributed
strongly to the sales growth for both the quarter and year-to-date period, as
the supply constraints that impacted the entire factor concentrates industry in
1998 have eased somewhat in 1999.
Renal
The Renal segment generated sales growth of 12 percent and 14 percent during the
three and six months ended June 30, 1999, respectively. International sales were
particularly strong in both the quarter and year-to-date period, with
significant growth generated from the segment's Renal Therapy Services (RTS)
business, which operates dialysis clinics in partnership with local physicians
and hospitals in international markets. While RTS sales are expected to remain
strong, management expects that growth rates in the third and fourth quarters of
1999 will be less than in the first half of the year due to a reduction in
acquisition-related growth. Domestically, the Renal Management Services (RMS)
business, which is a renal-disease management organization, contributed to the
sales growth rate for both the three- and six-month periods ended June 30, 1999.
The base business, which consists of products for hemodialysis and peritoneal
dialysis, also generated solid sales growth during the first half of the year.
I.V. Systems/Medical Products
The I.V. Systems/Medical Products segment generated 6 percent and 8 percent
sales growth during the three and six months ended June 30, 1999, respectively.
The April 1998 acquisition of the Pharmaceutical Products Division of The BOC
Group's Ohmeda health-care business (Ohmeda), a domestic manufacturer of
inhalants and drugs used for general and local
14
<PAGE>
anesthesia, was a significant contributor to sales growth, especially for the
six-month period ended June 30, 1999. The recent introductions of the
Colleague(R) single-channel and triple-channel volumetric infusion pumps, and
increased penetration and new product introductions in emerging markets also
contributed to sales growth for both the quarter and year-to-date period.
Partially offsetting these factors were the effects of competitive pricing and
cost pressures from health-care providers in certain markets.
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,
1999 1998 (Decrease) 1999 1998 (Decrease)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross profit margin 44.2% 46.1% (1.9 pts) 43.5% 45.5% (2.0 pts)
Marketing and
administrative expenses 20.4% 21.6% (1.2 pts) 20.6% 21.0% (0.4 pts)
- -----------------------------------------------------------------------------------------------------
</TABLE>
The gross profit margin decreased for both the quarter and year-to-date period
primarily due to a less favorable product and services mix. The decrease in the
margin in the year-to-date period was also due to the recognition of unfavorable
manufacturing variances. These variances relate to increased investments in 1998
in the Blood Therapies segment's safety and quality systems in response to
heightened FDA regulatory activity.
Marketing and administrative expenses decreased as a percent of sales for both
the three-month and six-month periods ended June 30, 1999 as the company
effectively leveraged expenses as a result of strong sales, particularly in the
Blood Therapies and Renal segments. Partially offsetting this leveraging effect
was an increase in the ratio in the year-to-date period due to the acquisition
of Ohmeda. Management expects to decrease the expense ratio during the second
half of the year as it focuses on cost control across all business units,
integrates recent acquisitions and implements the reorganization programs
discussed below.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, Percent June 30, Percent
(in millions) 1999 1998 Increase 1999 1998 Increase
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Research and
development expenses $84 $84 0% $159 $158 1%
As a percent of sales 5% 6% 5% 6%
- ----------------------------------------------------------------------------------------------------
</TABLE>
Research and development (R&D) expenses above exclude the in-process R&D charge
recorded in 1998 relating to the acquisition of Somatogen, Inc. (Somatogen).
Refer to Note 5 to the Condensed Consolidated Financial Statements for further
information regarding this charge. R&D expenses decreased as a percentage of
sales in 1999 as compared to 1998, primarily due to the September 1998 decision
to end the clinical development of the company's first-generation oxygen-
carrying therapeutic called HemAssist(R)(DCLHb). Management expects the growth
rate in R&D expenses will increase in the future as the company focuses on the
next-generation oxygen-carrying therapeutics program within its Blood Therapies
segment, as well as on other R&D initiatives across its three segments.
15
<PAGE>
EXIT AND OTHER REORGANIZATION PROGRAMS
Refer to Note 7 to the Condensed Consolidated Financial Statements for a
discussion of the company's 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. Future cash
expenditures will be funded by cash generated from operations.
The 1998 program is in process and principally relates to the decision to end
the clinical development of HemAssist (DCHLb), as discussed above, as well as
the decision to exit certain non-strategic investments, primarily in Asia, and
reorganize certain other activities. The 1995 program has been completed. The
plant closures and consolidations in Puerto Rico lower manufacturing costs and
help mitigate any future exposure to gross margin erosion arising from pricing
pressures, primarily in the United States.
OTHER INCOME AND EXPENSE
Net interest expense decreased for the three- and six-month periods ended June
30, 1999 as compared to the prior-year periods principally due to the impact of
a higher level of foreign currency denominated debt, which bears a lower average
interest rate, and, in the second quarter, due to the cash proceeds from the
Shared Investment Plan, which is further discussed in Note 4 to the Condensed
Consolidated Financial Statements.
PRETAX INCOME
Refer to Note 10 to the Condensed Consolidated Financial Statements for a
summary of financial results by segment.
