-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SpbzxAn4okJ4A4QsPPX/My350S0qZGQIOp9I0y/pY38RlEvO+Pzdu+jDYQiv8AP7 lu7CKfdhhCugfR/qU1hNqQ== 0000950131-00-001927.txt : 20000324 0000950131-00-001927.hdr.sgml : 20000324 ACCESSION NUMBER: 0000950131-00-001927 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAXTER INTERNATIONAL INC CENTRAL INDEX KEY: 0000010456 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 360781620 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-04448 FILM NUMBER: 576068 BUSINESS ADDRESS: STREET 1: ONE BAXTER PKWY CITY: DEERFIELD STATE: IL ZIP: 60015 BUSINESS PHONE: 8479482000 MAIL ADDRESS: STREET 1: ONE BAXTER PARKWAY CITY: DEERFIELD STATE: IL ZIP: 60015 FORMER COMPANY: FORMER CONFORMED NAME: BAXTER TRAVENOL LABORATORIES INC DATE OF NAME CHANGE: 19880522 FORMER COMPANY: FORMER CONFORMED NAME: BAXTER LABORATORIES INC DATE OF NAME CHANGE: 19760608 10-K405 1 FORM 10-K - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 1999 OR [_]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 in its Charter) Delaware 36-0781620 ------------------------------------------- ------------------------- (State or Other Jurisdiction of Incorporation or (I.R.S. Employer Organization) Identification No.) One Baxter Parkway, Deerfield, Illinois 60015 ------------------------------- ------------------------- (Address of Principal Executive Offices) (Zip Code) 847.948.2000 Registrant's telephone number, including area code ____________________________ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered -------------------- Common stock, $1 par value New York Stock Exchange, Inc. Preferred Stock Purchase Rights Chicago Stock Exchange, (currently traded with common stock) Inc. Pacific Exchange, Inc. New York Stock Exchange, Inc. Chicago Stock Exchange, Inc. Pacific Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None ---------------- 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. X Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting common equity held by non- affiliates of the registrant (based on the per share closing sale price of $54.50 on February 29, 2000, and for the purpose of this computation only, the assumption that all registrant's directors and executive officers are affiliates) was approximately $15.6 billion. There is no non-voting common equity held by non-affiliates of the registrant. The number of shares of the registrant's common stock, $1 par value, outstanding as of February 29, 2000, was 290,529,593. Documents Incorporated By Reference Those sections or portions of the registrant's annual report to stockholders for fiscal year ended December 31, 1999 and of the registrant's proxy statement for use in connection with its annual meeting of stockholders to be held on May 2, 2000, described in the cross reference sheet and table of contents attached hereto are incorporated by reference in this report. - ------------------------------------------------------------------------------- CROSS REFERENCE SHEET and TABLE OF CONTENTS
Page Number or (Reference) (1) --------------- Item 1. Business (a) General Development of Business................. 1(2) (b) Financial Information about Segments............ 1(3) (c) Narrative Description of Business............... 1(4) (d) Financial Information about Foreign and Domestic Operations and Export Sales..................... 7(5) Item 2. Properties.......................................... 8 Item 3. Legal Proceedings................................... 8 Item 4. Submission of Matters to a Vote of Security Holders. 12 Market for the Registrant's Common Equity and Item 5. Related Stockholder Matters......................... 13(6) Item 6. Selected Financial Data............................. 13(7) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 13(8) Quantitative and Qualitative Disclosures about Item 7A. Market Risk......................................... 13(9) Item 8. Financial Statements and Supplementary Data......... 13(10) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 13 Item 10. Directors and Executive Officers of the Registrant (a) Identification of Directors..................... 14(11) (b) Identification of Executive Officers............ 14 (c) Compliance with Section 16(a) of the Securities Exchange Act of 1934............................ 15 Item 11. Executive Compensation.............................. 15(12) Security Ownership of Certain Beneficial Owners and Item 12. Management.......................................... 15(13) Item 13. Certain Relationships and Related Transactions...... 15 Exhibits, Financial Statement Schedules and Reports Item 14. on Form 8-K......................................... 16 (a) Financial Statements............................ 16 (b) Reports on Form 8-K............................. 16 (c) Exhibits........................................ 16
- ------- (1) Information incorporated by reference to Baxter's Annual Report to Stockholders for the year ended December 31, 1999 ("Annual Report") and Baxter's proxy statement for use in connection with its annual meeting of stockholders to be held May 2, 2000 ("Proxy Statement"). (2) Annual Report, pages 37-39, section entitled "Notes to Consolidated Financial Statements--Acquisitions and Divestitures." (3) Annual Report, pages 48-49, section entitled "Notes to Consolidated Financial Statements--Segment Information." (4) Annual Report, pages 21-29, section entitled "Management's Discussion and Analysis" and pages 48-49, section entitled "Notes to Consolidated Financial Statements--Segment Information." (5) Annual Report, pages 48-49, section entitled "Notes to Consolidated Financial Statements--Segment Information." (6) Annual Report, page 50, section entitled "Notes to Consolidated Financial Statements--Quarterly Financial Results and Market for the Company's Stock (Unaudited)." (7) Annual Report, inside back cover, section entitled "Five-Year Summary of Selected Financial Data." (8) Annual Report, pages 21-29, section entitled "Management's Discussion and Analysis." (9) Annual Report, pages 28-29, section entitled "Financial Instrument Market Risk." (10) Annual Report, pages 30-50, sections entitled "Report of Independent Accountants," "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Cash Flows," "Consolidated Statements of Stockholders' Equity and Comprehensive Income" and "Notes to Consolidated Financial Statements." (11) Proxy Statement, pages 10-12, section entitled "Board of Directors-- Director Biographies." (12) Proxy Statement, page 14, section entitled "Board of Directors-- Compensation of Directors" and pages 18-23, section entitled "Executive Compensation." (13) Proxy Statement, pages 24-25, section entitled "Ownership of Baxter Stock." - -------------------------------------------------------------------------------- Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015 - -------------------------------------------------------------------------------- PART I - -------------------------------------------------------------------------------- Item 1. Business. (a) General Development of Business. Baxter International Inc. was incorporated under Delaware law in 1931. As used in this report, except as otherwise indicated in information incorporated by reference, "Baxter International" means Baxter International Inc. and "Baxter" or the "company" means Baxter International and its subsidiaries. Baxter engages in the worldwide development, manufacture and distribution of a diversified line of products, systems and services used primarily in the health-care field. We manufacture products in 29 countries and sell them in over 100 countries. Health care is concerned with the preservation of health and with the diagnosis, cure, mitigation and treatment of disease and body defects and deficiencies. Our products are used by hospitals, clinical and medical research laboratories, blood and dialysis centers, rehabilitation centers, nursing homes, doctors' offices and by patients, at home, under physician supervision. For information regarding significant acquisitions, investments in affiliates and divestitures, see our Annual Report to Stockholders for the year ended December 31, 1999 (Annual Report), pages 37-39, section entitled "Notes to Consolidated Financial Statements--Acquisitions and Divestitures" which is incorporated by reference. See also "Recent Acquisitions." (b) Financial Information About Segments. Incorporated by reference from the Annual Report, pages 48-49, section entitled "Notes to Consolidated Financial Statements--Segment Information." (c) Narrative Description of Business. Recent Acquisitions North American Vaccine, Inc. In November 1999, Baxter announced an agreement to acquire North American Vaccine, Inc., a developer, manufacturer and marketer of vaccines for adults and children to prevent infectious diseases. The transaction has been structured as a stock for stock transaction and is valued at approximately $390 million. The transaction is subject to a number of conditions, including regulatory approval, and is expected to close during the first six months of 2000. Althin Medical A.B. In December 1999, Baxter announced an agreement to acquire Althin Medical A.B. (Althin), a leading manufacturer of hemodialysis products based in Sweden. The transaction, which closed in March 2000, was structured as a purchase of a controlling interest in Althin followed by a public tender offer for all of remaining shares. The cash and stock transaction was valued at approximately $130 million. Company Overview Baxter operates as a global leader in critical therapies for life- threatening conditions. We develop, manufacture and market products and technologies related to the blood and circulatory system. Our continuing operations are comprised of three segments: I.V. Systems/Medical Products, which develops technologies and systems to improve intravenous medication delivery and distributes medical products; Blood Therapies, which develops biopharmaceutical and blood collection and separation products and technologies; and Renal, which develops products and provides services to treat end-stage kidney disease. Our three businesses enjoy leading positions in the medical products and services fields. In July 1999, we announced that our board of directors had approved a plan to spin-off Baxter's CardioVascular business to our stockholders. As a result of the board's approval of the spin-off, the CardioVascular business, which is substantially the same as the former 1 CardioVascular segment, is now being reported as a discontinued operation in our financial statements. We expect the spin-off to occur on or about March 31, 2000. Unless otherwise indicated, each of the factors discussed in this Part I do not materially differ in their impact across each of our three segments. Information about operating results is incorporated by reference from the Annual Report, pages 21-29, section entitled "Management's Discussion and Analysis" and pages 48-49, section entitled "Notes to Consolidated Financial Statements--Segment Information." I.V. Systems/Medical Products Business Description. Baxter manufactures a range of products used to deliver fluids and drugs to patients. These products provide fluid replenishment, nutrition therapy, pain management, antibiotic therapy, chemotherapy and other therapies. Baxter provides intravenous (IV) and irrigating solutions in flexible, plastic and non-PVC containers; premixed liquid and frozen drugs for IV delivery; IV access systems and tubing sets; electronic IV infusion pumps; solutions, containers and automated compounding systems for IV nutrition; IV anesthesia devices and inhalation agents; and ambulatory infusion systems. Baxter also provides custom IV solution compounding services in a number of markets around the world. Global Strategy. In established markets, such as North America, Australia and parts of Europe, Latin America and Asia, Baxter uses its recognized leadership in IV therapy to introduce value-added products that increase productivity and quality while reducing costs for hospitals and other health- care providers. In new and developing markets, Baxter's strategy is to establish a presence with selected products based on local market requirements and then broaden its offering as the market develops and market acceptance of Baxter's technologies grows. Although the company has a strong manufacturing presence all over the world, it has continued to form joint ventures to market or manufacture its IV products in developing regions of Asia, Latin America and Eastern Europe. Because IV products are used in such a broad range of medical therapies, Baxter expects much of its future growth in the IV Systems/Medical Products group to come from the continuing economic expansion of developing regions as health-care standards improve. Product Development. Two years ago, Baxter introduced the Colleague(R) single-channel volumetric infusion pump, and in 1999 launched a triple-channel version, allowing clinicians to administer up to three IV solutions at a time to a patient from a single pump. Also in 1999, Baxter launched a German- language version of the Colleague, and in 2000, expects to introduce Colleague in additional languages. In addition, last year Baxter launched a new electronic ambulatory infusion pump for pain management and a new multi- chamber bag for IV nutrition. In 2000, Baxter plans to release a new automated compounding system for use by hospital pharmacies to custom-mix patient- specific IV nutrition solutions. Baxter