10-Q 1 0001.txt FORM 10-Q 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, 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 August 4, 2000 the latest practicable date, was 292,178,813 shares. BAXTER INTERNATIONAL INC. FORM 10-Q For the quarterly period ended June 30, 2000 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...................................................... 21 Report of Independent Accountants............................................................. 22 Part II. OTHER INFORMATION -------------------------- Item 1. Legal Proceedings.................................................................... 23 Item 4. Submission of Matters to a Vote of Security Holders.................................. 26 Item 6. Exhibits and Reports on Form 8-K..................................................... 27 Signature..................................................................................... 28 Exhibits...................................................................................... 29
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)
Three months ended Six months ended June 30, June 30, 2000 1999 2000 1999 ---------------------- ----------------------- Operations Net sales $1,694 $1,560 $3,277 $3,022 Costs and expenses Cost of goods sold 947 870 1,843 1,707 Marketing and administrative expenses 336 319 651 623 Research and development expenses 93 84 176 159 In-process research and development and acquisition- related charges 286 -- 286 -- Goodwill amortization 6 4 11 9 -------------------------------------------------------------------------------------------------------------------------- Operating income 26 283 310 524 Interest, net 19 22 34 46 Other expense (income) (6) 5 6 6 -------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes and cumulative effect of accounting change 13 256 270 472 Income tax expense (benefit) (33) 67 33 121 -------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before cumulative effect of accounting change 46 189 237 351 Discontinued operation Income from discontinued operation, net of applicable income tax expense of $1 and $5 in 2000 and $6 and $10 in 1999 2 18 14 34 Costs associated with effecting the business distribution -- -- (12) -- -------------------------------------------------------------------------------------------------------------------------- Total discontinued operation 2 18 2 34 -------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 48 207 239 385 Cumulative effect of accounting change, net of income tax benefit of $7 -- -- -- (27) -------------------------------------------------------------------------------------------------------------------------- Net income $ 48 $ 207 $ 239 $ 358 ========================================================================================================================== Earnings per basic common share Continuing operations, before cumulative effect of accounting change $ .15 $ .65 $ .81 $ 1.21 Discontinued operation .01 .06 .01 .12 Cumulative effect of accounting change -- -- -- (.09) -------------------------------------------------------------------------------------------------------------------------- Net income $ .16 $ .71 $ .82 $ 1.24 ========================================================================================================================== Earnings per diluted common share Continuing operations, before cumulative effect of accounting change $ .15 $ .64 $ .80 $ 1.19 Discontinued operation .01 .06 .01 .12 Cumulative effect of accounting change -- -- -- (.09) -------------------------------------------------------------------------------------------------------------------------- Net income $ .16 $ .70 $ .81 $ 1.22 ========================================================================================================================== Weighted average number of common shares outstanding Basic 291 290 291 289 ========================================================================================================================== Diluted 297 295 296 294 ==========================================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 Baxter International Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in millions, except shares)
---------------------------------------------------------------------------------------------------------------------- June 30 December 31, 2000 1999 (unaudited) ----------------------------------- Current assets Cash and equivalents $ 496 $ 606 Accounts receivable 1,454 1,504 Notes and other current receivables 179 148 Inventories 1,271 1,116 Short-term deferred income taxes 196 216 Prepaid expenses 223 229 ----------------------------------------------------------------------------------------------------- Total current assets 3,819 3,819 ---------------------------------------------------------------------------------------------------------------------- Property, At cost 4,755 4,709 plant and Accumulated depreciation and amortization (2,087) (2,059) Equipment ----------------------------------------------------------------------------------------------------- Net property, plant and equipment 2,668 2,650 ---------------------------------------------------------------------------------------------------------------------- Other assets Net assets of discontinued operation -- 1,231 Goodwill and other intangibles 1,194 921 Insurance receivables 186 301 Other 920 722 ----------------------------------------------------------------------------------------------------- Total other assets 2,300 3,175 ---------------------------------------------------------------------------------------------------------------------- Total assets $ 8,787 $ 