Blood Therapies
The pretax income growth of 7 percent and 11 percent for the three and six
months ended June 30, 1999, respectively, was driven by the strong sales for the
quarter, a reduction in R&D expenses due to the termination of the HemAssist
(DCLHb) program, leveraging of marketing and administrative expenses, and
fluctuations in currency exchange rates. As discussed above, the gross profit
margin for the Blood Therapies segment declined in the year-to-date period
primarily due to the recognition of unfavorable manufacturing variances.
Additionally, the blood-collection businesses generated lower profits in 1999
principally as a result of a less favorable mix of sales, pricing pressures due
to competition and continued regulatory activity in the industry, which has
affected certain of the segment's customers.
Renal
Pretax income increased approximately 22 percent and 12 percent for the quarter
and year-to-date period, respectively. Strong sales growth for the quarter and
the effect of currency exchange rate fluctuations were partially offset by a
less favorable product and services mix, and increased investments in the
business.
I.V. Systems/Medical Products
Pretax income increased 1 percent for three months and was flat for the six
months ended June 30, 1999, respectively, as compared to the prior year periods.
This growth in profitability was principally due to the acquisition of Ohmeda in
April 1998, partially offset by the effect of currency exchange rate
fluctuations.
16
<PAGE>
INCOME TAXES FROM CONTINUING OPERATIONS
Excluding the in-process research and development charge in the second quarter
of 1998, the effective income tax rate was 26 percent and 26 percent for the
three- and six-month periods ended June 30, 1999, compared to 24 percent and 25
percent for the three- and six-month periods ended June 30, 1998. The increase
in the effective income tax rate for both periods was due to a larger portion of
the company's earnings being generated in higher tax jurisdictions.
DISCONTINUED OPERATION
Income from the discontinued operation increased by $7 million in both the
quarter and year-to-date period ended June 30, 1999, resulting in growth of 64
percent and 26 percent, respectively. These results reflect the favorable effect
of currency exchange rate fluctuations, growth in the higher-margin tissue heart
valves and valve-repair product lines and reduced R&D spending, partially offset
by reduced profits in certain other product and service lines due to pricing and
competitive pressures, loss of a distribution agreement and a reduction in the
number of open-heart surgical procedures.
CHANGE IN ACCOUNTING PRINCIPLE
In the first quarter of 1999, the company recorded a $27 million after-tax
charge for the cumulative effect of a change in accounting principle. The
charge related to the adoption of AICPA Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-up Activities." Excluding the initial effect
of adopting this standard, management does not anticipate that the new SOP will
have a material impact on future results of 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
that evaluates each operating business and geographic region on all aspects of
cash flow under its direct control.
The following table reconciles cash flow provided by operations, as determined
by generally accepted accounting principles, to operational cash flow:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Six months ended June 30,
(in millions) 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Cash flow from operations per the company's
Condensed Consolidated Statements of Cash Flows $ 246 $ 91
Capital expenditures (248) (221)
Net interest after tax 34 51
Other, including mammary implant litigation 112 84
- -----------------------------------------------------------------------------
Operational cash flow $ 144 $ 5
=============================================================================
</TABLE>
Approximately $30 million of the total net cash flows used for acquisitions and
investments in affiliates for the six months ended June 30, 1999 related to a
contingent purchase price payment pertaining to the 1997 acquisition of Immuno
International AG. Refer
17
<PAGE>
to "Part II Item 1. Legal Proceedings" for further information. Approximately
$114 million of the total net cash flows used for acquisitions and investments
in affiliates for the six months ended June 30, 1998 related to the acquisition
of Bieffe Medital S.p.A., with most of the remaining amount related to the
acquisition of Ohmeda. Refer to Note 5 to the Condensed Consolidated Financial
Statements for further information regarding these acquisitions.
The company's net-debt-to-capital ratio was 42.9 percent and 48.4 percent at
June 30, 1999 and December 31, 1998, respectively. The decrease in the ratio
was primarily due to the $198 million cash inflow from the Shared Investment
Plan, which is discussed in Note 4 to the Condensed Consolidated Financial
Statements, cash flows from ongoing operations and favorable currency exchange
rate fluctuations.
In addition, due principally to favorable fluctuations in currency exchange
rates, the total market value of the company's foreign exchange contracts has
increased significantly from that disclosed in the Annual Report.
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.
No shares were repurchased between the end of 1996 and the end of the second
quarter of 1999. As the company's net-debt-to-capital ratio is now in the
targeted low-to-mid 40 percent range, management resumed the share repurchase
program in the third quarter of 1999. During July, 1999 the company repurchased
approximately 1.1 million shares of its stock at a net cost of approximately $71
million.
The company intends to fund its short-term and long-term obligations as they
mature by issuing additional debt or through cash flow from operations. The
company believes it has lines of credit adequate to support ongoing operational
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.
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 matters,
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 they are recorded or paid,
management believes that the outcomes of these actions, individually or in the
aggregate, will not have a material adverse effect on the company's consolidated
financial position.