also continues to look at advancing technologies in the "needleless" IV access area, and at expanding its line of premixed drugs. Acquisitions and Alliances. In 1999, Baxter reclaimed the distribution rights for its inhalation agents in Canada and Western Europe from Pharmacia & Upjohn, Inc. and also acquired its IV business in Germany. Baxter also began distributing Gensia Sicor's generic propofol anesthetic. In early 2000, Baxter acquired several outpatient infusion pumps and related medical systems from Sabratek Corporation. Baxter also expects to continue to expand its alliances with pharmaceutical companies to premix and package their drugs in Baxter IV solution containers. Blood Therapies Business Description. Baxter produces therapeutic proteins from plasma and through recombinant methods to treat hemophilia, immune deficiencies and other blood-related disorders. These include coagulation factors, immune globulins, albumin, wound-management products and vaccines. Baxter also manufactures blood-collection containers and automated blood-cell separation and collection systems. These products are used by hospitals, blood banks and plasma- collection centers to collect and process blood components for therapeutic use, or for processing into therapeutic products, such as albumin. Therapeutic blood components are used to treat patients undergoing surgery, cancer therapy and other critical therapies. Global Strategy. The company has benefited from growth from its Recombinate Antihemophilic Factor (recombinant), used to treat hemophilia A (the most common form of hemophilia, characterized by lack of a clotting factor, Factor VIII), as more production capacity has become available in Baxter's recombinant facility in Thousand Oaks, California, in 2000. For Baxter's blood-collection products, increased automation and the incorporation of leukoreduction technologies (to eliminate unwanted white cells from collected blood components) is expected to continue to drive growth. Technologies to automate the collection of red cells and inactivate viral pathogens in collected blood components may provide opportunities for longer term growth. 2 Product Development. In the first quarter of 1999, Baxter launched a recombinant Factor IX product in Europe. Baxter also continues to pursue a protein-free manufacturing process for recombinant blood-clotting factors. Other products in development include a next-generation fibrin sealant and vaccines for Lyme disease and influenza. In blood processing, Baxter and its development partner, Cerus Corporation, are in clinical trials with pathogen- inactivation technologies for platelets, plasma and red cells. Baxter also is developing technology for the automated collection of red cells. In addition, the company is developing a recombinant solution to replicate the function of the hemoglobin molecule in carrying oxygen to vital organs in cases of severe blood loss. Acquisitions and Alliances. Baxter's 1997 acquisition of Immuno AG greatly expanded the company's portfolio of plasma-derived therapeutic proteins. It also added significant new wound-management products, like Tisseel(R) fibrin sealant, and vaccines to Baxter's product offering, while strengthening Baxter's market presence and research and development capabilities in Europe. In November 1999, Baxter announced plans to acquire North American Vaccine, Inc., which Baxter expects will further broaden its position in the vaccines market. Renal Business Description. Baxter provides a range of renal dialysis products and services to support people with kidney failure. The company is the world's leading manufacturer of products for peritoneal dialysis (PD), a home dialysis therapy. These products include PD solutions, container systems, and automated machines that cleanse patients' blood overnight while they sleep. Baxter also manufactures dialyzers and instrumentation for hemodialysis (HD). Baxter's Renal Therapy Services (RTS) operates dialysis clinics in 12 countries outside the United States, while Renal Management Strategies Inc. (RMS) partners with U.S. nephrologists to provide a kidney-disease management program to health- care payers. Global Strategy. There are approximately one million known dialysis patients in the world. Many more people with kidney disease currently go undiagnosed or untreated, particularly in developing countries. Because PD can offer a lower- cost alternative to HD, which requires an infrastructure of clinics, one of Baxter's strategies is to increase the use of PD in developing countries where people desperately need some form of dialysis treatment. Baxter also seeks to expand PD in developed countries, where the lifestyle advantages offered by the therapy make it an attractive alternative to in-center care for certain patients. Baxter expects to continue to invest in both PD and HD and in its RTS business in order to improve patient outcomes and provide a full spectrum of quality, cost-effective dialysis products and services that best meet the needs of patients, physicians and payers. Product Development. In 1999, Baxter introduced a new generation of HomeChoice(TM) technology: the HomeChoice(TM) PRO with PD Link. In addition to providing overnight dialysis, the device improves patient monitoring by allowing physicians to electronically access therapy data directly from the machine. Baxter also continues to develop new PD solutions to manage specific patient conditions. These include Nutrineal(R) solution, which provides extra nutrition to patients, and Extraneal(R) solution, which draws excess fluid from the bloodstream. For HD patients, Baxter has received approval from the U.S. Food and Drug Administration for its new Meridian(R) hemodialysis instrument. The company also is investing in xenotransplantation--animal-to-human transplants. Baxter's Nextran unit is working to develop genetically modified pig organs that someday could be transplanted safely into humans. This research extends beyond kidneys to livers, hearts and other organs. Acquisitions and Alliances. In late 1999, Baxter announced that it was acquiring Althin Medical A.B., a Swedish manufacturer of hemodialysis instruments and dialyzers. As described under "Joint Ventures" below, Baxter entered into a joint venture with Gambro A.B. (Gambro) of Sweden to create Tandem Healthcare LLC (Tandem). The company's RTS business continues to acquire dialysis clinics in Asia, Europe and Latin America, where it operates the clinics in partnership with local physicians. RTS entered the year 2000 with more than 160 clinics in Argentina, Brazil, China, Colombia, France, Indonesia, Korea, Malaysia, Singapore, Spain, Taiwan and the United Kingdom. Discontinued Operation In July 1999, our board of directors approved a plan to spin-off Baxter's CardioVascular business to our stockholders. We expect that the CardioVascular business will become an independent, publicly-traded company on or about March 31, 2000. The new company will be headquartered in Irvine, California, and will be named Edwards Lifesciences Corporation. 3 Business Description. The CardioVascular business designs, develops, manufactures and markets a comprehensive line of products and services to treat late-stage cardiovascular disease. These include: cardiac surgery products, encompassing heart valve therapy products, mechanical cardiac assist systems, and cannulae and cardioplegia; critical care products, featuring cardiac monitoring systems and disposables used to evaluate cardiac output and measure blood pressure; vascular products, which includes products used in peripheral vascular surgery, surgical accessories, implantable grafts, and endovascular graft systems for treating aortic aneurysms; perfusion products and services, comprised of oxygenators and related disposables used during cardiopulmonary bypass, cardiopulmonary bypass hardware and perfusion services; and left ventricular-assist devices. United States Markets The health-care marketplace continues to be highly competitive. There has been consolidation in the company's customer base, and by its competitors, which has resulted in pricing and market share pressures. These industry trends are expected to continue. The company intends to continue to manage these issues by developing new products and services, leveraging its cost structure and making acquisitions. International Markets Baxter generates more than 50 percent of its revenues outside the United States. While health-care cost containment continues to be a focus around the world, demand for health-care products and services continues to be strong worldwide, particularly in developing markets. The company's strategies emphasize global expansion and technological innovation to advance medical care worldwide. Joint Ventures In March 1999, Baxter entered into a United States-based manufacturing joint venture with Gambro, an international medical technology and health-care company based in Sweden. The joint venture, named Tandem, sources dialyzers from an existing Baxter production facility in Mountain Home, Arkansas. Baxter manages the day-to-day operations on behalf of the joint venture. In addition to the joint venture with Gambro, the company conducts a non- material amount of business through other joint ventures. Many of these joint ventures are conducted by the company's IV Systems/Medical Products and Renal businesses, and most are accounted for under the equity method of accounting. Methods of Distribution Baxter conducts its selling efforts through its subsidiaries and divisions. Many subsidiaries and divisions have their own sales forces and direct their own sales efforts. In addition, sales are made to and through independent distributors, dealers and sales agents. In the United States, Allegiance Healthcare Corporation distributes a significant portion of the company's products. These distribution centers are generally stocked with adequate inventories to facilitate prompt customer service. Sales and distribution methods include frequent contact by sales representatives, automated communications via various electronic purchasing systems, circulation of catalogs and merchandising bulletins, direct-mail campaigns, trade publications and advertising. Customers may return defective merchandise for credit or replacement. In recent years, such returns have been insignificant. International sales and distribution are made in over 100 countries either on a direct basis or through independent local distributors. International subsidiaries employ their own field sales forces in Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, the Czech Republic, Denmark, Ecuador, Finland, France, Germany, Greece, Guatemala, Hungary, India, Indonesia, Ireland, Italy, Japan, Korea, Mexico, the Netherlands, New Zealand, Norway, Panama, Peru, the Philippines, Portugal, Russia, Singapore, Spain, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom and Venezuela. In other countries, sales are made through independent distributors or sales agents. Raw Materials Raw materials essential to the company's business are purchased worldwide in the ordinary course of business from numerous suppliers. The vast majority of these materials are generally available, and no serious shortages or delays have been encountered. Certain raw materials used in producing some of the company's products are available only from a small number of suppliers. In addition, certain biomaterials for medical implant applications (primarily polymers) are becoming more difficult to obtain due to market withdrawals by biomaterial suppliers, primarily as a result of perceived exposures to liability in the United States. 