9,644 ====================================================================================================================== Current Short-term debt $ 57 $ 125 liabilities Current maturities of long-term debt and lease obligations 141 130 Accounts payable and accrued liabilities 1,498 1,805 Income taxes payable 663 640 ----------------------------------------------------------------------------------------------------- Total current liabilities 2,359 2,700 ---------------------------------------------------------------------------------------------------------------------- Long-term debt and lease obligations 2,355 2,601 ---------------------------------------------------------------------------------------------------------------------- Long-term deferred income taxes 379 311 ---------------------------------------------------------------------------------------------------------------------- Long-term litigation liabilities 208 273 ---------------------------------------------------------------------------------------------------------------------- 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, 2,576,678 shares in 2000 and 4,163,737 shares in 1999 (164) (269) Additional contributed capital 2,462 2,282 Retained earnings 693 1,415 Accumulated other comprehensive expense (418) (374) ----------------------------------------------------------------------------------------------------- Total stockholders' equity 2,871 3,348 ---------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 8,787 $ 9,644 ======================================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Baxter International Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited) (in millions)
------------------------------------------------------------------------------------------------------------------------ Six months ended June 30, (brackets denote cash outflows) 2000 1999 --------------------------------- Cash flows Income from continuing operations before cumulative from effect of non-cash accounting change $ 237 $ 351 operations Adjustments Depreciation and amortization 183 184 Deferred income taxes (87) 23 In-process research and development and acquisition- related charges 286 -- Other 7 8 Changes in balance sheet items Accounts receivable 12 (7) Inventories (175) (80) Accounts payable and other accrued liabilities (268) (131) Net litigation payments and other (43) (150) ----------------------------------------------------------------------------------------------------- Cash flows from continuing operations 152 198 Cash flows relating to discontinued operation (43) 26 ------------------------------------------------------------------------------------------------------------------------ Cash flows from operations 109 224 ------------------------------------------------------------------------------------------------------------------------ Cash flows Capital expenditures (256) (227) from investing Acquisitions (net of cash received) activities and investments in affiliates (211) (57) Divestitures and other asset dispositions -- 7 ----------------------------------------------------------------------------------------------------- Cash flows from investing activities (467) (277) ------------------------------------------------------------------------------------------------------------------------ Cash flows Issuances of debt and lease obligations 588 268 from financing Redemptions of debt and lease obligations (842) (375) activities Increase in debt with maturities of three months or less, net 639 122 Common stock cash dividends (84) (169) Stock issued under Shared Investment Plan -- 198 Stock issued under employee benefit plans 140 67 Purchases of treasury stock (141) -- ------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities 300 111 ------------------------------------------------------------------------------------------------------------------------ Effect of currency exchange rate changes on cash and equivalents (52) (44) ------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and equivalents (110) 14 Cash and equivalents at beginning of period 606 709 ------------------------------------------------------------------------------------------------------------------------ Cash and equivalents at end of period $ 496 $ 723 ========================================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 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 (loss) was ($22) million and $226 million for the three months ended June 30, 2000 and 1999, respectively, and was $195 million and $283 million for the six months ended June 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, 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 5 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. The effect of adoption will be recorded as a cumulative effect of a change in accounting principle. Adoption of the Standard 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. Upon completion of the company's analyses, management may decide to utilize alternative derivative and non-derivative instruments after December 31, 2000 in certain situations in meeting its risk management objectives. Any such changes in the company's use of financial instruments could affect future reported results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which was amended by SAB No. 101A in March 2000 and SAB No. 101B in June 2000. SAB 101A and 101B delayed the implementation date of SAB No. 101. These SAB's, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements, are effective in the fourth quarter of 2000. The company is currently assessing the impact of adoption on its 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.