YEAR 2000
- ---------
The company has developed, and is implementing, a comprehensive program to
address Year 2000 issues pertaining to both information technology (IT) and non-
IT systems. The program is monitored by a steering committee comprised of
senior management in key functional areas, which periodically reports to the
audit committee of the board of directors as to the program's status. The
program consists of identification, compliance and post-implementation phases
and considers the effect of the Year 2000 on the company's internal systems,
customers, products
18
<PAGE>
and services, and manufacturing systems, as well as on its suppliers and other
critical business partners. The current status of these areas of scope vary
within the post-implementation phase.
The company has been upgrading, replacing or modifying non-compliant internal
systems. All major systems are expected to be Year 2000 compliant, based on a
phased implementation plan, by the end of the third quarter of 1999. To date,
the company has achieved all significant milestones relating to this initiative,
with approximately 85 percent of major system implementations complete as of the
end of the second quarter of 1999, and with the remainder scheduled for
completion by the end of the third quarter of 1999.
The total cost to upgrade or replace IT systems that would not have been Year
2000 ready is estimated to be approximately $145 million. More than 75 percent
of this total has been expended to date, with the remainder to be substantially
expended by the end of 1999. None of the company's systems are being upgraded
or replaced solely to address Year 2000 issues, although in some cases the
timing of the system upgrades and replacements was accelerated.
Compliance checking of products has been completed and fewer than 20 products
were identified to have Year 2000 issues. Approximately 80 percent of product
modifications and replacements have been completed as of June 30, 1999. The
remaining modifications and replacements are expected to be completed by the end
of 1999. The company's Year 2000 customer website includes a complete list of
the company's electronic medical products, frequent and detailed updates
regarding the status of Year 2000 affected products, a product supply
requirements policy addressing Year 2000 supply chain issues, and other
information regarding the company's Year 2000 program.
The company is actively addressing systems in its manufacturing plants and other
facilities. All remediation decisions for critical items were complete at the
end of 1998. Over 95 percent of the required changes for critical and non-
critical date-dependent items have been implemented as of the end of the second
quarter of 1999, consistent with management's expectations. The remainder of
the required changes are expected to be completed by the end of 1999. In
addition, the company has been communicating with critical suppliers and other
business partners to determine the extent to which any Year 2000 issues
affecting such third parties will affect the company. Such communications have
included solicitation of written responses to questionnaires and follow-up
meetings as needed. To date, the company has achieved a response rate in excess
of 90 percent from critical supplier questionnaires. Such communications are
ongoing and are expected to continue through the end of 1999, with action plans
developed and implemented as necessary.
Based upon the company's current estimates, and information available at this
time, incremental out-of-pocket costs of the Year 2000 program, which are
required to be expensed as incurred, have been and are expected to be immaterial
to the company's financial results. A large part of the Year 2000 effort has
been accomplished through the redeployment of existing resources. The cost of
such redeployment or of internal management time has not been specifically
quantified. However, no critical projects of the company have been deferred due
to the Year 2000 program.
Management of the company believes that its program will be effective to resolve
the Year 2000 issue in a timely manner. The company has, however, begun
contingency planning to address any situations that may arise in which the
readiness of the company's internal technology or
19
<PAGE>
that of third parties is not reasonably expected to be adequate, and where
practical alternatives are available. The company has been assessing the
viability of the entire supply chain and is in the process of finalizing any
necessary and feasible contingency plans accordingly. Current contingency
planning centers on human resource issues, inventory management, and the
development of a rapid response capability and monitoring process for critical
communications during the transition into the Year 2000. To accumulate ongoing
input into the contingency planning process, the company is meeting regularly
with key health-care industry leaders, contacting customs officials and
monitoring the Year 2000 status of key customers, distributors and suppliers.
Key company management and other critical resources have been identified to be
available during the transition into the Year 2000 to address any business needs
and communicate as needed with employees, customers, suppliers and other
business partners.
Management does not believe there has been or will be a significant disruption
to the company's business due to the Year 2000 remediation effort. However,
there can be no assurance that the company's Year 2000 program or the programs
of critical business partners will be successful. Any failure to adequately
address the Year 2000 issue could significantly disrupt the company's operations
and possibly lead to litigation against the company. The costs and expenses
associated with any such failure or litigation, or with any disruptions in the
economy in general as a result of the Year 2000, are not presently estimable,
but could have a material adverse effect on the company's business and results
of operations.
FORWARD-LOOKING INFORMATION
- ---------------------------
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, unforeseen
information technology issues related to the company or third parties, 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, global regulatory, trade
and tax policies, continued price competition, product development risks,
including technological difficulties, ability to enforce patents and unforeseen
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.
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
strengthens against most foreign currencies, the company's growth rates in its
sales and net earnings will be negatively impacted.
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
20
<PAGE>
of the company will conform to any future results or performance expressed or
implied by such forward-looking statements.
NEW ACCOUNTING STANDARD
- -----------------------
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (Statement No. 133) which was to be
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
In June 1999, the FASB issued Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133" (Statement No. 137). Statement No. 137 deferred the
effective date of Statement No. 133 to all fiscal quarters of fiscal years
beginning after June 15, 2000. Statement No. 133 requires that all derivatives
be recorded in the balance sheet as either assets or liabilities and be measured
at fair value. If certain conditions are met, a derivative may be specifically
designated as (i) a hedge of a recognized asset or liability or an unrecognized
firm commitment, (ii) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (iii) a hedge of the foreign currency exposure of a
net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
Management is in the process of evaluating this standard and has not yet
determined the future impact on the company's consolidated financial statements.
