<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 September 30, 2000
_______ 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 November 3, 2000 the latest practicable date,
was 294,142,946 shares.
<PAGE>
BAXTER INTERNATIONAL INC.
FORM 10-Q
For the quarterly period ended September 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
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............................................. 14
Review by Independent Public Accountants........................................... 23
Report of Independent Accountants.................................................. 24
Part II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings........................................................ 25
Item 6. Exhibits and Reports on Form 8-K......................................... 28
Signature.......................................................................... 29
Exhibits........................................................................... 30
</TABLE>
<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 Nine months ended
September 30, September 30,
2000 1999 2000 1999
---------------------- -----------------------
<S> <C> <C> <C> <C>
Operations
Net sales $1,687 $1,589 $4,964 $4,611
Costs and expenses
Cost of goods sold 925 876 2,768 2,583
Marketing and administrative expenses 328 328 979 951
Research and development expenses 97 83 273 242
In-process research and development and acquisition-
related charges -- -- 286 --
Goodwill amortization 9 4 20 13
--------------------------------------------------------------------------------------------------------------------------
Operating income 328 298 638 822
Interest, net 25 22 59 68
Other expense (income) (9) 9 (3) 15
--------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
and cumulative effect of accounting change 312 267 582 739
Income tax expense 81 70 114 191
--------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before cumulative
effect of accounting change 231 197 468 548
Discontinued operation
Income from discontinued operation, net of applicable
income tax expense of $5 in 2000 and
$4 and $14 in 1999 -- 13 14 47
Costs associated with effecting the business distribution -- -- (12) --
--------------------------------------------------------------------------------------------------------------------------
Total discontinued operation -- 13 2 47
--------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting
change 231 210 470 595
Cumulative effect of accounting change, net of
income tax benefit of $7 -- -- -- (27)
--------------------------------------------------------------------------------------------------------------------------
Net income $ 231 $ 210 $ 470 $ 568
==========================================================================================================================
Earnings per basic common share
Continuing operations, before cumulative effect of
accounting change $ .78 $ .67 $ 1.60 $ 1.89
Discontinued operation -- .05 .01 .16
Cumulative effect of accounting change -- -- -- (.09)
--------------------------------------------------------------------------------------------------------------------------
Net income $ .78 $ .72 $ 1.61 $ 1.96
==========================================================================================================================
Earnings per diluted common share
Continuing operations, before cumulative effect of
accounting change $ .77 $ .67 $ 1.57 $ 1.86
Discontinued operation -- .04 .01 .16
Cumulative effect of accounting change -- -- -- (.10)
--------------------------------------------------------------------------------------------------------------------------
Net income $ .77 $ .71 $ 1.58 $ 1.92
==========================================================================================================================
Weighted average number of common shares outstanding
Basic 295 292 292 289
==========================================================================================================================
Diluted 302 297 298 295
==========================================================================================================================
</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>
----------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2000 1999
(unaudited)
--------------------------------------
<S> <C> <C>
Current assets Cash and equivalents $ 568 $ 606
Accounts receivable 1,446 1,504
Notes and other current receivables 145 148
Inventories 1,257 1,116
Short-term deferred income taxes 163 216
Prepaid expenses 246 229
---------------------------------------------------------------------------------------------------
Total current assets 3,825 3,819
----------------------------------------------------------------------------------------------------------------------
Property, At cost 4,854 4,709
plant and Accumulated depreciation and amortization (2,144) (2,059)
equipment ---------------------------------------------------------------------------------------------------
Net property, plant and equipment 2,710 2,650
----------------------------------------------------------------------------------------------------------------------
Other assets Net assets of discontinued operation -- 1,231
Goodwill and other intangibles 1,258 921
Insurance receivables 162 301
Other 853 722
---------------------------------------------------------------------------------------------------
Total other assets 2,273 3,175
----------------------------------------------------------------------------------------------------------------------
Total assets $ 8,808 $ 9,644
======================================================================================================================
Current Short-term debt $ 428 $ 125
liabilities Current maturities of long-term debt and lease obligations 20 130
Accounts payable and accrued liabilities 1,358 1,805
Income taxes payable 640 640
---------------------------------------------------------------------------------------------------
Total current liabilities 2,446 2,700
----------------------------------------------------------------------------------------------------------------------
Long-term debt and lease obligations 2,246 2,601
----------------------------------------------------------------------------------------------------------------------
Long-term deferred income taxes 371 311
----------------------------------------------------------------------------------------------------------------------
Long-term litigation liabilities 192 273
----------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 615 411
----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
----------------------------------------------------------------------------------------------------------------------
Stockholders' Common stock, $1 par value, authorized 350,000,000
equity shares, issued 298,133,251 shares in 2000 and
294,363,251 shares in 1999 298 294
Common stock in treasury, at cost, 4,396,657
shares in 2000 and 4,163,737 shares in 1999 (316) (269)
Additional contributed capital 2,459 2,282
Retained earnings 923 1,415
Accumulated other comprehensive expense (426) (374)
---------------------------------------------------------------------------------------------------
Total stockholders' equity 2,938 3,348
----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 8,808 $ 9,644
======================================================================================================================
</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>
------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
(brackets denote cash outflows) 2000 1999
---------------------------------
<S> <C> <C>
Cash flows Income from continuing operations before cumulative
from effect of non-cash accounting change $ 468 $ 548
operations Adjustments
Depreciation and amortization 301 279
Deferred income taxes (48) 95
In-process research and development and acquisition-
related charges 286 --
Other 24 30
Changes in balance sheet items
Accounts receivable 31 (85)
Inventories (174) (78)
Accounts payable and other accrued liabilities (359) (154)
Net litigation payments and other (63) (228)
-----------------------------------------------------------------------------------------------------
Cash flows from continuing operations 466 407
Cash flows relating to discontinued operation (19) 54
------------------------------------------------------------------------------------------------------------------------
Cash flows from operations 447 461
------------------------------------------------------------------------------------------------------------------------
Cash flows Capital expenditures (398) (394)
from investing Acquisitions (net of cash received)
activities and investments in affiliates (321) (70)
Divestitures and other asset dispositions (34) 5
-----------------------------------------------------------------------------------------------------
Cash flows from investing activities (753) (459)
------------------------------------------------------------------------------------------------------------------------
Cash flows Issuances of debt and lease obligations 863 802
from financing Redemptions of debt and lease obligations (1,088) (313)
activities Increase (decrease) in debt with maturities
of three months or less, net 785 (353)
Common stock cash dividends (84) (254)
Stock issued under Shared Investment Plan -- 198
Stock issued under employee benefit plans 194 120
Purchases of treasury stock (350) (71)
------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities 320 129
------------------------------------------------------------------------------------------------------------------------
Effect of currency exchange rate changes on cash and equivalents (52) (15)
------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents (38) 116
Cash and equivalents at beginning of period 606 709
------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 568 $ 825
========================================================================================================================
</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 1999
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 1999 financial
statements to the 2000 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 net loss from operations
of $34 million for these entities was recorded directly to retained earnings.