4 In some of these situations, the company has long-term supply contracts with its suppliers, although it does not consider its obligations under such contracts to be material. Baxter does not always recover cost increases through customer pricing due to contractual limits and market pressure on such price increases. See "Contractual Arrangements." Patents and Trademarks Products manufactured by Baxter are sold primarily under its own trademarks and trade names. Some products purchased and resold by the company are sold under the company's trade names while others are sold under trade names owned by its suppliers. Baxter owns a number of patents and trademarks throughout the world and is licensed under patents owned by others. Baxter's policy is to protect its products and technology through patents and trademarks on a worldwide basis. This protection is sought in a manner that balances the cost of such protection against obtaining the greatest value for the company. The company also recognizes the need to promote the enforcement of its patents and trademarks. However, while Baxter can not make any assurances that any of its patents will not be circumvented, it does not consider its overall business to be materially dependent upon any individual patent or trademark. Competition Historically, competition in the health-care industry has been characterized by the search for technological and therapeutic innovations in the prevention, diagnosis and treatment of disease. The company believes that it has benefited from the technological advantages of certain of its products. While others will continue to introduce new products which compete with those sold by Baxter, the company believes that its research and development efforts will permit it to remain competitive in all presently material product areas. Although no single company competes with Baxter in all of its businesses, Baxter is faced with substantial competition in all of its markets. The changing health-care environment in recent years has led to increasingly intense competition among United States and certain European health-care suppliers. Competition is focused on price, service and product performance. Pressure in these areas is expected to continue. The company continues to increase its efforts to minimize costs and meet price competition. The company believes that its cost position will continue to benefit from improvements in manufacturing technology and increased economies of scale. The company intends to continue to develop new products and services, invest in capital and human resources to upgrade and expand facilities, leverage its cost structure and make selected acquisitions. Credit and Working Capital Practices As of March 1, 2000, Baxter's debt ratings on senior debt were A3 by Moody's, A by Standard & Poor's and A- by Duff & Phelps. The company's credit practices and related working capital needs are comparable to those of other market participants. Collection periods tend to be longer for sales outside the United States. Quality Management Baxter places significant emphasis on providing quality products and services to its customers. A major portion of the company's quality systems relate to the manufacturing, packaging, sterilization, handling, distribution and labeling of the products by the company. These quality systems, including control procedures that are developed and implemented by technically trained professionals, result in rigid specifications for raw materials, packaging materials, labels, sterilization procedures and overall manufacturing process control. The quality systems integrate the efforts of suppliers of both raw materials and finished goods to provide the highest value to customers. On a statistical sampling basis, internal quality assurance organizations test components and finished goods at different stages in the manufacturing process to assure that exacting standards are met. Research and Development Baxter is actively engaged in research and development programs to develop and improve products, systems and manufacturing methods. These activities are performed at research and development centers located around the world and include facilities in Argentina, Australia, Austria, Belgium, Brazil, China, France, Germany, Italy, Japan, Malta, Sweden, the United Kingdom and the United States. Expenditures for Baxter-sponsored research and development activities were $332 million in 1999, $323 million in 1998, and $339 million in 1997. 5 Principal areas of strategic focus for research include hemoglobin therapeutics, plasma-based therapies, vaccines, xenotransplantation, and medication-delivery systems. The company's research efforts emphasize self- manufactured product development, and portions of that research relate to multiple product lines. For example, many product categories benefit from the company's research effort as applied to the human body's circulatory systems. In addition, research relating to the performance and purity of plastic materials has resulted in advances that are applicable to a large number of the company's products. Government Regulation Most products manufactured or sold by the company are subject to regulation by numerous governmental agencies, both within and outside the United States, including the United States Food and Drug Administration (FDA) for products manufactured or sold in the United States. In the United States, the federal agencies which regulate the company's facilities, operations and personnel include the FDA, the Environmental Protection Agency, the Occupational Health & Safety Administration, the Customs Department, the Commerce Department, the Treasury Department and others. State agencies also regulate the facilities, operations and personnel of the company within their respective states. The various governmental agencies possess authority to regulate the manufacturing procedures, labeling, recordkeeping, promotion and advertising of the company's products. In addition, the FDA has the authority to halt the distribution of certain medical devices, detain or seize adulterated or misbranded medical devices, or order the repair, replacement or refund of the costs of such devices. The FDA may also require notification of health professionals and others with regard to medical devices that present risks of substantial harm to the public health. The FDA may enjoin and restrain certain violations of the Federal Food, Drug and Cosmetic Act, the Public Health Services Act and the Safe Medical Devices Act pertaining to medical products, or initiate action for criminal prosecution of such violations. Moreover, the FDA administers certain controls over the export of medical products from the United States and the importation of products into the United States. From time to time, the company has removed products from the market that were found not to meet acceptable standards. This may occur in the future. Similar regulations and laws exist in most other countries where the company does business. Government agencies outside of the United States also regulate public health, environmental, employment, export, customs, and other aspects of the company's global operations. Environmental policies of the company mandate compliance with all applicable regulatory requirements concerning environmental quality and contemplate, among other things, appropriate capital expenditures for environmental protection. Various non-material capital expenditures for environmental protection were made by Baxter during 1999 and similar expenditures are planned for 2000. See Item 3.--"Legal Proceedings." Employees As of December 31, 1999, Baxter employed approximately 45,000 people. Contractual Arrangements A substantial portion of the company's products are sold through contracts with both United States and foreign purchasers. Some of these contracts are for terms of more than one year and include limits on price increases. In the case of hospitals, clinical laboratories and other facilities, these contracts may specify minimum quantities of a particular product or categories of products to be purchased by the customer. In keeping with the increased emphasis on cost-effectiveness in health care delivery, the current trend among hospitals and other customers of medical products manufacturers is to consolidate into larger purchasing groups to enhance purchasing power. The medical products industry has also experienced some consolidation, partly in order to offer a broader range of products to large purchasers. As a result, transactions with customers are larger, more complex and tend to involve more long-term contracts than in the past. The enhanced purchasing power of these larger customers may also increase the pressure on product pricing, although management is unable to estimate the potential impact at this time. Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 Statements throughout this report that are not historical facts, including but not limited to, statements in the "Company Overview," "International Markets" and "Recent Acquisitions" sections of this report (including material incorporated therein by reference) are 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. 6 The factors below in some cases have affected and could affect the company's actual results, causing results to differ, and possibly differ materially, from those expressed in any such forward-looking statements. These factors include technological advances in the medical field, unforeseen information technology issues related to the company or third parties, economic conditions, demand and market acceptance risks for new and existing products, technologies and health- care services, the impact of competitive products and pricing, manufacturing capacity, new plant start-ups, global regulatory, trade and tax policies, continued price competition, product development risks, including technological difficulties, ability to enforce patents and unforeseen commercialization and regulatory factors. In particular, the company, like other companies in its industry, is experiencing increased regulatory activity by the FDA with respect to its plasma-based operations. Additionally, as discussed in Item 3.-- "Legal Proceedings," upon the resolution of certain legal matters, the company may incur charges in excess of presently established reserves. Any such charge could have a material adverse effect on the company's results of operations or cash flows in the period in which it is recorded. Currency fluctuations are also a significant variable for global companies, especially fluctuations in local currencies where hedging opportunities are unreasonably expensive or unavailable. If the United States dollar strengthens significantly against most foreign currencies, the company's ability to realize projected growth rates in its sales and net earnings outside the United States could be negatively impacted. The company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its 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. (d) Financial Information About Foreign and Domestic Operations and Export Sales. International operations are subject to certain additional risks inherent in conducting business outside the United States, such as changes in currency exchange rates, price and currency exchange controls, import restrictions, nationalization, expropriation and other governmental action. Financial information is incorporated by reference from the Annual Report, pages 48-49, section entitled "Notes to Consolidated Financial Statements-- Segment Information." 7 - ------------------------------------------------------------------------------- Item 2. Properties. Baxter owns or has long-term leases on substantially all of its major manufacturing facilities. With respect to its continuing operations, the company maintains 23 manufacturing facilities in the United States, including five in Puerto Rico. The company also manufactures in Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Costa Rica, the Dominican Republic, France, Germany, Indonesia, Ireland, Italy, Japan, Malta, Mexico, New Zealand, the Philippines, Poland, Singapore, Spain, Switzerland, Tunisia, Turkey and the United Kingdom. While the majority of these facilities are shared by more than one of the company's business segments, eleven domestic facilities and ten international facilities exclusively manufacture for the IV Systems/Medical Products operations; nine domestic and six international facilities exclusively manufacture for Blood Therapies operations, and the Renal business is the exclusive operator of two international facilities. The company also owns or operates shared distribution facilities throughout the world, including eleven in the United States and Puerto Rico, and 98 located in 35 foreign countries. The company maintains a continuing program for improving its properties, including the retirement or improvement of older facilities and the construction of new facilities. This program includes improvement of manufacturing facilities to enable production and quality control programs to conform to the current state of technology and government regulations. Capital expenditures relating to continuing operations were $529 million in 1999, $461 million in 1998 and $367 million in 1997. Additions to the installed base of equipment leased to customers was $102 million in 1999, $95 million in 1998 and $87 million in 1997. - ------------------------------------------------------------------------------- Item 3. Legal Proceedings. Baxter International 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. These cases and claims raise difficult and complex factual and legal issues and are subject to many uncertainties and complexities, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is brought, and differences in applicable law. Accordingly, in many cases, Baxter International is not able to estimate the amount of its liabilities with respect to such matters. Upon resolution of any of the legal matters discussed below, Baxter International 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 International's consolidated financial position. Mammary Implant Litigation Baxter International, 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 (Heyer-Schulte) of American Hospital Supply Corporation (AHSC). AHSC, which was acquired by Baxter 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 their findings that reported medical studies contained no clear evidence of a connection between silicone mammary implants and traditional or atypical systemic diseases. In June 1999, a similar conclusion was announced by a committee of independent medical experts from the Institute of Medicine, an arm of the National Academy of Sciences. As of December 31, 1999, Baxter International, together with certain of its subsidiaries, was named as a defendant or co-defendant in 2,006 lawsuits and 340 claims relating to mammary implants, brought by approximately 4,762 plaintiffs, of which 3,810 are implant plaintiffs and the remainder are consortium or second generation plaintiffs. Of those plaintiffs, 1,335 currently are included in the Lindsey class action Revised Settlement described below, which accounts for 755 of the pending lawsuits against the company. Additionally, 2,335 plaintiffs have opted out of the Revised Settlement (representing 1,176 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 December 31, 1999, 919 of the opt-out plaintiffs had confirmed Heyer-Schulte mammary implant product identification. Furthermore, during 1999, Baxter obtained dismissals, or agreements for dismissals, with respect to 5,687 plaintiffs. 