21
<PAGE>
Review by Independent Public Accountants
- ----------------------------------------
Reviews 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, 1999 and 1998 have been performed by PricewaterhouseCoopers LLP, the
company's independent public accountants. Their report on the interim condensed
consolidated financial information follows. There have been no material
adjustments or disclosures proposed by PricewaterhouseCoopers LLP, which have
not been reflected in the interim condensed consolidated financial information.
This 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.
22
<PAGE>
Report of Independent Accountants
---------------------------------
To the
Board of Directors and Stockholders of
Baxter International Inc.
We have reviewed the accompanying condensed consolidated balance sheet as of
June 30, 1999 and the related condensed consolidated statements of income for
the three-month and six-month periods ended June 30, 1999 and 1998, and
condensed consolidated statements of cash flows for the six-month periods ended
June 30, 1999 and 1998 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, 1998, 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 5, 1999
we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet information as of December 31, 1998, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
August 16, 1999
23
<PAGE>
PART II. OTHER INFORMATION
Baxter International Inc. and Subsidiaries
Item 1. Legal Proceedings
Baxter International Inc. (Baxter or the company) and certain of its
subsidiaries are named as defendants in a number of lawsuits, claims and
proceedings, including product liability claims involving products now or
formerly manufactured or sold by the company or by companies that were acquired
by the company. The most significant of these are reported in the company's
Annual Report on Form 10-K for the year ended December 31, 1998, and material
developments in such matters for the quarter ended June 30, 1999 are described
below. Upon resolution of any such matters, Baxter 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 no such charge
would have a material adverse effect on Baxter's consolidated financial
position.
Mammary Implant Litigation
- --------------------------
As previously reported in the company's Annual Report on Form 10-K, the company,
together with certain of its subsidiaries, is currently a defendant in various
courts in a number of lawsuits brought by individuals, all seeking damages for
injuries of various types allegedly caused by silicone mammary implants formerly
manufactured by the Heyer-Schulte division of American Hospital Supply
Corporation (AHSC). AHSC, which was acquired by the company in 1985, divested
its Heyer-Schulte division in 1984. It is not known how many of these claims
and lawsuits involve products manufactured and sold by Heyer-Schulte, as opposed
to other manufacturers. On December 1, 1998, a panel of independent medical
experts appointed by a federal judge announced their findings that reported
medical studies contained no clear evidence of a connection between silicone
mammary implants and traditional or atypical systemic diseases. In June 1999 a
similar conclusion was announced by a committee of independent medical experts
from the Institute of Medicine, an arm of the National Academy of Sciences.
As of June 30, 1999, Baxter, together with certain of its subsidiaries, had been
named as a defendant or co-defendant in 4,447 lawsuits and 136 claims relating
to mammary implants, brought by approximately 11,899 plaintiffs, of which 9,640
are implant plaintiffs and the remainder are consortium or second-generation
plaintiffs. Of those plaintiffs, 4,687 currently are included in the Lindsey
class action revised settlement described below, which accounts for 1,896 of the
pending lawsuits against the company. Additionally, 4,765 plaintiffs have opted
out of the revised settlement (representing 2,500 pending lawsuits), and the
status of the remaining plaintiffs with pending lawsuits 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. As of June 30, 1999, 1,585 of the opt-out
plaintiffs had confirmed Heyer-Schulte mammary implant product identification.
Furthermore, during the first two quarters of 1999, Baxter obtained dismissals,
or agreements for dismissals, with respect to 1,992 plaintiffs.
In addition to the individual suits against the company, a class action on
behalf of all women with silicone mammary implants is pending in the United
States District Court (U.S.D.C.) for the Northern District of Alabama involving
most manufacturers of such implants, including Baxter,
24
<PAGE>
as successor to AHSC (Lindsey, et al., v. Dow Corning, et al., U.S.D.C., N.
Dist. Ala., CV 94-P-11558-S). The class action was certified for settlement
purposes only by the court on September 1, 1994, and the settlement terms were
subsequently revised and approved on December 22, 1995 (the revised settlement).
All appeals directly challenging the revised settlement have been dismissed.
In addition to the Lindsey class action, the company also has been named in 12
other purported class actions in various state and provincial courts, only one
of which is certified.
Plasma-Based Therapies Litigation
- ---------------------------------
As previously reported in the company's Annual Report on Form 10-K, Baxter
currently is a defendant in a number of claims and lawsuits brought by
individuals who have hemophilia, all seeking damages for injuries allegedly
caused by anti-hemophilic factor concentrates VIII or IX derived from human
blood plasma (factor concentrates) processed by the company from the late 1970s
to the mid-1980s. The typical case or claim alleges that the individual was
infected with the HIV virus by factor concentrates, which contained the HIV
virus. None of these cases involves factor concentrates currently processed by
the company.