The one-month lag for the remainder of the international operations will be
eliminated in 2001.
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.
Comprehensive income
--------------------
Total comprehensive income was $223 million and $161 million for the three
months ended September 30, 2000 and 1999, respectively, and was $418 million and
$444 million for the nine months ended September 30, 2000 and 1999,
respectively.
New accounting pronouncements
-----------------------------
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which was later amended by Statement No.
137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of FASB Statement No. 133" and by Statement No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of FASB Statement No. 133 (collectively, SFAS no. 133 or the
Standard). The Standard requires companies to record derivatives on the balance
sheet as assets or liabilities measured at fair value. The accounting treatment
of gains and losses
5
<PAGE>
resulting from changes in the value of derivatives depends on the use of the
derivatives and whether they qualify for hedge accounting. The company plans to
adopt the new Standard on January 1, 2001. Adoption of the Standard will be
recorded as a cumulative effect of a change in accounting principle and will not
result in restatement of previously issued financial statements. The company is
in the process of assessing the impact of adoption on its consolidated financial
statements. There are certain issues that still need to be resolved by the
Derivatives Implementation Group and the Financial Accounting Standards Board
that may affect the company. In addition, since the impact of adoption of the
Standard is dependent on future market rates and future derivative actions prior
to year-end, the impact of adoption is not fully determinable at this time.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which was
later amended by SAB No. 101A and SAB No. 101B. These SABs, which provide
guidance on the recognition, presentation and disclosure of revenue in financial
statements, are effective in the fourth quarter of 2000 and are not expected to
have a material impact on the company's consolidated financial statements.
In September 2000, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus on Issue 00-19, "Determination of
Whether Share Settlement is Within the Control of the Issuer for Purposes of
Applying Issue No. 96-13, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock." " The consensus
provides specific guidance regarding when a contract indexed to a company's own
stock must be classified in stockholders' equity versus classified as an asset
or liability. Any new contracts entered into after the date of consensus must
comply with the consensus, and any contracts outstanding as of the September
2000 consensus date are grand fathered until June 2001 before compliance is
required. Management anticipates that compliance with the consensus will not
have a material impact on the company's consolidated financial statements.
2. SPIN-OFF OF THE CARDIOVASCULAR BUSINESS
-------------------------------------------
On March 31, 2000, Baxter stockholders of record on March 29, 2000 received all
of the outstanding stock of Edwards Lifesciences Corporation (Edwards), the
company's cardiovascular business, in a tax-free spin-off. The common stock of
Edwards began trading publicly on April 3, 2000.
The company's consolidated financial statements and related notes have been
adjusted and restated to reflect the financial position, results of operations
and cash flows of Edwards as a discontinued operation. The following selected
financial data for Edwards, as included in the Baxter consolidated financial
statements as a discontinued operation, is presented for informational purposes
only and does not necessarily reflect what the net sales or net income would
have been had the business operated as a stand-alone entity.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(in millions) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales -- $ 217 $ 252 $ 673
Net income -- $ 13 $ 14 $ 47
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
In the first quarter of 2000, the company recorded approximately $12 million in
costs directly associated with effecting the business distribution (including
tax of $6 million). The impact on basic and diluted earnings per share in 2000
relating to these costs was $.04.
6
<PAGE>
Through an issuance of new third-party debt, approximately $502 million of
Baxter's debt was indirectly assumed by Edwards upon spin-off. Approximately
$961 million of net assets relating to the spin-off were transferred to Edwards.
The cardiovascular business in Japan was not transferred to Edwards at the time
of distribution due to Japanese regulatory requirements and business culture
considerations. The business is operated pursuant to a contractual joint
venture under which a Japanese subsidiary of Baxter retains ownership of the
business assets, but a subsidiary of Edwards holds a 90 percent profit interest.
Edwards has an option to purchase the Japanese assets, which option may be
exercised no earlier than 28 months following the spin-off date and no later
than 60 months following the spin-off date. The exercise price of the option is
approximately $245 million, of which Edwards would obtain approximately $216
million upon termination of the joint venture for the return of its fair value
in the joint venture at inception. Included in Baxter's condensed consolidated
balance sheet at September 30, 2000 is a $216 million liability relating to this
contractual joint venture, which was established in connection with the
accounting for the spin-off of Edwards.