8 In addition to the individual suits against the company, a class action on behalf of all women with silicone mammary implants was filed on March 23, 1994 and 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 (Revised Settlement). The monetary provisions of the Revised Settlement provide compensation for all present and future plaintiffs and claimants through a series of specific funds and a disease-compensation program involving certain specified medical conditions. All appeals directly challenging the Revised Settlement have been dismissed. On January 16, 1996, Baxter, Bristol-Myers Squibb Company and Minnesota Mining and Manufacturing Company each paid $125 million into the court- established fund as an initial fund to pay claims under the Revised Settlement. Union Carbide Corporation and McGhan Medical Corporation also are parties to the Revised Settlement. 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: Harrington v. Dow Corning Corp., et al., Supreme Court, British Columbia, C954330. The class action in British Columbia has been certified solely with respect to the issue of whether silicone gel breast implants are reasonably fit for their intended purpose. In the fourth quarter of 1993, Baxter International accrued $556 million for its estimated liability resulting from the settlement of the Lindsey class action and recorded a receivable for estimated insurance recoveries totaling $426 million, resulting in a net charge of $130 million. Based on its continuing evaluation of the remaining opt-outs, Baxter International accrued an additional $298 million for its estimated liability to litigate or settle cases and claims involving opt-outs and recorded an additional receivable for estimated insurance recoveries totaling $258 million, resulting in an additional net charge of $40 million in the first quarter of 1995. In the third quarter of 1998, Baxter International accrued an additional $250 million for its estimated liability resulting from the class action settlement and remaining opt-out cases and claims. Substantially more women have both participated in, and opted out of, the global class action than originally anticipated, thereby increasing the total estimated costs of this litigation and necessitating an increase in litigation reserves. Baxter International recorded a receivable for related estimated insurance recoveries of $121 million, resulting in an additional net charge of $129 million. The mammary implant litigation includes issues related to which of Baxter's insurers are responsible for covering each matter and the extent of the company's claims for contribution against third parties. Baxter believes that a substantial portion of its liability and defense costs for mammary implant litigation will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. The company has entered into "coverage-in-place" agreements with a number of its insurers, each of which issued or subscribed to policies of insurance between 1974 and 1985. These agreements resolve the signatory insurers' coverage defenses and specify rules and procedures for allocation and payment of defense and indemnity costs pursuant to which signatory insurers will reimburse Baxter for mammary implant losses. Five of the company's claims-made insurers, which issued policies subsequent to 1985, have agreed to pay under their policies with respect to mammary implant claims. The combined total of the amount thus far paid by insurers, committed for payment, and projected by Baxter to be paid by insurers under these agreements is in excess of $700 million, based on the company's current estimate of mammary implant expenditures. The insurers with which Baxter has not reached coverage agreements generally have reserved (i.e., neither admitted nor denied), and may attempt to reserve in the future, the right to deny coverage, in whole or in part, due to differing theories regarding, among other things, the applicability of coverage and when coverage may attach. Baxter is engaged in active litigation with each of these insurers and is negotiating with certain of them to resolve outstanding insurance coverage issues. Plasma-Based Therapies Litigation 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. 9 As of December 31, 1999, Baxter was named in 251 lawsuits and 108 claims in the United States, Canada, Ireland, Japan, Germany and the Netherlands. All U.S. federal court factor concentrate cases have been transferred to the U.S.D.C. for the Northern District of Illinois for case management under Multi District Litigation (MDL) rules (MDL Docket No. MDL-986), and are being remanded in 2000 to the courts in which they were filed. The company also has been named in four purported class actions. None of these class actions has been certified for trial. In most states, Baxter's potential liability is limited by laws that provide that the sale of blood or blood derivatives, including factor concentrates, is not covered by the doctrine of strict liability. As a result, each claimant must prove that his or her injuries were caused by the company's negligence. On May 6, 1997, the U.S.D.C. approved a class action settlement submitted by the plaintiffs' steering committee for the MDL, Baxter, Alpha Therapeutic Corporation, Armour Pharmaceutical and Bayer Corporation. The essential terms of the settlement provide payments of $100,000 to each HIV-positive person with hemophilia in the United States who can demonstrate use of factor concentrates produced by one of the settling defendants between 1978 and 1985. Additionally, the defendants have established a $40 million fund for payment of attorneys' fees, costs and court-administration expenses. Baxter's agreed contribution to the proposed settlement is 20 percent of the total settlement proceeds. Baxter and the other defendants have reached agreements to settle potential subrogation and reimbursement claims with most private insurers, the federal government and all 50 states, the District of Columbia and Puerto Rico. As of December 31, 1999, approximately 6,500 claimant groups had been found eligible to participate in the settlement, and approximately 300 claimants had opted out of the settlement. Approximately 6,128 of the claimant groups had received payments as of December 31, 1999, and payments are expected to continue through the first quarter of 2000 as releases are received from the remaining claimant groups. 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 December 31, 1999, the cases involved 1,315 plaintiffs, of whom 1,307 have settled their claims. Based upon the Osaka and Tokyo courts' recommendations, the parties have agreed to a settlement of all pending and future factor concentrate cases. In general, the settlement provides for payment of an up-front, lump-sum amount of approximately $360,000 per plaintiff to be funded 40 percent by the Japanese government and 60 percent by the corporate defendants. The share of the settlement to be paid by each corporate defendant was determined based upon its market share, resulting in a contribution by Baxter of approximately 15.36 percent. The portion of the settlement to be funded by the corporate defendants will include credits for certain prior payments made by the corporate defendants under a separate Japanese government-administered program, which pays monthly amounts to HIV-positive and AIDS-manifested people with hemophilia and their survivors. Additionally, monthly payments will be made to each plaintiff according to a set schedule. In Spain, Baxter was notified in 1995 that approximately 1,370 HIV-positive people with hemophilia wished to explore settlement possibilities with the company in lieu of filing suit in both Spain and the United States. The parties have reached agreement on the terms of a settlement whereby each claimant will receive $25,000 (including attorneys' fees and costs) in return for a general release and protection against contribution claims by other defendants. As of December 31, 1999, all 1,370 claimants had agreed to the settlement. Baxter does not expect any additional claimants to come forward. 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 (or approximately $16 million at December 31, 1999) in consideration for an April 1999 payment by the company of 29 million Swiss francs to Immuno as additional purchase price. Based on management's estimates, the company has recorded an appropriate liability and related insurance receivable with regard to the matters described above. 10 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 December 31, 1999, Baxter was a defendant in 38 lawsuits and 50 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. All U.S. federal court Gammagard(R) IVIG cases have been transferred to the U.S.D.C. for the Central District of California for case management under MDL rules. On February 21, 1996, the court certified a nationwide class of persons who had infused Gammagard(R) IVIG (Geary, et al., v. Baxter Healthcare Corporation, U.S.D.C., C.D., CA, ML-95-160-R). 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. Baxter has entered into coverage in place agreements covering factor concentrates lawsuits with certain of its insurers that issued or subscribed to policies of insurance between 1978 and 1985. These agreements resolve the signatory insurers' coverage defenses and specify rules and procedures for allocation and payment of defense and indemnity costs pursuant to which the signatory insurers will reimburse the company for factor concentrates losses. The few insurers with which Baxter has not reached coverage agreements generally have reserved (i.e., neither admitted nor denied), and may attempt to reserve in the future, the right to deny coverage, in whole or in part, due to differing theories regarding, among other things, the applicability of coverage and when coverage may attach. Baxter is engaged in negotiations with certain of these insurers to resolve outstanding insurance coverage issues. The company believes that a substantial portion of the liability and defense costs related to all of its plasma-based therapies litigation will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. In the fourth quarter of 1993, Baxter International accrued $131 million for its estimated worldwide liability for litigation and settlement expenses involving factor concentrates cases and recorded a receivable for insurance coverage of $83 million, resulting in a net charge of $48 million. In the third quarter of 1995, significant developments occurred, primarily in the United States, Europe and Japan relative to claims and litigation pertaining to Baxter's plasma-based therapies. After analyzing circumstances in light of such developments and considering various factors and issues unique to each geography, Baxter International revised its estimated exposure from the $131 million previously recorded for factor concentrates litigation to $378 million for all litigation relating to plasma-based therapies, including the factor concentrates litigation and the Gammagard(R) IVIG litigation. Related estimated insurance recoveries were revised from $83 million for factor concentrates to $274 million for all plasma-based therapies. This resulted in a net charge of $56 million in the third quarter of 1995. Baxter has settled and continues to settle claims and lawsuits relating to its plasma-based therapies through court-ordered mediation and other mechanisms. Based on this and other currently available information, Baxter International revised its estimate of liabilities and insurance recoveries and, in the third quarter of 1998, accrued an additional $180 million for its estimated liability for plasma-based therapies litigation and other litigation and recorded a receivable for related estimated insurance recoveries of $131 million, for a net charge of $49 million. Other Litigation As of September 30, 1996, the date of the spin-off of Allegiance Corporation ("Allegiance") from Baxter International, 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 December 31, 1999, the company had been named as a defendant in 491 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. On February 26, 1997, all federal cases involving latex gloves were ordered to be transferred to the U.S.D.C. for the Eastern District of Pennsylvania for case management under the MDL rules (MDL Docket No. 1148). 