As of June 30, 1999, Baxter had been named in 269 lawsuits and 441 claims in the
United States, Canada, Ireland, Italy, Taiwan, Japan, Germany and the
Netherlands. The U.S.D.C. for the Northern District of Illinois has approved a
settlement of all U.S. federal court factor concentrates cases. As of June 30,
1999, approximately 6,500 claimant groups had been found eligible to participate
in the settlement, and approximately 350 claimants had opted out of the
settlement. Approximately 6,075 of the claimant groups had received payments as
of June 30, 1999, and payments are expected to continue through the third
quarter of 1999 as releases are received from the remaining claimant groups.
The company also has been named in four purported class actions. None of these
class actions has been certified.
In Japan, Baxter is a defendant, along with the Japanese government and four
other co-defendants, in factor concentrates cases in Osaka, Tokyo, Nagoya,
Tohoku, Fukuoka, Sapporo and Kumamoto. As of June 30, 1999, the cases involved
1,308 plaintiffs, of whom 1,296 have settled their claims.
In addition, Immuno International AG (Immuno), a company Baxter acquired in
1997, 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 factor concentrates containing the HIV
virus. 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, pursuant
to the original stock purchase agreement between the company and Immuno,
approximately 84 million Swiss francs (or approximately $61 million at year-end)
of the purchase price was withheld to cover these contingent liabilities. In
April 1999, the stock purchase agreement between the company and Immuno was
amended to revise the holdback amount from 84 million Swiss francs to 26 million
Swiss francs in consideration for an April 1999 payment by the company of 29
million Swiss francs to Immuno as additional purchase price.
As previously reported in the company's Annual Report on Form 10-K, Baxter is
currently a defendant in a number of claims and lawsuits brought by individuals
who infused the company's
25
<PAGE>
Gammagard(R) IVIG (intravenous immunoglobulin), all of whom are seeking damages
for hepatitis C infections allegedly caused by infusing Gammagard(R) IVIG. As of
June 30, 1999, Baxter was a defendant in 43 lawsuits and 54 claims in the United
States, Denmark, France, Germany, Italy, Spain and the United Kingdom. Three
suits currently pending in the United States have been filed as purported class
actions but only one has been certified.
Other Litigation
- ----------------
As of September 30, 1996, the date of the spin-off of Allegiance Corporation
(Allegiance) from Baxter, Allegiance 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 Baxter pursuant to certain contractual obligations for all
expenses and potential liabilities associated with claims pertaining to latex
gloves. As of June 30, 1999, the company had been named as a defendant in 435
lawsuits, including the following purported class action: Swartz v. Baxter
Healthcare Corporation, et al. Court of Common Pleas, Jefferson County, PA, 656-
1997 C.D.
26
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The company's annual meeting of stockholders was held on May 4, 1999 for the
purpose of electing directors, approving the appointment of auditors, and voting
on the other proposal 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. Each of management's
nominees for directors as listed in the proxy statement were elected with the
number of votes set forth below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Number of Votes
--------------------------------
Abstained/
In Favor Withheld
--------------------------------
<S> <C> <C>
Martha R. Ingram 230,446,118 16,995,367
Harry M. Jansen Kraemer, Jr. 230,494,999 16,946,486
Fred L. Turner 230,305,310 17,136,175
</TABLE>
The results of other matters voted upon at the annual meeting are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Number of Votes
-------------------------------------------
In Favor Against Abstained
-------------------------------------------
<S> <C> <C> <C>
PricewaterhouseCoopers LLP as independent
accountants for the company for 1999 246,406,410 332,094 702,981
Defeat of the stockholder proposal relating to
cumulative voting in the election of directors 70,230,594 134,640,810 19,189,534
- ------------------------------------------------------------------------------------------------
</TABLE>
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
A report on Form 8-K was filed on July 12, 1999, which reported under "Item
5 -- Other Events" a press release which announced a planned spin-off by
Baxter International Inc. of its cardiovascular business to Baxter
shareholders. In addition, the report noted that, during a conference call
with analysts on the topic, Harry M. Jansen Kraemer, Jr., President and
Chief Executive Officer of Baxter International Inc., reaffirmed that the
company expects to meet its previously announced financial commitments for
the second quarter of 1999.
27
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAXTER INTERNATIONAL INC.
-------------------------
(Registrant)
/s/ Brian P. Anderson
Date: August 16, 1999 By: _________________________
Brian P. Anderson
Senior Vice President and Chief
Financial Officer
(Chief Accounting Officer)
28
<PAGE>
EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Description of Exhibit
- -------- ----------------------
<S> <C>
10.1 Baxter International Inc. 1999 Shared Investment Plan.................
12 Computation of Ratio of Earnings to Fixed Charges.....................
15 Letter Re Unaudited Interim Financial Information.....................
27 Financial Data Schedule...............................................
(All other exhibits have been omitted because they are not applicable
or not required.)
</TABLE>
29
<PAGE>
Exhibit 10.1
BAXTER INTERNATIONAL INC.