3. INVENTORIES
-----------------
Inventories consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
(in millions) 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 295 $ 251
Work in process 193 193
Finished products 769 672
-----------------------------------------------------------------------------------------------------------------------------
Total inventories $1,257 $1,116
=============================================================================================================================
</TABLE>
4. INTEREST, NET
-------------------
Net interest expense consisted of the following:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(in millions) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense $ 35 $ 36 $ 96 $ 116
Interest income (10) (9) (30) (23)
-------------------------------------------------------------------------------------------------------------------------------
Interest expense, net $ 25 $ 27 $ 66 $ 93
===============================================================================================================================
Allocated to continuing operations $ 25 $ 22 $ 59 $ 68
===============================================================================================================================
Allocated to discontinued operation $ -- $ 5 $ 7 $ 25
===============================================================================================================================
</TABLE>
The allocation of interest to continuing operations and the discontinued
operation was based on estimated relative net assets of these operations.
7
<PAGE>
5. EARNINGS PER SHARE
-----------------------
The numerator for both basic and diluted earnings per share (EPS) is net
earnings available to common shareholders. 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 Nine months ended
September 30, September 30,
(in millions) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic EPS shares 295 292 292 289
------------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities
Employee stock options 7 4 5 5
Employee stock purchase plans and equity
forward agreements -- 1 1 1
------------------------------------------------------------------------------------------------------------------------
Diluted EPS shares 302 297 298 295
========================================================================================================================
</TABLE>
6. COMMON STOCK
-----------------
Equity forward agreements
-------------------------
In order to partially offset the effect of stock issuances pertaining to
employee stock option plans, the company has entered into forward agreements
with independent third parties related to the company's common stock. 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. The
company may, at its option, terminate and settle these agreements early at any
time before maturity. Any income or expense resulting from these agreements is
reflected as an adjustment to compensation expense. At September 30, 2000,
agreements related to approximately 2.5 million shares mature in 2001 at
exercise prices ranging from $57 to $58 per share and agreements related to
approximately 3.7 million shares mature in 2002 at exercise prices ranging from
$70 to $78 per share.
Equity collar agreements
-------------------------
In connection with the company's stock repurchase program, during the first
quarter of 2000 the company issued put options and purchased call options on
shares of its common stock. The put options give the purchaser the right to
sell Baxter International Inc. common stock to the company at contractually
specified prices. The call options give the company the right to purchase
Baxter International Inc. common stock at contractually specified prices. The
agreements were executed with independent third parties, and the cost of the
call options was offset by the premium from the put options. 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. The company may,
at its option, terminate and settle these agreements at any time before
maturity. In conjunction with its stock repurchase program, the company
terminated certain of these contracts during the third quarter of 2000. At
September 30, 2000, put options for approximately 1.9 million shares of common
stock and call options for approximately 1.2 million shares of common stock were
outstanding. The exercise prices of the outstanding put options range from $56
to $59 per share and the exercise prices of the outstanding call options range
from $62 to $63 per share. The contracts mature in 2000 and 2001.
8
<PAGE>
7. ACQUISITIONS
-----------------
Acquisitions during the nine months ended September 30, 2000 and 1999 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, identifiable intangible assets and
liabilities acquired was allocated to goodwill. As further discussed below, a
portion of the purchase price for certain acquisitions was allocated to in-
process research and development (IPR&D) which, under GAAP, was immediately
expensed.
In the second quarter of 2000, the company recorded a $286 million charge for
IPR&D and acquisition-related costs. This charge principally consisted of $250
million for IPR&D related to the June 2000 acquisition of North American
Vaccine, Inc., which is further discussed below. The remaining portion of the
charge related to insignificant IPR&D charges pertaining to three other
acquisitions as well as certain charges associated with the I.V. Systems/Medical
Products segment's acquisition of certain assets of Sabratek Corporation.
North American Vaccine, Inc.
----------------------------
In June 2000, the company acquired North American Vaccine, Inc. (NAV) for
approximately $312 million, plus assumed debt and acquisition-related tax
payments. NAV was engaged in the research, development, production and sales of
vaccines for the prevention of human infectious diseases. The purchase price
was principally paid in 3,770,000 shares of Baxter International Inc. common
stock. Approximately $250 million, $255 million and $7 million of the purchase
price was allocated to IPR&D, goodwill and other intangible assets,
respectively. Goodwill and other intangible assets are being amortized on a
straight-line basis over 20 years and 10 years, respectively.
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 of the
IPR&D projects, after being adjusted for the projects' percentage of completion,
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. Projected revenue and cost assumptions were determined
considering the company's historical experience and industry trends and
averages. No value was assigned to any IPR&D project unless it was probable of
being further developed. The following is a summary of the amounts allocated to
IPR&D by significant project category, all of which relate to vaccines:
(in millions)
-----------------------------------------------------
Streptococcal B $ 59
Pneumococcal 57
Meningococcal B/C/Y 51
Meningococcal C 34
DTaP-IPV-conjugate Hib 32
Other 17
-----------------------------------------------------
Total $250
-----------------------------------------------------
The status of development, stage of completion, assumptions, nature and timing
of remaining efforts for completion, risks and uncertainties, and other key
factors varied by individual project. A discount rate of 20 percent was used
for all projects. Material net cash inflows for significant
9
<PAGE>
projects were forecasted to commence between 2002 and 2005. Assumed additional
research and development expenditures prior to the dates of product
introductions totaled approximately $85 million. The percentage completion rate
for significant projects ranged from approximately 65 percent to over 90
percent, with the weighted-average completion rate approximately 70 percent.