--------------------------------------------------------------------------------------------------------------- Three months ended Six months ended June 30, June 30, (in millions) 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------------------- Net sales $ 26 $ 233 $ 252 $ 456 Net income $ 2 $ 18 $ 14 $ 34 ---------------------------------------------------------------------------------------------------------------
The income statement activity relating to Edwards in the second quarter of 2000 related to certain operations outside the United States. As discussed in Note 1 above, such operations are included in the consolidated financial statements on a one-month lag. 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. 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 6 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 $250 million, of which approximately $219 million would be obtained by Edwards upon termination of the joint venture from the return of its fair value in the joint venture at inception. Included in Baxter's condensed consolidated balance sheet at June 30, 2000 is a $219 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:
June 30, December 31, (in millions) 2000 1999 ------------------------------------------------------------------------------------------------------------------------- Raw materials $ 305 $ 251 Work in process 194 193 Finished products 772 672 ------------------------------------------------------------------------------------------------------------------------- Total inventories $ 1,271 $1,116 =========================================================================================================================
4. INTEREST, NET ------------------- Net interest expense consisted of the following:
------------------------------------------------------------------------------------------------------------------------------- Three months ended Six months ended June 30, June 30, (in millions) 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------- Interest expense $ 29 $ 39 $ 61 $ 80 Interest income (10) (8) (20) (14) ------------------------------------------------------------------------------------------------------------------------------- Interest expense, net $ 19 $ 31 $ 41 $ 66 =============================================================================================================================== Allocated to continuing operations $ 19 $ 22 $ 34 $ 46 =============================================================================================================================== Allocated to discontinued operation $ -- $ 9 $ 7 $ 20 ===============================================================================================================================
The allocation of interest to continuing operations and the discontinued operation was based on estimated relative net assets of these operations. 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:
Three months ended Six months ended June 30, June 30, (in millions) 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------ Basic EPS shares 291 290 291 289 ------------------------------------------------------------------------------------------------------------------------ Effect of dilutive securities Employee stock options 5 4 4 5 Employee stock purchase plans and equity forward agreements 1 1 1 --- ------------------------------------------------------------------------------------------------------------------------ Diluted EPS shares 297 295 296 294 ========================================================================================================================
7 6. COMMON STOCK ---------------- Equity forward agreements ------------------------- In order to partially offset the dilutive 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. At June 30, 2000, agreements relating to approximately one million shares, 4.8 million shares, and 3.7 million shares mature in 2000, 2001, and 2002, respectively. Exercise prices are approximately $67 per share for contracts maturing in 2000, range from $57 to $73 per share for contracts maturing in 2001, and range from $70 to $78 per share for contracts maturing in 2002. Equity collar agreements ------------------------- In connection with the company's stock repurchase program, during the first quarter of 2000 the company issued put options on 2.3 million shares of its common stock and purchased call options on 1.5 million 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 early at any time before maturity. The exercise prices of the put options range from $56 to $59 per share and the exercise prices of the call options range from $61 to $63 per share. The contracts mature on various dates in 2000 and 2001. 7. ACQUISITIONS ----------------- Acquisitions during the six months ended June 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 a $250 million IPR&D charge 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. 8 North American Vaccine, Inc. ---------------------------- In June 2000, the company acquired North American Vaccine, Inc. (NAV) for approximately $420 million, including assumed debt of approximately $155 million. 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, $140 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 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 $134 million, including 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 9 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:
----------------------------------------------------------------------------------------------------------------------------- Three months ended Six months ended June 30, June 30, (in millions, except per share data) 2000 1999 2000 1999 ----------------------------------------------------------------------------------------------------------------------------- Net sales $1,695 $1,592 $3,296 $3,086 Income from continuing operations before cumulative effect of accounting change $ 35 $ 177 $ 214 $ 329 Earnings per diluted common share $ 0.12 $ 0.59 $ 0.71 $ 1.11 -----------------------------------------------------------------------------------------------------------------------------