11 Baxter has been named a potentially responsible party (PRP) for environmental cleanup costs at [19] hazardous-waste sites. Under the United States Superfund statute and many state laws, generators of hazardous waste that is sent to a disposal or recycling site are liable for cleanup of the site if contaminants from that property later leak into the environment. The laws generally provide that a PRP may be held jointly and severally liable for the costs of investigating and remediating the site. Allegiance has assumed responsibility for 10 of these sites. In 1999, Baxter settled liability at one of the seven sites not assumed by Allegiance. The estimated exposure for Baxter's remaining six sites is approximately $2 million, which has been accrued (and not discounted) in the company's financial statements. In addition to the cases discussed above, Baxter is a defendant in a number of other claims, investigations and lawsuits. Based on the advice of counsel, management does not believe that, individually or in the aggregate, these other claims, investigations and lawsuits will have a material adverse effect on the company's results of operations, cash flows or consolidated financial position. - -------------------------------------------------------------------------------- Item 4. Submission of Matters to a Vote of Security Holders. None. 12 - -------------------------------------------------------------------------------- PART II - -------------------------------------------------------------------------------- Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. Incorporated by reference from the Annual Report, page 50, section entitled "Notes to Consolidated Financial Statements -- Quarterly Financial Results and Market for the Company's Stock (Unaudited)." - -------------------------------------------------------------------------------- Item 6. Selected Financial Data. Incorporated by reference from the Annual Report, inside back cover, section entitled "Five-Year Summary of Selected Financial Data." - -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Incorporated by reference from the Annual Report, pages 21-29, section entitled "Management's Discussion and Analysis." - -------------------------------------------------------------------------------- Item 7a. Quantitative and Qualitative Disclosures about Market Risk. Incorporated by reference from the Annual Report, pages 28-29, section entitled "Financial Instrument Market Risk." - -------------------------------------------------------------------------------- Item 8. Financial Statements and Supplementary Data. Incorporated by reference from the Annual Report, pages 30-50, sections entitled "Report of Independent Accountants," "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Cash Flows," "Consolidated Statements of Stockholders' Equity and Comprehensive Income" and "Notes to Consolidated Financial Statements." - -------------------------------------------------------------------------------- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 13 - ------------------------------------------------------------------------------- PART III - ------------------------------------------------------------------------------- Item 10. Directors and Executive Officers of the Registrant. (a) Identification of Directors Incorporated by reference from Baxter's proxy statement for use in connection with its annual meeting of stockholders to be held on May 2, 2000 (Proxy Statement), pages 10-12, section entitled "Board of Directors--Director Biographies." (b) Identification of Executive Officers Following are the names and ages, as of March 1, 2000, of the executive officers of Baxter International, and one or both of its two principal direct subsidiaries, Baxter Healthcare Corporation (Healthcare) and Baxter World Trade Corporation (World Trade), their positions and summaries of their backgrounds and business experience. All executive officers of Baxter International are elected or appointed by the board of directors and hold office until the next annual meeting of directors and until their respective successors are elected and qualified. The annual meeting of directors is held on the date of the annual meeting of stockholders. All executive officers of Healthcare and World Trade are elected or appointed by the boards of directors of the applicable subsidiary and hold office until their respective successors are elected and qualified. As permitted by applicable law, actions by these boards (and their sole stockholder, Baxter International) may be taken by written consent in lieu of a meeting. (1) Baxter International Inc. Executive Officers Harry M. Jansen Kraemer, Jr., age 45, is chairman of the board and chief executive officer of Baxter International. He became chief executive officer in January 1999, and chairman in January 2000. Mr. Kraemer previously was the senior vice president and chief financial officer of Baxter from 1993 to 1997. Brian P. Anderson, age 49, is senior vice president and chief financial officer of Baxter International, having served in that capacity since February 1998. Mr. Anderson previously was corporate vice president of finance of Baxter International beginning May 1997, and the corporate controller from 1993 to 1997. Timothy B. Anderson, age 53, is group vice president, corporate strategy and development of Baxter International, having served in that capacity since November 1999. Prior to that he served as group vice president of Healthcare and World Trade. John F. Gaither, Jr., age 50, is corporate vice president, corporate development for Baxter International having served in that capacity since 1994. Before assuming his current position, Mr. Gaither was vice president of law and strategic planning for a subsidiary of Baxter, and prior to that, was secretary and deputy general counsel of Baxter International. Steven J. Meyer, age 43, is treasurer of Baxter International, having served in that capacity since February 1997. From 1993 to 1997, Mr. Meyer was a vice president of international finance of a business group of World Trade. Kshitij Mohan, age 55, is corporate vice president, research and technical services, of Baxter International having served in that capacity since 1995. John L. Quick, age 55, is a corporate vice president, quality/regulatory, of Baxter International, having served in that capacity since 1994. Jan Stern Reed, age 40, is corporate secretary of Baxter International having served in that capacity since February 1998. Prior to that she was assistant corporate secretary from February 1997 to February 1998. From 1995 to 1997, Ms. Reed was assistant corporate secretary of, and counsel to, Wheelabrator Technologies Inc., a publicly-traded subsidiary of Waste Management, Inc. Thomas J. Sabatino, Jr., age 41, is corporate vice president and general counsel of Baxter International, having served in that capacity since December 1997. He was also assistant secretary from February 1997 to December 1997. From 1995 to December 1997, Mr. Sabatino was an associate general counsel of Healthcare. Prior to that, he was vice president and assistant general counsel of Tenet Healthcare Corporation. 14 Michael J. Tucker, age 47, is senior vice president, human resources, of Baxter International, having served in that capacity since October 1995. Prior to that, he was a corporate vice president of World Trade. (2) Healthcare and World Trade Executive Officers Eric A. Beard, age 48, is a corporate vice president of World Trade, having served in that capacity since October 1998. Prior to that, he was president of a division of a subsidiary of World Trade. Carlos del Salto, age 57, is a senior vice president of World Trade, having served in that capacity since 1996. Prior to that, Mr. del Salto was a corporate vice president of World Trade. David F. Drohan, age 61, is a corporate vice president of Healthcare, having served in that capacity since 1996. Prior to that, Mr. Drohan was president of a division of Healthcare. James M. Gatling, age 50, is a corporate vice president of Healthcare, having served in that capacity since December 1996. Prior to that, Mr. Gatling was a vice president of a division of Healthcare. Thomas H. Glanzmann, age 41, is a corporate vice president of World Trade and Healthcare, having served in that capacity since October 1998. Prior to that, he was president of a division of a subsidiary of World Trade. J. Robert Hurley, age 50, is a corporate vice president of World Trade, having served in that capacity since 1993. Donald W. Joseph, age 62, is a group vice president of Healthcare and World Trade, having served in that capacity since 1994. Jack L. McGinley, age 53, is a group vice president of Healthcare, having served in that capacity since 1994. David C. McKee, age 52, is a corporate vice president and deputy general counsel of Healthcare, having served in that capacity since 1999. Prior to that, Mr. McKee was corporate vice president and deputy general counsel of Baxter International since 1994, and was corporate secretary from February 1997 to February 1998. Michael A. Mussallem, age 47, is a group vice president of Healthcare, having served in that capacity since 1994. Mr. Mussallem will be the chairman and chief executive officer of Edwards Lifesciences Corporation following Baxter's spin-off of the cardiovascular business. (c) Compliance with Section 16(a) of the Securities Exchange Act of 1934. Not applicable. - -------------------------------------------------------------------------------- Item 11. Executive Compensation. Incorporated by reference from the Proxy Statement, page 14, section entitled "Board of Directors --Compensation of Directors" and pages 18-23, section entitled "Executive Compensation." - -------------------------------------------------------------------------------- Item 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated by reference from the Proxy Statement, pages 24-25, section entitled "Ownership of Baxter Stock." - -------------------------------------------------------------------------------- Item 13. Certain Relationships and Related Transactions. None. 15 - -------------------------------------------------------------------------------- PART IV - -------------------------------------------------------------------------------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. The following documents are filed as a part of this report: (a) Financial Statements Location Financial Statements Required By Item 8 of This Form Consolidated Balance Sheets Annual Report, page 31 Consolidated Statements of Income Annual Report, page 32 Consolidated Statements of Cash Flows Annual Report, page 33 Consolidated Statements of Stockholders' Equity Annual Report, page 34 Notes to Consolidated Financial Statements Annual Report, pages 35- Report of Independent Accountants 50 Annual Report, page 30 Schedules Required By Article 12 of Regulation S-X Report of Independent Accountants on Financial Statement Schedule page 17 II Valuation and Qualifying Accounts page 18 All other schedules have been omitted because they are not applicable or not required. (b) Reports on Form 8-K On April 1, 1999 and July 13, 1999, Baxter International filed current reports on Form 8-K, each under Item 5., "Other Events." The first filed an exhibit to its Annual Report on Form 10-K for the year ended December 31, 1998. The second filed a press release announcing the spin-off of its CardioVascular business to Baxter International stockholders. (c) Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated herein by reference. Exhibits in the Exhibit Index marked with a "C" in the left margin constitute management contracts or compensatory plans or arrangements contemplated by Item 14(a) of Form 10-K. The list of exhibits so designated is incorporated by reference in this Part IV, Item 14. 16 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Baxter International Inc. Our audits of the consolidated financial statements referred to in our report dated February 16, 2000 appearing in the 1999 Annual Report to Stockholders of Baxter International Inc., (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K), also included an audit of the financial statement schedule listed in Item 14(A) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Chicago, Illinois February 16, 2000 17 SCHEDULE II - ------------------------------------------------------------------------------- Valuation and Qualifying Accounts (in millions of dollars) - --------------------------------------------------------------------------------
Additions ----------------------- Balance at Charged to Charged to Deductions Balance beginning costs and other from at end of of period expenses accounts (a) reserves period - -------------------------------------------------------------------------------- Year ended December 31, 1999 Allowance for doubtful accounts 37 6 -- (9) 34 Inventory reserves 97 68 -- (87) 78 Litigation reserves 698 -- -- (272) 426 Deferred tax asset valuation allowance 34 14 -- (5) 43 - -------------------------------------------------------------------------------- Year ended December 31, 1998 Allowance for doubtful accounts 26 14 -- (3) 37 Inventory reserves 65 135 2 (105) 97 Litigation reserves 599 430 -- (331) 698 Deferred tax asset valuation allowance 45 7 1 (19) 34 - -------------------------------------------------------------------------------- Year ended December 31, 1997 Allowance for doubtful accounts 21 9 (1) (3) 26 Inventory reserves 50 87 -- (72) 65 Litigation reserves 807 -- 109 (317) 599 Deferred tax asset valuation allowance 35 13 12 (15) 45
- ------------------------------------------------------------------------------- (a) Valuation accounts of acquired or divested companies and foreign currency translation adjustments. Reserves are deducted from assets to which they apply. 18 SIGNATURES Pursuant to the requirements of section 13 or 15(d) 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. /s/ Harry M. Jansen Kraemer, Jr. By: ____________________________________ Harry M. Jansen Kraemer, Jr. Chairman and Chief Executive Officer Date: March 23, 2000 KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Harry M. Jansen Kraemer, Jr. and Jan Stern Reed, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, in any and all capacities, to sign any or all amendments to this Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.