Substantial further research and development, pre-clinical testing and clinical
trials will be required to determine the technical feasibility and commercial
viability of the products under development. There can be no assurance such
efforts will be successful. Delays in the development, introduction or marketing
of the products under development could result either in such products being
marketed at a time when their cost and performance characteristics would not be
competitive in the marketplace or in a shortening of their commercial lives. If
the products are not completed on time, the expected return on the company's
investments could be significantly and unfavorably impacted.
Althin Medical A.B.
-------------------
In March 2000, the company acquired Althin Medical A.B. (Althin), a manufacturer
of hemodialysis products, for approximately $86 million, plus assumed debt of
approximately $48 million. Approximately $54 million of the purchase price was
paid in cash and approximately $32 million was paid in approximately 592,000
shares of Baxter International Inc. common stock. Approximately $59 million and
$27 million of the purchase price was allocated to goodwill and other
intangibles, respectively. Goodwill and other intangible assets are being
amortized on a straight-line basis over 40 years and 10 years, respectively.
Pro forma information
---------------------
The following unaudited pro forma information presents a summary of the
company's consolidated results of operations as if acquisitions during the
period had taken place as of the beginning of the fiscal year:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(in millions, except per share data) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $1,688 $1,621 $4,986 $4,703
Income from continuing operations before cumulative
effect of accounting change $ 231 $ 184 $ 441 $ 507
Earnings per diluted common share $ 0.77 $ 0.61 $ 1.47 $ 1.69
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
These pro forma results of operations have been presented for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisitions occurred on the date
indicated, or which may result in the future. The diluted pro forma earnings
and per-share earnings included in the table above primarily reflect the
historical pre-acquisition net losses reported by NAV.
Acquisition reserves
--------------------
Based on plans formulated at acquisition date, as part of the allocation of
purchase price, reserves have been established for certain acquisitions.
Actions executed to date and anticipated in the future with respect to these
acquisitions are substantially consistent with the original plans. During the
third quarter of 2000, approximately $2 million of reserves were utilized, all
of which related to the acquisition of Immuno International AG (Immuno). During
the nine months ended September 30, 2000, approximately $17 million of reserves
were utilized, of which approximately $15 million related to the acquisition of
Immuno, and approximately $2 million related to the acquisition of Bieffe
Medital S.p.A. Management expects the plans to be substantially complete in
accordance with the originally established timetables. Management believes
remaining reserves are adequate to complete the actions contemplated by the
plans.
10
<PAGE>
8. LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES
-----------------------------------------------------
Refer to "Part II - Item 1. Legal Proceedings" below.
9. 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: medication delivery
products and services, including intravenous infusion pumps and solutions,
anesthesia devices and pharmaceutical agents; BioScience: biopharmaceuticals and
blood-collection, separation and storage products and technologies; and Renal:
products and services to treat end-stage kidney disease. As discussed in Note 2
above, the company spun off its cardiovascular business to Baxter stockholders
on March 31, 2000. Financial information for the cardiovascular business, which
is substantially the same as the former CardioVascular segment, is reflected in
the condensed consolidated financial statements 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.
11
<PAGE>
Financial information for the company's segments for the three and nine months
ended September 30 is as follows:
I.V. Systems/
Medical
Products BioScience Renal Other Total
--------------------------------------------------------------------------------
For the three months ended
-------------- -----------
September 30,
-------------
2000
----
Net sales $ 682 $ 546 $ 459 -- $1,687
Pretax income 108 114 74 $ 16 312
1999
----
Net sales 651 523 415 -- 1,589
Pretax income 102 100 67 (2) 267
For the nine months ended
-------------------------
September 30,
-------------
2000
----
Net sales $1,969 $1,663 $1,332 -- $4,964
Pretax income 291 358 230 ($297) 582
1999
----
Net sales 1,805 1,578 1,228 -- 4,611
Pretax income 265 303 216 (45) 739
--------------------------------------------------------------------------------
The following are reconciliations of total segment amounts to amounts per the
condensed consolidated financial statements:
Three months
ended September 30,
----------------------
2000 1999
--------------------------------------------------------------------------------
Pretax income
-------------
Total pretax income from segments $ 296 $ 269
Unallocated amounts
Interest expense, net (25) (22)
Other Corporate items 41 20
-----------------------------------------------------------------------------
Income from continuing operations before income
taxes $ 312 $ 267
-------------------------------------------------------------------------------
12
<PAGE>
Nine months
ended September 30,
--------------------
2000 1999
--------------------------------------------------------------------------------
Pretax income
-------------
Total pretax income from segments $ 879 $ 784
Unallocated amounts
Interest expense, net (59) (68)
In-process research and development and acquisition-
related charges (286) --
Other Corporate items 48 23
--------------------------------------------------------------------------------
Income from continuing operations before income
taxes and cumulative effect of accounting change $ 582 $ 739
--------------------------------------------------------------------------------
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Baxter International Inc.'s (the company or Baxter) 1999 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,
1999. In the Annual Report, management outlined its key financial objectives
for 2000. The objectives, which are summarized below, were established based on
Baxter's results excluding the cardiovascular business, the stock of which was
distributed to shareholders during the first quarter of 2000. Refer to Note 2
to the Condensed Consolidated Financial Statements for further information
regarding the spin-off. The company's consolidated financial statements and
related notes have been restated to reflect the financial position, results of
operations and cash flows of the cardiovascular business as a discontinued
operation. The results presented below reflect the results of continuing
operations only.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
RESULTS THROUGH
FULL YEAR 2000 OBJECTIVES SEPTEMBER 30, 2000
--------------------------------------------------------------------------------------------------------------------
<S> <C>
. Increase net sales approximately 10 . Net sales during the nine months ended
percent. September 30, 2000 increased eight percent.