1999 SHARED INVESTMENT PLAN
1. Purpose. The 1999 Shared Investment Plan ("Plan"), of Baxter International
Inc. ("Baxter"), is adopted pursuant to the Baxter International Inc. 1998
Incentive Compensation Program ("1998 Program") to facilitate the immediate
purchase, by the senior managers of Baxter and its subsidiaries
(collectively, the "Company"), of Baxter's common stock, $1.00 par value
("Common Stock"). The purchases facilitated by the plan are intended to
achieve the following specific purposes:
a) more closely align senior managers' financial rewards with the
financial rewards realized by all other holders of the Common Stock;
b) increase senior managers' motivation to manage the Company as owners;
and
c) increase the ownership of Common Stock among senior managers of the
Company.
2. Eligibility. To be eligible to participate in the Plan, the individual must
have been granted an option to purchase a specified number of shares of
Common Stock ("Stock Option") at a meeting of the Compensation Committee of
Baxter's Board of Directors held on May 3, 1999 ("Eligible Employee").
3. Participation. To become a Plan participant ("Participant"), an Eligible
Employee must satisfy the following requirements:
a) submit a completed, signed and irrevocable agreement to exercise all
or a portion of the Stock Option, subject to the terms and conditions
of the Stock Option Plan adopted on May 3, 1999 by the Compensation
Committee;
b) complete, sign, and submit all necessary agreements and other
documents relating to the loan described in Section 4 below,
including an agreement to reimburse Baxter for amounts it pays on
behalf of the Participant and for the portion of the gain on the sale
of the Purchased Shares (as defined below) which is payable to Baxter
pursuant to such agreement ("Reimbursement Agreement"); and
c) satisfy all other conditions of participation specified in the Plan.
The agreements and other documents specified in subsections 3(a), (b) and
(c) must be in such forms and must be submitted at such times and to such
Company offices as specified by the Committee or its designee(s). No
Eligible Employee is required to participate in the Plan.
4. Payment of Exercise Price. Each Participant must deliver in cash 100% of
the exercise price of the shares, with respect to which the Stock Option is
exercised ("Purchased Shares"), within three days after the option exercise
date ("Exercise Date"). The Purchased Shares will not be issued to the
Participant until Baxter has received such payment. The payment must be
made at the time, place and manner specified by the Committee or its
designee(s).
<PAGE>
Baxter has arranged the opportunity for each Participant to obtain a loan
through a syndicate of banks agented by The First National Bank of Chicago
("Banks") to fund the purchase of the Purchased Shares. Each Participant
must sign a letter of direction which directs all loan proceeds to be paid
directly to Baxter in payment of the Purchased Shares. Each Participant is
responsible for satisfying all of the lending requirements specified by the
Banks to qualify for the loan. Each Participant is fully obligated to repay
to the Banks all principal, interest, and any prepayment fees on the loan
when due and payable.
5. Registration of Shares. The Purchased Shares will be registered in the name
of the Participant and held in an uncertificated account.
6. Shareholder Rights. The Purchased Shares may be authorized and unissued
shares or shares issued from treasury shares. Each Participant will have
all of the rights of a shareholder with respect to the Purchased Shares,
including the right to vote the shares and the right to receive all
dividends paid on the shares. Unless otherwise directed by a Participant,
Baxter will deliver all such dividends directly to the Banks for payment of
loan principal or interest.
7. Sale of Purchased Shares. Each Participant is permitted to sell, pledge or
otherwise dispose of all or any portion of the Purchased Shares at any
time. Except for as specified in Sections 9 and 10, no Participant is
entitled to any gain on any of the Purchased Shares sold before the first
anniversary of the Exercise Date. In accordance with the Reimbursement
Agreement, such gain must be paid to Baxter simultaneously with the sale.
If there is any loss on any of the Purchased Shares sold before the first
anniversary of the Exercise Date, the Participant is responsible for 100%
of the loss, except as specified in Section 9.
8. Risk Sharing. In accordance with the Reimbursement Agreement, if the
Participant remains employed by Baxter or one of its subsidiaries until the
first anniversary of the Exercise Date, certain risk sharing provisions
will apply. The risk sharing on the Purchased Shares will be allocated as
follows:
a) if any portion of the Purchased Shares is sold before the third
anniversary of the Exercise Date, the Participant
1) is responsible for 100% of the loss on that portion of the
Purchased Shares; and
2) is entitled to receive 50% of the gain on that portion of the
Purchased Shares.
b) if any portion of the Purchased Shares is sold on or after the third
anniversary of the Exercise Date, the Participant
1) is responsible for 50% of the loss on that portion of the
Purchased Shares; and
2) is entitled to receive 100% of the gain on that portion of the
Purchased Shares.
<PAGE>
For purposes of the Plan, gain and loss will be measured by the difference
between the purchase price of the Purchased Shares and the sale price of
the Purchased Shares.
Baxter's agreement to make any payment in respect of losses under this
Section 8 will apply only to such Purchased Shares as are sold by the
Participant and the proceeds from which sale are applied to repayment of
the loan.