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 second quarter of 2000, approximately $12 million of reserves were utilized, all of which related to the acquisition of Immuno International AG (Immuno). During the six months ended June 30, 2000, approximately $15 million of reserves were utilized, of which approximately $14 million related to the acquisition of Immuno, and approximately $1 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. 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. 10 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. Financial information for the company's segments for the three and six months ended June 30 is as follows: I.V. Systems/ Medical Products BioScience Renal Other Total -------------------------------------------------------------------------------- For the three months ended -------------------------- June 30, -------- 2000 ---- Net sales $ 667 $ 575 $452 -- $1,694 Pretax income 99 131 78 ($295) 13 1999 ---- Net sales 604 543 413 -- 1,560 Pretax income 95 107 78 (24) 256 For the six months ended ------------------------ June 30, -------- 2000 ---- Net sales $1,287 $1,117 $873 -- $3,277 Pretax income 183 244 156 ($313) 270 1999 ---- Net sales 1,154 1,055 813 -- 3,022 Pretax income 163 203 149 (43) 472 -------------------------------------------------------------------------------- The following are reconciliations of total segment amounts to amounts per the condensed consolidated financial statements: Three Months Ended June 30, -------------- 2000 1999 -------------------------------------------------------------------------------- Pretax income ------------- Total pretax income from segments $ 308 $ 280 Unallocated amounts Interest expense, net (19) (22) In-process research and development and acquisition- related charges (286) -- Other Corporate items 10 (2) -------------------------------------------------------------------------------- Income from continuing operations before income taxes $ 13 $ 256 ------------------------------------------------------------------------------- 11 Six Months Ended June 30, -------------- 2000 1999 ----- ----- Pretax income ------------- Total pretax income from segments $ 583 $ 515 Unallocated amounts Interest expense, net (34) (46) In-process research and development and acquisition- related charges (286) -- Other Corporate items 7 3 ------------------------------------------------------------------------------- Income from continuing operations before income taxes and cumulative effect of accounting change $ 270 $ 472 ------------------------------------------------------------------------------- 12 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. -------------------------------------------------------------------------------- RESULTS THROUGH FULL YEAR 2000 OBJECTIVES JUNE 30, 2000 -------------------------------------------------------------------------------- . Increase net sales approximately 10 . Net sales during the six months percent. ended June 30, 2000 increased eight percent. Excluding the effects of changes in currency exchange rates, net sales increased 12 percent. -------------------------------------------------------------------------------- . Grow net earnings in the mid-teens. . Net earnings from continuing operations increased 18 percent for the first half of the year, excluding the in-process research and development (IPR&D) and acquisition-related charges. -------------------------------------------------------------------------------- . Generate $500 million in operational . The company had operational cash cash flow, after investing outflow of $92 million during approximately $1 billion in capital the six months ended June 30, improvements and research and 2000. Cash outflows or modest development. amounts of cash inflows are typical during the first half of the year based on the timing of receipts and disbursements. The total of capital expenditures and research and development expenses (excluding the IPR&D charge) for the six months ended June 30, 2000 was $432 million. -------------------------------------------------------------------------------- 13 RESULTS OF OPERATIONS --------------------- The following management discussion and analysis pertains to continuing operations, unless otherwise noted. NET SALES TRENDS
---------------------------------------------------------------------------------------------------------------------------------- Three months ended Six months ended June 30, Percent June 30, Percent (in millions) 2000 1999 Increase 2000 1999 Increase ---------------------------------------------------------------------------------------------------------------------------------- International $ 930 $ 858 8% $1,789 $1,663 8% United States 764 702 9% 1,488 1,359 10% ---------------------------------------------------------------------------------------------------------------------------------- Total net sales $1,694 $1,560 9% $3,277 $3,022 8% ==================================================================================================================================
Excluding the effect of a stronger United States dollar, which impacted sales growth for all segments, total net sales growth was 13 percent and 12 percent for the three months and six months ended June 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 11 percent and 12 percent sales growth during the three months and six months ended June 30, 2000, respectively. Excluding the impact of a stronger U.S. dollar, sales growth was 14 percent and 15 percent for the quarter and year-to-date period, respectively. Sales growth was strong in both the domestic and international markets. Of the constant-currency sales growth, approximately two points of growth for both the quarter and year-to-date period were generated by recent acquisitions, principally the September 1999 acquisition of a nutrition and fluid therapy business in Europe. Approximately six points and seven points of growth in the quarter and six-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. The