Excluding the effects of changes in currency
exchange rates, net sales increased 11 percent.
--------------------------------------------------------------------------------------------------------------------
. Grow net earnings in the mid-teens. . Net earnings from continuing operations increased
18 percent for the first nine months of the year,
excluding the in-process research and development
(IPR&D) and acquisition-related charges.
--------------------------------------------------------------------------------------------------------------------
. Generate $500 million in operational cash . The company had operational cash flow of $75
flow, after investing approximately $1 million during the nine months ended September 30,
billion in capital improvements and 2000. The total of capital expenditures and research
research and development. and development expenses (excluding the IPR&D charge)
for the nine months ended September 30, 2000 was $671
million.
--------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<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 Nine months ended
September 30, Percent September 30, Percent
(in millions) 2000 1999 increase 2000 1999 increase
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International $ 911 $ 846 8% $2,700 $2,509 8%
United States 776 743 4% 2,264 2,102 8%
----------------------------------------------------------------------------------------------------------------------------
Total net sales $1,687 $1,589 6% $4,964 $4,611 8%
============================================================================================================================
</TABLE>
Excluding the effect of fluctuations in currency exchange rates, which impacted
sales growth unfavorably for all three segments, total net sales growth was 10
percent and 11 percent for the three months and nine months ended September 30,
2000, respectively. The United States dollar strengthened principally relative
to the Euro, partially offset by a weakened position relative to the Japanese
Yen. Refer to Note 9 to the Condensed Consolidated Financial Statements for a
summary of net sales by segment.
I.V. Systems/Medical Products
The I.V. Systems/Medical Products segment generated five percent and nine
percent sales growth during the three months and nine months ended September 30,
2000, respectively. Excluding the impact of fluctuations in currency exchange
rates, sales growth was eight percent and 12 percent for the quarter and year-
to-date period, respectively, with sales growth strongest in the international
market. Of the constant-currency sales growth, approximately two points of
growth for both the quarter and year-to-date period was generated by recent
acquisitions, principally the September 1999 acquisition of a nutrition and
fluid therapy business in Europe. Approximately three points and five points of
growth in the quarter and nine-month period, respectively, were generated from
the anesthesia business, with a significant portion of such growth driven by the
segment's late-1999 exclusive agreement to sell the first generic formulation of
Propofol approved by the United States Food and Drug Administration. Propofol
is an intravenous drug used for the induction or maintenance of anesthesia in
surgery, and as a sedative in monitored anesthesia care. A significant portion
of the remaining sales growth was due to increased sales of Colleague(R)
electronic infusion pumps and intravenous fluids and administration sets used
with electronic infusion pumps.
BioScience
Sales in the BioScience segment increased four percent and five percent for the
three- and nine-month periods ended September 30, 2000, respectively. Excluding
the impact of fluctuations in currency exchange rates, sales growth was nine
percent and 10 percent for the quarter and year-to-date period, respectively,
with especially strong sales growth in the international market. Of the
constant-currency sales growth, approximately five points of growth in both the
quarter and year-to-date period was due to increased sales of plasma-derived
products, primarily as a result of strong sales growth of Gammagard(R) S/D IGIV
and improved product supply. Sales of recombinant products decreased the
segment's constant-currency growth rate by approximately three points during the
quarter and increased the growth rate slightly for the year-to-date period. The
decline in the quarter, which was principally due to supply constraints, is not
expected to continue in the fourth quarter due to the company's increase in
manufacturing capacity that occurred early in the fourth quarter. In addition,
sales growth for recombinant products was only modest for the year-to-date
period due to the
15
<PAGE>
unusually strong sales in early 1999 resulting from an increase in manufacturing
capacity occurring in late 1998. Sales in the blood-collection and processing
businesses also grew during the quarter and year-to-date period principally due
to an increase in sales of products that provide for leukoreduction, which is
the removal of white blood cells from blood products used for transfusion. The
June 2000 acquisition of North American Vaccine, Inc. (NAV), which was engaged
in the research, development, production and sale of vaccines for the prevention
of human infectious diseases, contributed approximately five points and two
points to the segment's sales growth rate for the quarter and year-to-date
period, respectively.
Renal
The Renal segment generated sales growth of 11 percent and nine percent during
the three-month period and nine-month period ended September 30, 2000,
respectively, due principally to growth in the international market. Excluding
the impact of fluctuations in currency exchange rates, sales growth was 14
percent and 12 percent for the quarter and year-to-date period, respectively.
During the first quarter of 2000, the company acquired Althin Medical A.B., a
manufacturer of hemodialysis products. Sales related to this acquisition
contributed approximately five points and four points to the segment's growth
rate for the quarter and nine-month period, respectively. The Renal Therapy
Services business, which operates dialysis clinics in partnership with local
physicians in international markets, and the Renal Management Services business,
which is a renal-disease management organization, together generated low single
digit percentage sales growth for both the quarter and year-to-date period. The
remaining sales growth in the Renal segment was driven principally by continued
penetration of products for peritoneal dialysis, particularly in Latin America
and Asia.