9. Death or Disability. If a Participant's employment with the Company
terminates, at any time while his or her loan under Section 4 is
outstanding, because of the Participant's death or disability, the
Participant (or the Participant's representative in the case of death)
remains free to sell all or any portion of the Purchased Shares, subject to
the Participant's Reimbursement Agreement. Upon the death of a Participant,
his or her loan may become immediately due and payable, at the discretion
of the Banks. With respect to the Purchased Shares sold after the
Participant's employment termination due to death or disability, and while
his or her loan under Section 4 is outstanding, the Participant (or the
Participant's estate in the case of death) is not responsible for any loss
on the sale of the Purchased Shares but is entitled to receive 100% of the
gain on the sale of the Purchased Shares, in accordance with the
Reimbursement Agreement. This Section 9 has no effect on a deceased or
disabled Participant's sale of Purchased Shares before the Participant's
employment termination due to death or disability or after the
Participant's loan under Section 4 has been repaid.
10. Employment Termination by Transaction. If a Participant's employment with
the Company terminates because of an acquisition, divestiture, merger,
spin-off or similar transaction ("Transaction"), the Participant will be
deemed to have remained employed by Baxter or one of its subsidiaries until
the first anniversary of the Exercise Date, for purposes of the risk
sharing provisions of Section 8, without regard to his actual employment
termination date. In all other respects, the Participant whose employment
is terminated because of a Transaction will remain subject to all of the
terms and conditions of the Plan.
11. Other Employment Termination. If a Participant's employment with the
Company terminates for any reason other than death or disability under
Section 9, or pursuant to a Transaction or a Change in Control (as defined
in the 1998 Program), the following will apply:
a) if the Participant's employment with the Company terminates on or
after the first anniversary of the Exercise Date, he or she will
remain subject to all of the terms and conditions of the Plan, as if
his or her employment had not terminated, including specifically the
risk sharing provisions of Section 8.
b) if the Participant's employment with the Company terminates before
the first anniversary of the Exercise Date, and the Participant sells
any portion of the Purchased Shares before the first anniversary of
the Exercise Date, he or she is:
1) responsible for 100% of the loss on the sale of the Purchased
Shares; and
<PAGE>
2) 100% of the gain must be paid to Baxter simultaneously with the
sale.
12. Risk Sharing Implementation. If a Participant sells any portion of the
Purchased Shares at a loss (as determined by the provisions of Section 8)
while his or her loan under Section 4 is outstanding, and if the
Participant is responsible for less than 100% of that loss under the
provisions of the Plan, Baxter will assume the portion of the loss for
which the Participant is not responsible. Baxter will assume its portion of
the loss by delivering cash equal to such portion ("Risk Sharing Payment")
directly to the Participant simultaneously with the repayment of the
Participant's loan under Section 4. Baxter anticipates that the Risk
Sharing Payment will constitute compensation to the Participant, subject to
applicable tax withholding and reporting. Baxter also intends to take a tax
deduction for the Risk Sharing Payment as compensation in the year in which
it is paid. If Baxter determines that it is not entitled to a current tax
deduction for the Risk Sharing Payment with respect to any Participant, the
Committee has the discretion to implement a deferred compensation agreement
to the extent necessary or desirable to secure Baxter's related tax
deduction.
13. Loan Guarantee. Baxter will guarantee repayment to the Banks of 100% of all
principal, interest, prepayment fees and other obligations of each
Participant under such Participant's loan described in Section 4. The
Baxter loan guarantee is a condition to the loan arrangement Baxter has
made with the Banks. The terms and conditions of the guarantee are as
agreed by Baxter and the Banks. Each Participant is fully obligated to
repay to the Banks all principal, interest, and other amounts on the loan
when due and payable. Baxter may take all action relating to the
Participant and his or her assets, which the Committee deems reasonable and
necessary, to obtain full reimbursement for amounts Baxter pays to the
Banks under its guarantee related to the Participant's loan, in excess of
the Risk Sharing Payment it is obligated to make under Section 12 ("Loan
Default").
14. Change in Control. In the event of a Change in Control, each Participant
employed by the Company immediately before the Change in Control will be
deemed to have been employed by the Company until the first anniversary of
the Exercise Date, for purposes of the risk sharing provisions of Section
8, and the Participant will be deemed to have sold the Purchased Shares
after the third anniversary of the Exercise Date for purposes of Section
8(b).
15. Effect of Program. The Plan is governed by the provisions of the 1998
Program, except as otherwise expressly stated in the Plan.
16. Change of Law. As of May 3, 1999, the United States laws governing the
Banks do not allow Baxter or the Banks to require that possession of the
Purchased Shares be maintained by Baxter or the Banks. Also, those laws
currently do not allow Baxter or the Banks to restrict the timing or the
method of sale of the Purchased Shares. Because Baxter will guarantee
repayment to the Banks of 100% of all principal, interest, prepayment fees
and other obligations of each Participant under such Participant's loan
described in Section 4, Baxter has a legitimate interest in maintaining
possession of the Purchased Shares and restricting their sale until all
<PAGE>
Participant obligations under the loan and Reimbursement Agreement are
satisfied. If the applicable laws change to allow Baxter to require its
possession of the Purchased Shares or to restrict the sale of the Purchased
Shares, each Participant with an outstanding loan under Section 4, or an
outstanding obligation under the Reimbursement Agreement, agrees to
surrender possession of such of the Purchased Shares as he or she shall
then own to Baxter and to allow Baxter to restrict the timing and the
method of sale of the Purchased Shares. Such surrender must occur within 14
calendar days after the Participant receives written notice to do so by
Baxter. Surrender of possession of the Purchased Shares, as described in
this Section 16, will not change the Participant's obligations in the Plan,
the loan documents or the Reimbursement Agreement.