Signature Title --------- ----- /s/ Harry M. Jansen Kraemer, Jr. Chairman of the Board of Directors and ___________________________________________ Chief Executive Officer (principal Harry M. Jansen Kraemer, Jr. executive officer) /s/ Brian P. Anderson Senior Vice President and Chief Financial ___________________________________________ Officer (principal financial officer and Brian P. Anderson principal accounting officer) /s/ Walter E. Boomer Director ___________________________________________ Walter E. Boomer /s/ Pei-yuan Chia Director ___________________________________________ Pei-yuan Chia /s/ Susan Crown Director ___________________________________________ Susan Crown /s/ Mary Johnston Evans Director ___________________________________________ Mary Johnston Evans /s/ Frank R. Frame Director ___________________________________________ Frank R. Frame /s/ Martha R. Ingram Director ___________________________________________ Martha R. Ingram
19
Signature Title --------- ----- /s/ Arnold J. Levine Director ___________________________________________ Arnold J. Levine /s/ George C. St. Laurent, Jr. Director ___________________________________________ George C. St. Laurent, Jr. /s/ Thomas T. Stallkamp Director ___________________________________________ Thomas T. Stallkamp /s/ Monroe E. Trout, M.D. Director ___________________________________________ Monroe E. Trout, M.D. /s/ Fred L. Turner Director ___________________________________________ Fred L. Turner /s/ John W. Colloton Director ___________________________________________ John W. Colloton
20 - -------------------------------------------------------------------------------- APPENDICES
Description Page - ----------- ---- Computation of Ratio of Earnings to Fixed Charges (Exhibit 12) 24 Subsidiaries of the Company (Exhibit 21) 25
- -------------------------------------------------------------------------------- EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
Number and Description of Exhibit --------------------------------- 3. Certificate of Incorporation and Bylaws 3.1* Restated Certificate of Incorporation, filed as exhibit 3.1 to the Company's annual report on Form 10-K for the year ended December 31, 1992, file number 1-4448 (the "1992 Form 10-K"). 3.2* Certificate of Designation of Series A Junior Participating Preferred Stock, filed under the Securities Act of 1933 as exhibit 4.3 to the company's registration statement on Form S-8 (No. 33-28428). 3.3* Amended and Restated Bylaws, filed as Exhibit 3.3 to the company's annual report on Form 10-K for the year ended December 31, 1997, file number 1-4448 (the "1997 Form 10-K"). 3.4* Certificate of Designation of Series B Junior Participating Preferred Stock filed as Exhibit 3.4 to the company's annual report on Form 10-K for the year ended December 31, 1988, file number 1-4448 (the "1998 Form 10-K"). 3.5* Certificate of Elimination of Series A Junior Participating Preferred Stock filed under the Securities Act of 1933 as Exhibit 4.1A to the company's registration statement on Form S- 3 (No. 333-94889). Instruments defining the rights of security holders, including 4. indentures 4.1* Amended and Restated Indenture dated November 15, 1985 (the "Indenture"), between the company and First Trust N.A. ("First Trust") as successor in interest to Continental Illinois National Bank and Trust Company of Chicago ("Continental"), filed under the Securities Act of 1933 as exhibit 4.1 to the company's registration statement on Form S-3 (No. 33-1665). 4.2* First Supplemental Indenture to the Indenture between the company and First Trust (as successor in interest to Continental), filed under the Securities Act of 1933 as exhibit 4.1(A) to the company's registration statement on Form S-3 (No. 33-6746). 4.3* Supplemental Indenture dated as of January 29, 1997, between the company and First Trust (as successor to Continental), filed under the Securities Act of 1933 as exhibit 4.1B to the company's debt securities shelf registration statement on Form S-3 (No. 333-19025) (the "1997 Shelf"). 4.4* Fiscal and Paying Agency Agreement dated as of November 15, 1984, between the company and Citibank, N.A., as amended, filed as exhibit 4.16 to the company's annual report on Form 10-K for the year ended December 31, 1987, file no. 1-4448 (the "1987 Form 10-K"). 4.5* Specimen 9 1/2% Note, filed as exhibit 4.3(a) to the company's current report on Form 8-K dated June 23, 1988, file no. 1- 4448. 4.6* Specimen 9 1/4% Note, filed as exhibit 4.3(a) to the company's current report on Form 8-K dated September 13, 1989, file number 1-4448. 4.7* Specimen 9 1/4% Note, filed as exhibit 4.3(a) to the company's current report on Form 8-K dated December 7, 1989, file number 1-4448. 4.8* Specimen 7.125% Note, filed as exhibit 4.10 to the company's annual report on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K"). 4.9* Specimen 7.65% Debenture, filed as exhibit 4.11 to the 1996 Form 10-K. 4.10* Contingent Payment Rights Agreement, filed under the Securities Act of 1933 as exhibit 4.2 to the Company's registration statement on Form S-4 (No. 333-47927). 4.11* Rights Agreement dated as of December 9, 1998, between the company and First Chicago Trust Company of New York, filed as Exhibit 1 to a registration statement on Form 8-A dated February 23, 1999, file No. 1-4448.
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Number and Description of Exhibit --------------------------------- 10. Material Contracts C 10.1* Form of Indemnification Agreement entered into with directors and officers, filed as exhibit 19.4 to the company's quarterly report on Form 10-Q for the quarter ended September 30, 1986, file no. 1-4448. C 10.2* Baxter International Inc. and Subsidiaries Incentive Investment Excess Plan, filed as exhibit 10.17 to the 1988 Form 10-K. C 10.3* Baxter International Inc. and Subsidiaries Supplemental Pension Plan, filed as exhibit 10.18 to the 1988 Form 10-K. C 10.4* Limited Rights Plan, filed as exhibit 19.6 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1989, file no. 1-4448 (the "September 1989 Form 10-Q"). C 10.5* Amendments to various plans regarding disability, filed as exhibit 19.9 to the September 1989 Form 10-Q. C 10.6* 1987 Incentive Compensation Program, filed as exhibit C to the company's proxy statement for use in connection with its May 13, 1987, annual meeting of stockholders, file no. 1-4448. C 10.7* Amendment to 1987 Incentive Compensation Program, filed as exhibit 19.1 to September, 1989 Form 10-Q, file No. 1-4448. C 10.8* Restricted Stock Grant Terms and Conditions, filed as exhibit 10.25 to the company's annual report on Form 10-K for the year ended December 31, 1991, file number 1-4448 (the "1991 Form 10- K"). C 10.9* Vernon R. Loucks Restricted Stock Grant Terms and Conditions, filed as exhibit 10.26 to the 1991 Form 10-K. C 10.10* Deferred Compensation Plan, amended and restated effective January 1, 1998, filed as exhibit 10.17 to 1997 Form 10-K. C 10.11* Restricted Stock Plan for Non-Employee Directors (as amended and restated in 1992), filed as exhibit 10.28 to the 1992 Form 10-K. C 10.12* Restricted Stock Grant Terms and Conditions (as amended ), filed as exhibit 10.31 to the 1992 Form 10-K. C 10.13* Corporate Aviation Policy, filed as exhibit 10.33 to the 1992 Form 10-K. C 10.14* 1994 Incentive Compensation Program, filed as exhibit A to the company's proxy statement for use in connection with its April 29, 1994 annual meeting of stockholders, file no. 1-4448. C 10.15* 1999 Shared Investment Plan, filed as exhibit 10.1 to the company's quarterly report on Form 10-Q for the quarter ended June 30, 1999, file No. 1-4448. C 10.16* 1995 Officer Incentive Compensation Plan, filed as exhibit 10.31 to the company's annual report on Form 10-K for the year ended December 31, 1994 (the "1994 Form 10-K"). C 10.17* Baxter International Inc. Restricted Stock Plan for Non- Employee Directors, as amended and restated effective May 8, 1995, filed as exhibit 10.32 to the 1994 Form 10-K. C 10.18* 1996 Officer Incentive Compensation Plan, filed as exhibit 10.33 to the company's annual report on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K"). C 10.19* 1995 Stock Option Grant Terms and Conditions, filed as exhibit 10.34 to the 1995 Form 10-K. C 10.20* Supplemental Pension Agreement: Jack L. McGinley, filed as exhibit 10.32 to the 1996 Form 10-K.
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Number and Description of Exhibit --------------------------------- C 10.21* November 1996 Stock Option Grant Terms and Conditions, filed as exhibit 10.33 to the 1996 Form 10-K. C 10.22* November 1996 Premium Price Stock Option Grant Terms and Conditions, filed as exhibit 10.34 to the 1996 Form 10-K. C 10.23* November 1997 Stock Option Grant Terms and Conditions, filed as exhibit 10.36 to the 1997 Form 10-K. C 10.24* 1998 Incentive Compensation Program, filed as exhibit 10.37 to the 1997 Form 10-K. C 10.25* Long Term Incentive Plan, filed as exhibit 10.38 to the 1997 Form 10-K. C 10.26* Special Stock Option Plan adopted February 17, 1998, filed under the Securities Act of 1933 as exhibit 4.6 to the company's registration statement on Form S-8 (No. 333-71553). C 10.27* Stock Option Plan adopted February 17, 1998. C 10.28* 2000 Incentive Compensation Program, filed as Exhibit A to the company's proxy statement for use in connection with its May 2, 2000 annual meeting of stockholders, file No. 1-4448. C 10.29* Employee Stock Purchase Plan for United States Employees (as amended and restated effective October 1, 1999), filed as exhibit 10 to the company's quarterly report on Form 10-Q for the quarter ended September 30, 1999, file No. 1-4448. 12. Computation of Ratio of Earnings to Fixed Charges. 13. Selections from the 1999 Annual Report to Stockholders (such report, except to the extent incorporated herein by reference, is being furnished for the information of the Securities and Exchange Commission only and is not deemed to be filed as part of this annual report on Form 10-K). 21. Subsidiaries of Baxter International Inc. 23. Consent of PricewaterhouseCoopers LLP. 24. Powers of Attorney (included on signature page) 27.1 Financial Data Schedule--December 31, 1999 27.2 Financial Data Schedule--December 31, 1998 27.3 Financial Data Schedule--December 31, 1997 27.4 Financial Data Schedule--December 31, 1996 27.5 Financial Data Schedule--December 31, 1995
- ------- * Incorporated herein by reference. C Exhibit contemplated by Item 14(a)(3) of Form 10-K. (All other exhibits are inapplicable or not required.) Copies of the above exhibits are available at a charge of 35 cents per page upon written request to the Stockholder Services Department, Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015. Copies are also available at a charge of at least 25 cents per page from the Public Reference Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C., 20549. 23 EX-12 2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 - ------------------------------------------------------------------------------- Computation of Ratio of Earnings to Fixed Charges (in millions, except ratios) - -----------------------------------------------------------------------------
Year ended December 31 ---------------------------------- 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------- (B) (B) (B) Income from continuing operations before income taxes and cumulative effect of accounting change $1,052 $ 493 $ 570 $ 693 $ 455 - ----------------------------------------------------------------------------- Fixed charges Interest costs 123 152 166 98 82 Estimated interest in rentals (A) 30 26 26 24 26 - ----------------------------------------------------------------------------- Fixed charges as defined 153 178 192 122 108 - ----------------------------------------------------------------------------- Adjustments to income Interest costs capitalized (10) (4) (6) (2) (2) Losses of less than majority-owned affiliates, net of dividends (2) 0 0 8 10 - ----------------------------------------------------------------------------- Income as adjusted $1,193 $ 667 $ 756 $ 821 $ 571 - ----------------------------------------------------------------------------- Ratio of earnings to fixed charges 7.80 3.75 3.94 6.73 5.29 - -----------------------------------------------------------------------------