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 Nine months ended
September 30, Increase September 30, Increase
2000 1999 (decrease) 2000 1999 (decrease)
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross profit margin 45.2% 44.9% .3 pts 44.2% 44.0% .2 pts
Marketing and
administrative expenses 19.4% 20.6% (1.2 pts) 19.7% 20.6% (.9 pts)
----------------------------------------------------------------------------------------------------------------
</TABLE>
The change in the gross profit margin for both the quarter and year-to-date
period was partly due to changes in the products and services mix. The
reduction in the expense ratio was due to a number of factors. The company has
been making significant investments in order to attract and retain a highly
talented workforce. Such investments include increased cash compensation as
well as increased long-term Baxter stock incentives. The effect of these
strategic investments was more than offset by the company's aggressive
management of expenses, leveraging of recent acquisitions, improved pension plan
asset returns and hedging activities relating to certain employee stock plans.
In addition, various recently implemented e-business initiatives have resulted
in significant efficiencies and cost savings to the company, which has
contributed to an improved gross margin and expense ratio, and have allowed
management to redeploy valuable resources within the company. The above-
mentioned hedging activities increased the gross profit margin by approximately
.6 points and .2 points, and decreased the expense ratio by approximately 1.1
points and .5 points for the quarter and year-to-date period, respectively. The
gross profit margin and expense ratio are expected to remain at approximately
the third quarter level for the remainder of the year and next year as
management continues to make strategic investments while closely managing costs.
16
<PAGE>
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, Percent September 30, Percent
(in millions) 2000 1999 increase 2000 1999 increase
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Research and
development expenses $ 97 $ 83 17% $ 273 $ 242 13%
As a percent of sales 6% 5% 5% 5%
-----------------------------------------------------------------------------------------------------
</TABLE>
Research and development (R&D) expenses above exclude the IPR&D charge recorded
in the second quarter of 2000, which is further discussed below. The increase
in R&D expenses during the third quarter and year-to-date period of 2000 was
primarily due to increased spending in the BioScience business, principally
relating to the next-generation recombinant product, initiatives in the wound
management and plasma-based products areas, and the June 2000 acquisition of
NAV.
The $286 million charge for IPR&D and acquisition-related costs during the nine
months ended September 30, 2000 principally related to the June 2000 acquisition
of NAV and is discussed further in Note 7 to the Condensed Consolidated
Financial Statements. The remaining portion of the charge for IPR&D and
acquisition-related costs related to insignificant IPR&D charges pertaining to
three other acquisitions as well as certain charges associated with the I.V.
Systems/Medical Products segment's acquisition of certain assets of Sabratek
Corporation.
OTHER INCOME AND EXPENSE
Net interest expense increased for the three months ended September 30, 2000 as
compared to the prior year period principally due to increased interest rates in
the United States and Europe, partially offset by the impact of lower average
debt levels. For the nine months ended September 30, 2000, these factors were
more than offset by the impact of a greater mix of foreign currency denominated
debt, which bears a lower average interest rate. The increase in other income
for the third quarter and year-to-date period was primarily due to net gains
relating to foreign currency hedging transactions.
PRETAX INCOME
Refer to Note 9 to the Condensed Consolidated Financial Statements for a summary
of financial results by segment. The following is a summary of the significant
factors impacting the segments' financial results.
I.V. Systems/Medical Products
Pretax income increased six percent and 10 percent for the three months and nine
months ended September 30, 2000, respectively. Partially offset by the
unfavorable impact of fluctuations in currency exchange rates, increased raw
material costs, increased pump service costs and increased R&D expenses, the
growth in profitability was primarily a result of strong sales, and the
leveraging and close management of marketing and administrative expenses in
conjunction with recent acquisitions, particularly in the year-to-date period.
BioScience
Pretax income growth for the BioScience segment was 14 percent and 18 percent
for the quarter and year-to-date period ended September 30, 2000, respectively.
Partially offset by the unfavorable impact of fluctuations in currency exchange
rates and significantly increased R&D
17
<PAGE>
expenditures, this growth was driven by strong sales, improved manufacturing
efficiencies, and the leveraging and close management of marketing and
administrative expenses.
Renal
Pretax income increased 10 percent and six percent for the third quarter and
year-to-date period of 2000, respectively. The increase in pretax income was
principally due to strong sales, particularly during the third quarter,
partially offset by a less favorable mix of sales and services, higher R&D
costs, unfavorable fluctuations in currency exchange rates, and sales and
marketing investments in the business.
INCOME TAXES FROM CONTINUING OPERATIONS
Excluding the charge for IPR&D and acquisition-related costs, the effective
income tax rate for continuing operations was approximately 26 percent for the
third quarter and year-to-date period of both 2000 and 1999. Management expects
the effective tax rate to remain at approximately the same level for the rest of
the year.
DISCONTINUED OPERATION
As further discussed in Note 2 to the Condensed Consolidated Financial
Statements, on March 31, 2000, Baxter stockholders of record on March 29, 2000
received all of the outstanding stock of Edwards Lifesciences Corporation
(Edwards), the company's cardiovascular business, in a tax-free spin-off. In
addition to the effect of the spin-off on March 31, 2000, the decrease in income
from the discontinued operation primarily reflected increased pricing pressures,
unfavorable manufacturing variances, increased marketing and administrative
costs and increased R&D costs, partially offset by lower net interest expense.
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, the SOP does not have a material impact on the
company's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash flows from continuing operations per the company's Condensed Consolidated
Statements of Cash Flows increased for the nine months ended September 30, 2000.
Cash flows from continuing operations increased as a result of higher earnings
(before non-cash items), decreased cash payments pertaining to the company's
litigation partially offset by decreased related insurance collections, and a
decrease in the accounts receivable balance, which was partially due to sales of
certain receivables during the period. These increases in cash flows from
continuing operations were partially offset primarily by the effect of a higher
increase in inventory levels and a larger decrease in the liabilities balance.
Cash flows related to the discontinued operation decreased for the year-to-date
period ended September 30, 2000. The decrease principally related to the effect
of the spin-off of Edwards on March 31, 2000, as well as lower earnings, as
discussed above.