17. Amendment. The Committee may amend the Plan at any time subject to the
limitations in Section 11.9 of the 1998 Program.
<PAGE>
Baxter International Inc. and Subsidiaries
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
(unaudited - in millions, except ratios)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Years ended December 31, 1998 1998 1997 1997 1996 1995 1995 1994
(C) (C) (C)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income from continuing operations
before income taxes (A) $ 549 $ 974 $ 523 $ 875 $ 793 $ 524 $ 741 $ 559
- ----------------------------------------------------------------------------------------------------------------
Fixed charges
Interest costs 198 198 206 206 133 117 117 120
Estimated interest in rentals (B) 29 29 29 29 27 29 29 31
- ----------------------------------------------------------------------------------------------------------------
Fixed charges as defined 227 227 235 235 160 146 146 151
- ----------------------------------------------------------------------------------------------------------------
Adjustments to income
Interest costs capitalized (5) (5) (8) (8) (3) (3) (3) (2)
Losses of less than majority owned
affiliates, net of dividends 0 0 0 0 8 10 10 18
- ----------------------------------------------------------------------------------------------------------------
Income as adjusted $ 771 $1,196 $ 750 $1,102 $ 958 $ 677 $ 894 $ 726
================================================================================================================
Ratio of earnings to fixed charges 3.40 5.27 3.19 4.69 5.99 4.64 6.12 4.80
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Six months ended June 30, 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Income before income taxes and cumulative
effect of accounting change (A) $ 516
- ----------------------------------------------------------------------------------------------------------------
Fixed charges
Interest costs 80
Estimated interest in rentals (B) 15
- ----------------------------------------------------------------------------------------------------------------
Fixed charges as defined 95
- ----------------------------------------------------------------------------------------------------------------
Adjustments to income
Interest costs capitalized (4)
Losses of less than majority owned
affiliates, net of dividends (1)
- ----------------------------------------------------------------------------------------------------------------
Income as adjusted $ 606
================================================================================================================
Ratio of earnings to fixed charges 6.38
================================================================================================================
</TABLE>
(A) Historical amounts do not reflect the cardiovascular business as a
discontinued operation. Refer to Note 2 to the Condensed Consolidated
Financial Statements for further information.
(B) Represents the estimated interest portion of rents.
(C) Included in this exhibit are supplemental presentations of the ratio of
earnings to fixed charges which exclude the following significant unusual
charges:
1998: $116 million in-process research and development charge, $178
million net litigation charge, $131 million exit and reorganization
cost charge.
1997: $352 million in-process research and development charge.
1995: $103 million exit and other reorganization costs charge, $96 million
net litigation charge and $18 million in-process research and
development charge.
<PAGE>
EXHIBIT 15
August 16, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated August 16, 1999 on our review of interim
financial information of Baxter International Inc. (the "Company') as of and for
the period ended June 30, 1999 and included in the Company's quarterly report on
Form 10-Q for the quarter then ended is incorporated by reference in its
Registration Statements on Form S-8 (Nos. 2-82667, 2-86993, 2-97607, 33-8812,
33-15523, 33-15787, 33-28428, 33-33750, 33-54069, 333-43563, 333-47019,
333-71553 and 333-80403), on Form S-3 (Nos. 33-5044, 33-23450, 33-27505,
33-31388, 33-49820 and 333-19025) and on Form S-4 (Nos. 33-808, 33-15357,
33-53937, 333-21327 and 333-47927).
Very truly yours;
/s/ PricewaterhouseCoopers LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the condensed consolidated Balance Sheet as of June 30, 1999 and the condensed
consolidated Income Statement for the six months ended June 30, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 723
<SECURITIES> 0
<RECEIVABLES> 1,773
<ALLOWANCES> 39
<INVENTORY> 1,397
<CURRENT-ASSETS> 4,487
<PP&E> 4,945
<DEPRECIATION> 2,297
<TOTAL-ASSETS> 9,899
<CURRENT-LIABILITIES> 2,597
<BONDS> 2,907
0
0
<COMMON> 294
<OTHER-SE> 2,925
<TOTAL-LIABILITY-AND-EQUITY> 9,899
<SALES> 3,022
<TOTAL-REVENUES> 3,022
<CGS> 1,707
<TOTAL-COSTS> 1,707
<OTHER-EXPENSES> 168<F1>
<LOSS-PROVISION> 5
<INTEREST-EXPENSE> 56
<INCOME-PRETAX> 472
<INCOME-TAX> 121
<INCOME-CONTINUING> 351
<DISCONTINUED> 34
<EXTRAORDINARY> 0
<CHANGES> 27
<NET-INCOME> 358
<EPS-BASIC> 1.24
<EPS-DILUTED> 1.22
<FN>
<F1> Includes Research and Development Expenses and Goodwill Amortization.
</FN>
</TABLE>