(A) Represents the estimated interest portion of rents. (B) Excluding the following significant unusual charges, the ratio of earnings to fixed charges was 6.08, 5.08, and 7.13 in 1998, 1997, and 1995, respectively. 1998: $116 million in-process research and development charge, $178 million net litigation charge, $122 million exit and reorganization costs charge. 1997: $220 million in-process research and development charge. 1995: $96 million net litigation charge and $103 million exit and other reorganization costs charge. 24 EX-13 3 SELECTIONS FROM THE 1999 ANNUAL REPORT EXHIBIT 13 SELECTIONS FROM THE 1999 ANNUAL REPORT. Management's Discussion and Analysis This discussion and analysis presents the factors that had a material effect on Baxter International Inc.'s (Baxter or the company) cash flows and results of operations during the three years ended December 31, 1999, and the company's financial position at that date. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements of the company and related notes. KEY FINANCIAL OBJECTIVES AND RESULTS In last year's Annual Report, management outlined its key financial objectives for 1999. The objectives, which are summarized below, were established based on total company results prior to the July 1999 announcement of the plan to spin off the CardioVascular business in a distribution to stockholders. Baxter's consolidated financial statements have been restated to reflect the financial position, results of operations and cash flows of the CardioVascular business as a discontinued operation. However, the objectives and results presented below reflect the combined results for both continuing and discontinued operations. 1999 OBJECTIVES . Increase net sales approximately 10 percent. . Grow net earnings in the low double digits. . Generate at least $500 million in operational cash flow, after investing approximately $1 billion in capital improvements and research and development. RESULTS . Net sales increased 10 percent in 1999. . Excluding the cumulative effect of a change in accounting principle, and special charges, net income increased 15 percent in 1999. . The company generated operational cash flow of $719 million during 1999. The total of capital expenditures and research and development expenses was approximately $1.1 billion. COMPANY AND INDUSTRY OVERVIEW Baxter is a global leader in critical therapies for patients with life- threatening conditions. The company operates in three segments, which are described in Note 13 to the Consolidated Financial Statements. The company generates more than 50 percent of its revenues outside the United States. While health-care cost containment continues to be a focus around the world, demand for health-care products and services continues to be strong worldwide, particularly in developing markets. The company's strategies emphasize global expansion and technological innovation to advance medical care worldwide. The company's primary markets are highly competitive and subject to substantial regulation. There has been consolidation in the company's customer base and by its competitors, which has resulted in pricing and market share pressures. The company has experienced increases in its labor and material costs, which are partly influenced by general inflationary trends. Competitive market conditions have minimized inflation's impact on the selling prices of the company's products and services. Management expects these trends to continue. The company will continue to manage these issues by capitalizing on its market-leading positions, developing new products and services, investing in capital and human resources to upgrade and expand facilities, leveraging its cost structure, making acquisitions, and entering into alliances and joint venture arrangements. Baxter International 1999 Annual Report 21 Management's Discussion and Analysis RESULTS OF CONTINUING OPERATIONS
NET SALES TRENDS Percent increase years ended December 31 (in millions) 1999 1998 1997 1999 1998 - ------------------------------------------------------------------------------------------- I.V. Systems/Medical Products $2,524 $2,314 $2,110 9% 10% Blood Therapies 2,176 1,862 1,765 17% 5% Renal 1,680 1,530 1,384 10% 11% - ------------------------------------------------------------------------------------------- Total net sales $6,380 $5,706 $5,259 12% 8% =========================================================================================== Percent increase years ended December 31 (in millions) 1999 1998 1997 1999 1998 - ------------------------------------------------------------------------------------------- United States $2,921 $2,609 $2,371 12% 10% International 3,459 3,097 2,888 12% 7% - ------------------------------------------------------------------------------------------- Total net sales $6,380 $5,706 $5,259 12% 8% ===========================================================================================
Excluding the effect of changes in currency exchange rates, international sales growth would have been 12 percent in 1998. I.V. Systems/Medical Products Sales growth of nine percent in 1999 and 10 percent in 1998 in the I.V. Systems/Medical Products segment was significantly driven by increased sales from a multiyear agreement with Premier, Inc., a major U.S. customer, as well as strong sales of the Colleague(R) single-channel and triple-channel volumetric pumps, and related products, particularly in the domestic market. Sales of products and services used in anesthesiology also contributed significantly to 1999 growth and enhanced 1998 growth as well. In April 1998, the company acquired the Pharmaceutical Products Division of The BOC Group's Ohmeda health- care business (Ohmeda), a domestic manufacturer of inhalants and drugs used for general and local anesthesia, which contributed over three points and five points to the segment's 1999 and 1998 sales growth, respectively. During 1999, the segment entered into an exclusive agreement to sell the first generic formulation of Propofol approved by the United States Food and Drug Administration (FDA). Sales from this new agreement contributed over two points to the segment's 1999 sales growth. Also contributing approximately three points to 1998 sales growth was the acquisition of Bieffe Medital S.p.A. (Bieffe), a European manufacturer of dialysis and intravenous solutions and containers. Refer to Note 3 to the Consolidated Financial Statements for further information regarding the company's significant acquisitions. Partially offsetting these increases in 1998 were decreased sales of over $75 million due to the termination of a European distribution agreement with Allegiance Corporation, which was spun off from the company in 1996, the termination of a joint venture in Asia and other divestitures. In addition, currency exchange rate fluctuations reduced the segment's sales growth by approximately two points in 1998. Sales in the United States and Western Europe have been impacted by competitive pricing pressures and cost pressures from health-care providers in all periods. These factors were more than offset by increased penetration and new product introductions in Latin America and other emerging markets, as well as increased sales due to new agreements, new products and acquisitions. Management expects these trends to continue. Blood Therapies Sales in the Blood Therapies segment increased 17 percent and five percent in 1999 and 1998, respectively. Fluctuations in currency exchange rates unfavorably impacted the segment's sales growth in 1998, reducing the percentage growth by approximately two points. As a result of the company's increase in manufacturing capacity for Recombinate(TM) Antihemophilic Factor (recombinant) in 1998 and the strong demand for this product, sales of Recombinate generated significant worldwide growth in both 1999 and 1998, particularly in the United States. Recombinate contributed approximately eight points and four points, respectively, of the segment's total percentage sales growth. While strong sales growth for this product is expected to continue as the company is providing for increased manufacturing capacity by the end of 2000, the growth rate is expected to be less than in 1999. U.S. sales growth in 1998 of plasma-based products was unfavorably affected by regulatory and production issues impacting the supply of factor concentrates in the entire industry. These supply constraints eased in late 1998, and sales of plasma-based products were strong in 1999, especially in the United States, contributing approximately six points of growth. Sales grew approximately three 22 Baxter International 1999 Annual Report percent in the automated and manual blood-collection businesses in 1999 and declined approximately five percent in 1998. The increase in 1999 was principally due to an increase in sales of products which provide for leukoreduction, which is the removal of white blood cells from blood products used for transfusion. Sales growth in these businesses has also been negatively affected by regulatory and production issues in the plasma-fractionation industry. The effect of these supply issues, as well as competitive pricing pressures, was partially offset by continued penetration of basic blood- collection products into developing markets. The effects of regulatory, supply, competitive and other pressures on the Blood Therapies segment are expected to continue to be more than offset by the effects of global expansion, technological advancement and innovation, increases in manufacturing capacity, and strategic alliances, joint ventures and acquisitions. In November 1999, the company entered into a definitive agreement to acquire North American Vaccine, Inc., a developer of vaccines for the prevention of infectious diseases, as further discussed in Note 3 to the Consolidated Financial Statements. Renal The Renal segment generated sales growth of 10 percent and 11 percent in 1999 and 1998, respectively. Significant growth was generated from the Renal Therapy Services business, which operates dialysis clinics in partnership with local physicians and hospitals in international markets. Significant growth was also generated from the Renal Management Services business, a renal-disease management organization which creates partnerships with nephrologists to lead renal-care networks throughout the United States. Revenues generated from these services businesses increased over $80 million in both 1999 and 1998. Sales growth was also strong in the base peritoneal and hemodialysis businesses, driven in part by continued penetration of products used for peritoneal dialysis. Emerging markets in the Latin American and Asian regions continue to generate the strongest growth. Fluctuations in currency exchange rates favorably impacted sales growth in 1999 by approximately two points and unfavorably impacted sales growth in 1998 by approximately three points. The acquisition of Bieffe in the beginning of 1998 contributed to the 1998 sales growth rate, adding approximately three points to the total segment sales growth rate for the year. Sales in certain geographic markets continue to be affected by strong pricing pressures and the effects of market consolidation. These issues are expected to continue to be more than offset by increased penetration of peritoneal dialysis, growth in the sales of hemodialysis products, the development of new businesses and technologies, and alliances and acquisitions. In December 1999, the company entered into a definitive agreement to acquire Althin Medical AB, a manufacturer of hemodialysis products, as further discussed in Note 3 to the Consolidated Financial Statements.
GROSS MARGIN AND EXPENSE RATIOS years ended December 31 (as a percent of sales) 1999 1998 1997 - ---------------------------------------------------------------------- Gross margin 44.1% 44.9% 45.3% Marketing and administrative expenses 20.5% 21.2% 21.8% ======================================================================
The gross margin decreased in 1999 and 1998 due principally to a less favorable products and services mix. In 1998 and early 1999, the gross margin was also impacted by the recognition of unfavorable manufacturing variances. These variances related to increased investments and reduced production in 1998 in the Blood Therapies segment in response to heightened FDA regulatory activity with respect to safety and quality systems. Changes in currency exchange rates also unfavorably impacted the gross margin in 1998. Marketing and administrative expenses decreased as a percent of sales in both 1999 and 1998 as the company has more than offset the incremental costs of expanding into developing markets and new business initiatives with a continued focus on cost control across all businesses. In addition, the company has realized benefits from the integration of the acquisitions of Bieffe, Ohmeda, Immuno International AG (Immuno) and other recent acquisitions. Management expects to further leverage costs in 2000.