18
<PAGE>
Cash outflows from investing activities increased for the nine months ended
September 30, 2000. Capital expenditures were slightly higher for the nine
months ended September 30, 2000 as compared to the prior year period. This
increase principally reflects higher investments in the BioScience segment,
particularly relating to expansions in manufacturing capacity for vaccines,
plasma-based and recombinant products, partially offset by the impact of higher
than usual capital spending associated with information technology system
replacements and upgrades in the prior year period. Net cash outflows relating
to acquisitions increased during the first nine months of 2000. In 2000, net
cash outflows relating to acquisitions included approximately $54 million
related to the Renal segment's acquisition of Althin Medical A.B. and
approximately $48 million related to the BioScience segment's acquisition of
NAV. A portion of the purchase price for each of these acquisitions was paid in
Baxter International Inc. common stock. Refer to Note 7 to the Condensed
Consolidated Financial Statements for further information. Approximately $148
million of the company's acquisitions and investments for the nine months ended
September 30, 2000 related to several acquisitions and investments in the I.V.
Systems/Medical Products segment. Such total primarily related to the January
2000 acquisition of certain assets of Sabratek Corporation, which expands the
segment's offering of infusion products to alternate site customers, and a
contingent purchase price payment associated with the 1999 acquisition of the
Pharmaceutical Products Division of The BOC Group's Ohmeda healthcare business.
In addition, the company made certain other minor acquisitions and investments
in the current year across the various businesses and product lines. During the
nine months ended September 30, 1999, approximately $32 million of the total net
cash flows used for acquisitions related to a contingent purchase price payment
pertaining to the 1997 acquisition of Immuno International AG. Approximately $14
million of the 1999 total related to acquisitions of dialysis centers in
international markets and approximately $12 million related to a minority
investment. The cash flows relating to divestitures and other asset dispositions
principally related to the spin-off of Edwards on March 31, 2000.
Cash flows from financing activities increased for the nine months ended
September 30, 2000. Cash outflows relating to common stock dividends decreased
due to the company's change from a quarterly to an annual dividend payout
schedule effective at the beginning of the year. Cash received for stock issued
under employee benefit plans increased principally due to required exercises of
stock options by employees transferring to Edwards as a result of the March 31,
2000 spin-off of that business, as well as to increased employee stock purchases
as a result of a one-time modification to one of the company's employee stock
plans. Cash outflows relating to purchases of treasury stock increased as more
shares were purchased during 2000 at a higher average market price. During the
nine-month period ended September 30, 1999, the company received $198 million in
connection with a Shared Investment Plan, whereby Baxter managers voluntarily
purchased approximately 3.1 million shares of the company's common stock. In
addition, cash flows from financing activities increased during the period as
the total net cash used in operations and investing activities increased during
the first nine months of 2000 as compared to the corresponding prior year
period. The company's net-debt-to-capital ratio was 42.0 percent and 40.2
percent at September 30, 2000 and December 31, 1999, respectively.
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. Operational cash flow, as defined, reflects
all litigation payments and related insurance recoveries except for those
payments and recoveries relating to mammary implants, which the company never
manufactured or sold.
19
<PAGE>
The following table reconciles cash flow provided by continuing operations, as
determined by generally accepted accounting principles, to operational cash flow
provided by continuing operations:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
(in millions) 2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from continuing operations per the company's
Condensed Consolidated Statements of Cash Flows $ 466 $ 407
Capital expenditures (398) (394)
Net interest after tax 35 38
Other, including mammary implant litigation (28) 138
-----------------------------------------------------------------------------------------------------------------------
Operational cash flow - continuing operations $ 75 $ 189
=======================================================================================================================
</TABLE>
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. This program was completed during the first quarter of 2000. In
November 1999, the board of directors authorized the repurchase of an additional
$500 million of stock. The company also began repurchasing under the new
program in 2000, with a total of $350 million of common stock repurchased under
the two programs during the nine months ended September 30, 2000.
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.
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
20
<PAGE>
enforce patents and unforeseen commercialization and regulatory factors. In
particular, the company, as well as other companies in its industry, has
experienced 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
continues to strengthen 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 of the company will conform to
any future results or performance expressed or implied by such forward-looking
statements.
NEW ACCOUNTING STANDARDS
------------------------
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which was later amended by Statement No.
137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of FASB Statement No. 133" and by Statement No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of FASB Statement No. 133 (collectively, SFAS no. 133 or the
Standard). The Standard requires companies to record derivatives on the balance
sheet as assets or liabilities measured at fair value. The accounting treatment
of gains and losses resulting from changes in the value of derivatives depends
on the use of the derivatives and whether they qualify for hedge accounting.
The company plans to adopt the new Standard on January 1, 2001. Adoption of the
Standard will be recorded as a cumulative effect of a change in accounting
principle and will not result in restatement of previously issued financial
statements. The company is in the process of assessing the impact of adoption
on its consolidated financial statements. There are certain issues that still
need to be resolved by the Derivatives Implementation Group and the Financial
Accounting Standards Board that may affect the company. In addition, since the
impact of adoption of the Standard is dependent on future market rates and
future derivative actions prior to year-end, the impact of adoption is not fully
determinable at this time.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which was
later amended by SAB No. 101A and SAB No. 101B. These SABs, which provide
guidance on the recognition, presentation and disclosure of revenue in financial
statements, are effective in the fourth quarter of 2000 and are not expected to
have a material impact on the company's consolidated financial statements.