segment's sales growth rate was higher in the first half of the year than is anticipated for the remainder of the year primarily because the year-over-year impacts of acquisitions and the Propofol agreement is expected to be less significant in future quarters. BioScience Sales in the BioScience segment increased six percent for both the three-month and six-month periods ended June 30, 2000, with sales growth especially strong outside the United States. Excluding the impact of changes in currency exchange rates, sales growth was 12 percent and 11 percent for the quarter and year-to- date period, respectively. Of the constant-currency sales growth, approximately four points and three points of growth in the quarter and six-month period, respectively, was due to increased sales of recombinant products. Sales of recombinant products were unusually strong in the first part of 1999 due to an increase in manufacturing capacity in late 1998, which allowed the company to reduce its backlog. The company is in the process of further expanding its manufacturing capacity for recombinant products and expects that the sales growth rate will increase in the second half of 2000. 14 Approximately three points and five points of growth in the quarter and year-to- date period, respectively, was due to increased sales of plasma-derived products, as the supply constraints that had impacted the entire factor concentrates industry in 1998 and early 1999 have eased. Sales in the blood- collection and processing businesses also grew during the first half of 2000, principally due to an increase in sale of products which provide for leukoreduction, which is the removal of white blood cells from blood products used for transfusion. As discussed below, in June 2000 the company acquired North American Vaccine, Inc. (NAV), which is engaged in the research, development, production and sales of vaccines for the prevention of human infectious diseases. For the full year, this acquisition is expected to contribute approximately two points to the segment's percentage sales growth. Renal The Renal segment generated sales growth of 10 percent and seven percent during the three-month period and six-month period ended June 30, 2000, respectively, due principally to growth in the international market. Excluding the impact of a stronger U.S. dollar, sales growth was 12 percent and 10 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 six- month period, respectively, and the acquisition is expected to add approximately five points to the Renal segment's sales growth for the full year. Sales growth was also generated from 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. The remaining sales growth 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
---------------------------------------------------------------------------------------------------- Three months ended Six months ended June 30, June 30, Increase 2000 1999 Decrease 2000 1999 (decrease) ---------------------------------------------------------------------------------------------------- Gross profit margin 44.1% 44.2% (.1 pts) 43.8% 43.5% .3 pts Marketing and administrative expenses 19.8% 20.4% (.6 pts) 19.9% 20.6% (.7 pts) ----------------------------------------------------------------------------------------------------
The gross profit margin decreased slightly during the quarter and increased during the year-to-date period principally due to changes in the products and services mix. The gross profit margin is expected to increase in future quarters as the sales growth rate increases in the company's higher-margin businesses. Marketing and administrative expenses decreased as a percent of sales in both the quarter and year-to-date period as compared to the prior year periods as the company continues to leverage recent acquisitions and effectively manages costs across all business segments. Management expects to maintain this expense ratio for the rest of the year as it continues to manage costs. 15 RESEARCH AND DEVELOPMENT
Three months ended Six months ended June 30, Percent June 30, Percent (in millions) 2000 1999 Increase 2000 1999 Increase ---------------------------------------------------------------------------------------------------- Research and development expenses $ 93 $ 84 11% $ 176 $ 159 11% As a percent of sales 5% 5% 5% 5% ----------------------------------------------------------------------------------------------------
Research and development (R&D) expenses above exclude the IPR&D charge, which is further discussed below. The increase in R&D expenses during the second 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 and initiatives in the wound management and plasma-based products areas. Management expects R&D expenses to continue to grow over the prior year level for the remainder of the year. The $286 million charge for IPR&D and acquisition-related costs 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 decreased for the three months and six months ended June 30, 2000 as compared to the prior year periods principally due to the impact of a greater mix of foreign currency denominated debt, which bears a lower average interest rate, and lower average debt levels, partially offset by the effect of increasing interest rates in the United States and Europe. The increase in other income for the second quarter was primarily due to the effects of changes in currency exchange rates. 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 four percent and 12 percent for the three months and six months ended June 30, 2000, respectively. Partially offset by the unfavorable impact of the strengthening U.S. dollar and increased R&D expenditures, the growth in profitability was primarily a result of strong sales, and the leveraging 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 22 percent and 20 percent for the quarter and year-to-date period ended June 30, 2000, respectively. Partially offset by the unfavorable impact of the strengthening U.S. dollar and increased R&D expenditures, this growth was driven by strong sales, improved manufacturing efficiencies, and the leveraging of marketing and administrative expenses. 