21
<PAGE>
In September 2000, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus on Issue 00-19, "Determination of
Whether Share Settlement is Within the Control of the Issuer for Purposes of
Applying Issue No. 96-13, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock." The consensus
provides specific guidance regarding when a contract indexed to a company's own
stock must be classified in stockholders' equity versus classified as an asset
or liability. Any new contracts entered into after the date of consensus must
comply with the consensus, and any contracts outstanding as of the September
2000 consensus date are grand fathered until June 2001 before compliance is
required. Management anticipates that compliance with the consensus will not
have a material impact on the company's consolidated financial statements.
22
<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 nine months ended
September 30, 2000 and 1999 have been performed by PricewaterhouseCoopers LLP,
the company's independent public accountants. Their report on the interim
condensed consolidated financial information follows. 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.
23
<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 of Baxter
International Inc. and its subsidiaries as of September 30, 2000 and the related
condensed consolidated statements of income for the three-month and nine-month
periods ended September 30, 2000 and 1999, and condensed consolidated statements
of cash flows for the nine-month periods ended September 30, 2000 and 1999. 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 auditing standards generally accepted in the United States of America, 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 accounting principles generally accepted in the United States of
America.
We previously audited, in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 1999, 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 16, 2000 we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1999,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Chicago, Illinois
November 8, 2000
24
<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, 1999, and material
developments in such matters for the quarter ended September 30, 2000 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. In December 1998, a panel of independent medical experts
appointed by a federal judge announced its 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 September 30, 2000, Baxter, together with certain of its subsidiaries, had
been named as a defendant or co-defendant in 722 lawsuits and 327 claims
relating to mammary implants, brought by approximately 1,861 plaintiffs, of
which 1,404 are implant plaintiffs and the remainder are consortium or second
generation plaintiffs. Of those plaintiffs, 260 currently are included in the
Lindsey class action Revised Settlement described below, which accounts for
approximately 149 of the pending lawsuits against the Company. Additionally,
1,053 plaintiffs have opted out of the Revised Settlement (representing
approximately 519 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
September 30, 2000, 467 of the opt-out plaintiffs had confirmed Heyer-Schulte
mammary implant product identification. Furthermore, during the third quarter of
2000, Baxter obtained dismissals, or agreements for dismissals, with respect to
410 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, 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
25
<PAGE>
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 six
other purported class actions in various state and provincial courts, only one
of which is certified.
On March 31, 2000, the United States Department of Justice filed an action
against Baxter and other manufacturers of breast implants, as well as the escrow
agent for the revised settlement fund. The action is pending in the federal
district court in Birmingham, Alabama and seeks reimbursement under various
federal statutes for medical care provided to various women with mammary
implants. The company is defending the litigation.
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 September 30, 2000, Baxter had been named in 198 lawsuits and 203 claims
in the United States, Italy, Ireland, Taiwan, Japan and the Netherlands. The
U.S.D.C. for the Northern District of Illinois has approved a settlement to all
U.S. federal court factor concentrates cases. As of September 30, 2000,
approximately 6,220 claimant groups had been found eligible to participate in
the settlement, and approximately 300 claimants had opted out of the settlement.
Approximately 6,200 of the claimant groups had received payments as of September
30, 2000 and payments are expected to continue through the end of 2000 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 for trial.
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 September 30, 2000, the cases
involved 1,335 plaintiffs, of whom 1,324 have settled their claims.
In addition, Immuno International AG (Immuno) has unsettled claims for damages
for injuries allegedly caused by its plasma-based therapies. The typical claim
alleges that the individual with hemophilia was infected with HIV by 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 stock purchase agreement between the
company and Immuno, approximately 84 million Swiss francs 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 Gammagard(R) IVIG (intravenous immuno-globulin), all
of whom are seeking
26
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damages for Hepatitis C infections allegedly caused by infusing Gammagard(R)
IVIG. As of September 30, 2000, Baxter was a defendant in 36 lawsuits and 42
claims in the United States, Denmark, France, Germany, Italy, Spain and the
United Kingdom. Two suits currently pending in the United States have been filed
as purported class actions but only one has been certified. In September 2000,
the U.S.D.C. for the Central District of California approved a settlement of the
class action agreed upon by plaintiffs' class counsel and Baxter that would
provide financial compensation for U.S. individuals who used Gammagard(R) IVIG
between January 1993 and February 1994.
Other
-----
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 September 30, 2000, the company had been named as a defendant in
547 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.
In connection with the spin-off of its cardiovascular business, Baxter obtained
a ruling from the Internal Revenue Service to the effect that the distribution
should qualify as a tax-free spin-off in the United States. In many countries
throughout the world, Baxter has not sought similar rulings from the local tax
authorities and has taken the position that the spin-off was a tax-free event to
Baxter. In the event that this position was successfully challenged by one or
more countries' taxing authorities, Baxter would be liable for any resulting
liability. Baxter believes that it has established adequate reserves to cover
the expected tax liabilities. There can be no assurance, however, that Baxter
will not incur losses in excess of such reserves.
27
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit
Index hereto.
(b) Reports on Form 8-K
None.
28
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAXTER INTERNATIONAL INC.
-------------------------
(Registrant)
Date: November 10, 2000 By: /S/ Brian P. Anderson
------------------------
Brian P. Anderson
Senior Vice President and Chief
Financial Officer
(Chief Accounting Officer)
29
<PAGE>
EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
--------------------------------------------------------------------------------
Number Description of Exhibit
------ ----------------------
12 Computation of Ratio of Earnings to Fixed Charges....................
15 Letter Re Unaudited Interim Financial Information....................
27 Financial Data Schedule - September 30, 2000.........................
(All other exhibits have been omitted because they are not applicable
or not required.)
30