16 Renal Pretax income was flat and increased five percent for the second quarter and year-to-date period of 2000, respectively. In addition to the unfavorable impact of a strengthening U.S. dollar, the change in pretax income was principally due to strong sales, offset by a less favorable mix of sales and services, higher R&D costs 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 second 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. The income statement activity relating to Edwards in the second quarter of 2000 related to certain operations outside the United States. As discussed in Note 1 to the Condensed Consolidated Financial Statements, such operations are included in the consolidated financial statements on a one-month lag. 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 decreased for the six months ended June 30, 2000. The effect of increased earnings (before non-cash items), decreased cash payments relating to the company's litigation, and a larger decrease in the accounts receivable balance, which was partially due to a sale of certain receivables during the period, was more than offset primarily by the effect of a larger decrease in the liabilities balance and an increase in inventory levels. Cash flows related to the discontinued operation decreased for the year-to-date period ended June 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. Cash outflows from investing activities increased for the six months ended June 30, 2000. Capital expenditures were higher for the six months ended June 30, 2000 as compared to the prior year period as the company increased its investments in various capital projects across the three segments. The increased investments principally pertained to the BioScience 17 segment, as the company is in the process of increasing manufacturing capacity for various of its products, including vaccines and both plasma-based and recombinant products. Net cash outflows relating to acquisitions increased during the first half 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. A portion of the purchase price was paid in Baxter International Inc. common stock. Refer to Note 7 to the Condensed Consolidated Financial Statements for further information. Approximately $110 million of the company's acquisitions and investments for the six months ended June 30, 2000 related to several acquisitions and investments in the I.V. Systems/Medical Products segment, the largest of which was the January 2000 acquisition of certain assets of Sabratek Corporation, which expands the segment's offering of infusion products to alternate site customers. In addition, the company made certain other minor acquisitions and investments in the current year across the various businesses and product lines. During the six months ended June 30, 1999, approximately $30 million of the total net cash flows used for acquisitions and investments in affiliates related to a contingent purchase price payment pertaining to the 1997 acquisition of Immuno International AG. Cash flows from financing activities increased for the six months ended June 30, 2000. Cash received for stock issued under employee benefit plans increased in the first half of 2000 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 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. Offsetting these increased inflows was $141 million in cash outflows related to repurchases of Baxter common stock, as further discussed below. During the six-month period ended June 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 net cash used in operations and investing activities increased during the first six months of 2000 as compared to the corresponding prior year period. The company's net-debt-to-capital ratio was 41.7 percent and 40.2 percent at June 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. 18 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:
-------------------------------------------------------------------------------------------------------- Six months ended June 30, (in millions) 2000 1999 -------------------------------------------------------------------------------------------------------- Cash flows from continuing operations per the company's Condensed Consolidated Statements of Cash Flows $ 152 $ 198 Capital expenditures (256) (227) Net interest after tax 21 22 Other, including mammary implant litigation (9) 113 -------------------------------------------------------------------------------------------------------- Operational cash flow - continuing operations ($92) $ 106 ========================================================================================================
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 $141 million of common stock repurchased under the two programs during the six months ended June 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 19 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, 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. The effect of adoption will be recorded as a cumulative effect of a change in accounting principle. Adoption of the Standard 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. Based upon analyses performed to date, management may decide to utilize alternative derivative and non-derivative instruments after December 31, 2000 in certain situations in meeting its risk management objectives. Any such changes in the company's use of financial instruments could affect future reported results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which was amended by SAB No. 101A in March 2000 and SAB No. 101B in June 2000. SAB 101A and 101B delayed the implementation date of SAB No. 101. These SAB's, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements, are effective in the fourth quarter of 2000. The company is currently assessing the impact of adoption on its consolidated financial statements. 20 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, 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. 21 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 June 30, 2000 and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 2000 and 1999, and condensed consolidated statements of cash flows for the six-month periods ended June 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, 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. We previously audited, in accordance with auditing standards generally accepted in the United States, 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 information 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 August 8, 2000 22 PART II. OTHER INFORMATION Baxter International Inc. and Subsidiaries Item 1. Legal Proceedings Baxter International Inc. 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 June 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 June 30, 2000, Baxter, together with certain of its subsidiaries, had been named as a defendant or co-defendant in 933 lawsuits and 329 claims relating to mammary implants, brought by approximately 2,211 plaintiffs, of which 1,696 are implant plaintiffs and the remainder are consortium or second generation plaintiffs. Of those plaintiffs, 371 currently are included in the Lindsey class action Revised Settlement described below, which accounts for approximately 239 of the pending lawsuits against the Company. Additionally, 1,221 plaintiffs have opted out of the Revised Settlement (representing approximately 635 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, 2000, 577 of the opt-out plaintiffs had confirmed Heyer-Schulte mammary implant product identification. Furthermore, during the second quarter of 2000, Baxter obtained dismissals, or agreements for dismissals, with respect to 1,013 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 December 22, 1995 (the Revised Settlement). All appeals directly challenging the Revised Settlement have been dismissed. 23 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 June 30, 2000, Baxter had been named in 227 lawsuits and 204 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 June 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 6,182 of the claimant groups had received payments as of June 30, 2000 and payments are expected to continue through the third quarter 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 June 30, 2000, the cases involved 1,328 plaintiffs, of whom 1,319 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 damages for Hepatitis C infections allegedly caused by infusing Gammagard(R) IVIG. As of June 30, 2000, Baxter was a defendant in 37 lawsuits and 41 claims in the United States, 24 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 December 1999, the U.S.D.C. for the Central District of California granted preliminary approval to a proposed 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 June 30, 2000, the Company had been named as a defendant in 530 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. 25 Item 4. Submission of Matters to a Vote of Security Holders The Company's annual meeting of stockholders was held on May 2, 2000 for the purpose of electing directors, approving the incentive compensation program and the appointment of auditors, and voting on the other stockholder proposals listed below. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management's solicitation. Each of management's nominees for directors, as listed in the proxy statement, were elected with the number of votes set forth below. -------------------------------------------------------------------------------- Number of Votes ------------------------------------ Abstained/ In Favor Withheld ----------- ---------- Walter E. Boomer 231,090,818 1,877,673 John W. Colloton 231,018,421 1,950,070 Susan Crown 231,086,763 1,881,728 The results of other matters voted upon at the annual meeting are as follows: --------------------------------------------------------------------------------
Number of Votes ------------------------------------ In Favor Against Abstained ----------- ----------- ---------- Appointment of PricewaterhouseCoopers LLP 231,814,950 433,213 720,328 as independent accountants for the Company for year 2000 was approved by a majority of votes cast. The Baxter International Inc. 2000 210,391,709 21,064,007 1,512,775 Incentive Compensation Program was approved by a majority of votes cast. The stockholder proposal relating to 72,914,799 116,649,111 10,976,554 cumulative voting in the election of directors did not pass. The stockholder proposal relating to the 121,141,442 77,078,487 2,320,535 declassification of the Board of Directors was approved by a majority of the votes cast. The stockholder proposal relating to the 134,324,261 63,422,027 2,794,176 redemption of the stock purchase rights was approved by a majority of the votes cast.
26
Number of Votes ---------------------------------- In Favor Against Abstained ---------- ----------- ---------- The stockholder proposal requesting Baxter to 28,878,186 159,940,623 11,721,655 prepare a report describing Baxter's actions to ensure that it does not do business with foreign suppliers who manufacture items for sale in the United States using child labor did not pass.
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 April 14, 2000, which reported under "Item 2 - Acquisition or Disposition of Assets" that, on March 31, 2000, Baxter International Inc. (Baxter) completed the distribution of Edwards Lifesciences Corporation common stock to shareholders of record of Baxter common stock on March 29, 2000. Edwards Lifesciences Corporation was formed initially as a wholly owned subsidiary of Baxter and is primarily comprised of the cardiovascular business previously conducted by Baxter. 27 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BAXTER INTERNATIONAL INC. ---------------------------------- (Registrant) Date: August 10, 2000 By: /S/ Brian P. Anderson ------------------------------ Brian P. Anderson Senior Vice President and Chief Financial Officer (Chief Accounting Officer) 28 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 - June 30, 2000..........................
(All other exhibits have been omitted because they are not applicable or not required.)