RESEARCH AND DEVELOPMENT Percent increase (decrease) years ended December 31 (in millions) 1999 1998 1997 1999 1998 - ------------------------------------------------------------------------------- Research and development expenses $ 332 $ 323 $ 339 3% (5%) - ------------------------------------------------------------------------------- as a percent of sales 5% 6% 6% ===============================================================
Baxter International 1999 Annual Report 23 Management's Discussion and Analysis Research and development (R&D) expenses above exclude the in-process R&D (IPR&D) charges relating to the acquisitions of Somatogen, Inc. in 1998 and Immuno in 1997, both of which are included in the Blood Therapies segment and are further discussed in Note 3 to the Consolidated Financial Statements. R&D expenses increased in 1999 primarily due to increased spending in the Blood Therapies segment, principally relating to the next-generation recombinant product. The decrease in 1998 was principally due to the September 1998 decision to end the clinical development of the company's first-generation oxygen-carrying therapeutic program called HemAssist(R) (DCLHb). Excluding R&D expenses relating to the terminated HemAssist (DCLHb) program, R&D expenses decreased four percent in 1998. The decrease in 1998 is also partially due to a rationalization of R&D spending in the Blood Therapies segment as a result of the acquisition of Immuno in the beginning of 1997. Management expects the growth rate in R&D expenses will increase in the future as the company focuses on the next-generation oxygen-therapeutics program and the next-generation recombinant product within its Blood Therapies segment, as well as on other R&D initiatives across the three segments. With respect to the pending acquisition of North American Vaccine, Inc., it is expected that a substantial portion of the purchase price will be allocated to IPR&D and immediately expensed. EXIT AND OTHER REORGANIZATION COSTS Refer to Note 4 to the Consolidated Financial Statements for a discussion of charges recorded in 1998 and 1995 for exit and other reorganization costs. The company recorded a $122 million charge in 1998 that related principally to the decision to end the clinical development of HemAssist (DCLHb), as discussed above, exit certain non-strategic investments, primarily in Asia, and reorganize certain other activities. The 1998 program is substantially complete as originally planned. The expected benefits of the program have been achieved. Management believes remaining reserves for exit and other reorganization programs are adequate to complete the actions contemplated by the program. Future cash expenditures will be funded with cash generated from operations. Management anticipates savings from the programs will be partially invested in R&D, new business initiatives, and expansion into growing international markets. The 1995 program is complete. Management's objectives for the plan were met for the originally estimated cost. This program, which eliminated excess capacity and reduced manufacturing costs, will help mitigate future exposure to gross margin erosion from pricing pressures, primarily in the United States. Acquisition Reserves Based on plans formulated at acquisition date, reserves have been established for certain acquisitions as part of the allocation of purchase price. The reserves principally consisted of employee severance costs associated with headcount reductions at the acquired companies, and the costs of exiting activities and terminating distribution, lease and other contracts of the acquired companies that existed prior to the respective dates of acquisition and either continued with no economic benefit or required payment of a cancellation penalty. Refer to Note 3 for further information. Actions executed to date and anticipated in the future are substantially consistent with the original plans. Management believes remaining reserves are adequate to complete the actions contemplated by the plans. NET LITIGATION CHARGE As further discussed in Note 12 to the Consolidated Financial Statements, the company recorded a $178 million net litigation charge in 1998 relating to mammary implants, plasma-based therapies (relating to the Blood Therapies segment) and other litigation. OTHER INCOME AND EXPENSE Net interest expense declined in 1999 and 1998 due principally to the impact of a greater mix of foreign currency denominated debt, which bears a lower average interest rate and, in 1999, to slightly lower average debt levels. In 1998, the impact of a favorable currency denomination mix of debt was partially offset by higher average debt levels due primarily to acquisitions. Goodwill amortization did not change significantly from 1998 to 1999 and increased from 1997 to 1998 primarily as a result of the acquisition of Bieffe. Other expense in 1999 principally related to losses on disposals of nonstrategic investments and fluctuations in currency exchange rates. Included in other income in 1998 was a pretax gain of $20 million relating to the disposal of a nonstrategic investment in the I.V. Systems/Medical Products segment. Included in other income in 1997 was a pretax gain of $17 million relating to the disposal of a nonstrategic investment in the Blood Therapies segment. Other income in 1997 also included a pretax gain of $32 million relating to the divestiture by the Blood Therapies segment of certain assets of its Immunotherapy division, as further discussed in Note 3 to the Consolidated Financial Statements. 24 Baxter International 1999 Annual Report PRETAX INCOME Refer to Note 13 to the Consolidated Financial Statements for a summary of financial results by segment. I.V. Systems/Medical Products Pretax income increased eight percent in 1999 due principally to strong sales, particularly of the Colleague single-channel and triple-channel volumetric pumps and anesthesia products. In addition, the gross margin improved, particularly in the United States, due to a more favorable sales mix and manufacturing efficiencies. Pretax income increased 18 percent in 1998 due principally to acquisitions, introduction of the Colleague single-channel pump in late 1997 and the triple-channel pump in 1998 and an improved gross margin due to a more favorable sales mix and leveraging of costs, partially offset by the effects of unfavorable currency fluctuations. Blood Therapies Pretax income increased eight percent in both 1999 and 1998. As discussed above, increased regulatory activity in the factor concentrates industry in 1998 unfavorably impacted the sales growth and gross profit margin in this segment. Partially offsetting the impact of this activity were decreased R&D spending and other synergies as management integrated recent acquisitions. Pretax profits increased in late 1998 and 1999 as supply constraints in the plasma-based products industry eased, as production of Recombinate increased as a result of the company's manufacturing capacity expansion, and as profits increased in the blood-collection businesses. Partially offsetting growth in 1998 was reduced profitability in the blood-collection businesses due primarily to a less favorable mix of sales, pricing pressures due to competition, and the above- mentioned regulatory activity, which has affected certain of the segment's customers. Renal Pretax income grew 43 percent in 1999 and declined 26 percent in 1998. The decline in 1998 was principally due to significant unfavorable currency exchange rate fluctuations, primarily with respect to the Japanese Yen. The increase in 1999 was principally due to the strengthening of the Japanese Yen. Segment results do not include income or expense relating to the company's hedging activities. Excluding the effects of currency, growth was driven by the base peritoneal dialysis and hemodialysis businesses and manufacturing efficiencies, partially offset by the effect of a less favorable sales mix and investments in the business. INCOME TAXES Excluding the divestiture gains and the charges for IPR&D, net litigation and exit and other reorganization costs, and a related provision for U.S. taxes on previously unremitted foreign earnings, the effective income tax rate for continuing operations before cumulative effect of accounting change was approximately 26 percent, 24 percent and 24 percent in 1999, 1998 and 1997, respectively. The rate increase in 1999 was primarily due to a larger portion of the company's earnings generated in higher tax jurisdictions. Management does not expect a significant change in the effective tax rate in 2000.
INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE Percent increase (decrease) years ended December 31 (in millions) 1999 1998 1997 1999 1998 - -------------------------------------------------------------------------------- Income from continuing operations before cumulative effect of accounting change $779 $275 $371 183% (26%) ================================================================================
Excluding the divestiture gains and the charges for IPR&D, net litigation, and exit and other reorganization costs, as applicable in 1998 and 1997, the 1999 and 1998 growth in income from continuing operations before cumulative effect of accounting change would have been 15 percent and 20 percent, respectively. EARNINGS PER SHARE Excluding the divestiture gains and the charges for IPR&D, net litigation, and exit and other reorganization costs, as applicable in 1998 and 1997, earnings per diluted share in 1998 and 1997 would have been $2.34 and $1.99, respectively, and the 1999 and 1998 growth would have been 13 percent and 17 percent, respectively. Baxter International 1999 Annual Report 25 Management's Discussion and Analysis DISCONTINUED OPERATION Income from discontinued operation grew 60 percent, or approximately $24 million, in 1999 and, excluding a $132 million IPR&D charge relating to the acquisition of Research Medical, Inc. in 1997, declined 34 percent in 1998. These results primarily reflect growth in the higher-margin tissue heart valves and valve-repair product lines, partially offset by reduced profits in certain other product and service lines due to pricing, declines in surgical procedures, and competitive pressures. Favorable currency exchange rate fluctuations and an improved mix of sales contributed to the growth in pretax income in 1999. Unfavorable currency exchange rate fluctuations, costs relating to headcount reductions and a loss associated with the impairment of a minority equity investment contributed to the decline in 1998. Partially offsetting these increased costs in 1998 were insurance proceeds associated with hurricane damage at a manufacturing facility. 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 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 impact of the new SOP is not material. LIQUIDITY AND CAPITAL RESOURCES Cash flows from continuing operations as reported in the Consolidated Statements of Cash Flows increased during 1999 due principally to higher earnings and a decrease in inventories, as the company focuses on growing the business while effectively managing inventory levels. These increases were partially offset by higher net cash outflows relating to litigation (litigation payments net of insurance recoveries), and higher other asset balances. In 1998, net cash inflows from continuing operations increased principally due to higher earnings before noncash charges, lower net cash outflows relating to litigation (primarily due to higher insurance recoveries in 1998 relating to the company's mammary implant and plasma-based therapies litigation), a higher accounts payable and accrued liabilities balance, and a lower increase in inventories. Partially offsetting these factors in 1999 and 1998 were increases in accounts receivable due to sales growth from acquisitions and sales in certain regions outside the United States, which have longer collection periods. In addition, approximately $65 million and $150 million in proceeds were generated from the sales of certain receivables in 1999 and 1998, respectively. Such receivables were sold to reduce the overall costs of financing the receivables. Cash flows from discontinued operation relate to the company's CardioVascular business. Cash flows were relatively unchanged from 1998 to 1999, with increased earnings and a lower accounts receivable balance partially offset by an increase in inventories and a decrease in liabilities. Included in cash flows in 1998 were approximately $22 million in proceeds from the sales of certain receivables. Refer to Note 2 to the Consolidated Financial Statements for further information regarding the discontinued operation. Cash outflows relating to investing activities decreased in both 1999 and 1998. Capital expenditures (including additions to the pool of equipment leased or rented to customers) increased 13 percent and 22 percent in 1999 and 1998, respectively, as the company increased its investments in various capital projects across the three segments. Capital expenditures are made at a sufficient level to support the strategic and operating needs of the businesses. Recent significant expenditures have included implementation of a new integrated operational system and continuing expansion of facilities for the production of genetically engineered proteins. Management expects to invest approximately $700 million in capital expenditures in 2000. Net cash outflows relating to acquisitions decreased in 1999 and 1998. In 1999, net cash outflows relating to acquisitions included approximately $36 million for a contingent purchase price payment pertaining to the 1997 acquisition of Immuno. Approximately $22 million of the 1999 total related to acquisitions of dialysis centers in international markets and approximately $88 million related to the acquisition of a business in the I.V. Systems/Medical Products segment. In 1999, the company also generated approximately $42 million of cash relating to the sale and leaseback of certain assets and approximately $30 million relating to a prior year divestiture in the Blood Therapies segment. In 1998, net cash outflows relating to acquisitions included approximately $142 million pertaining to the acquisition of Bieffe, approximately $94 million related to the acquisition of Ohmeda, and the remainder primarily related to acquisitions of dialysis centers in international markets. Approximately $498 million and $48 million of the net cash flows used for acquisitions in 1997 related to the acquisitions of Immuno and Bieffe, respectively. Cash flows from financing activities decreased during 1999 and 1998. Included in the total for 1999 was $198 million in cash inflows relating to the Shared Investment Plan, which is discussed in Note 8 to the Consolidated Financial Statements. Cash received for stock issued under employee benefit plans increased in 1999 and 1998. Offsetting these increased inflows were increased common stock cash dividends due to a higher number of shares outstanding, $184 million in cash outflows in 1999 related to repurchases of Baxter common stock, as further discussed below, and other factors. 26 Baxter International 1999 Annual Report 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 their 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. The company expects to generate more than $500 million in operational cash flow from continuing operations in 2000. The following table reconciles cash flows from continuing operations, as determined by generally accepted accounting principles (GAAP), to operational cash flow, which is not a measure defined by GAAP:
Brackets denote cash outflows years ended December 31 (in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Cash flows from continuing operations per the company's Consolidated Statements of Cash Flows $977 $837 $472 Capital expenditures (631) (556) (454) Net interest after tax 52 74 78 Other 190 24 57 - -------------------------------------------------------------------------------- Operational cash flow - continuing operations 588 379 153 - -------------------------------------------------------------------------------- Operational cash flow - discontinued operation 131 136 121 - -------------------------------------------------------------------------------- Total operational cash flow $719 $515 $274 ================================================================================
The company's net-debt-to-capital ratio was 40.2 percent and 48.4 percent at December 31, 1999 and 1998, respectively. During 1998, a wholly-owned subsidiary of the company entered into an $800 million revolving credit facility. Due to the subsidiary's covenants under the facility, certain assets are restricted to the parent company. Refer to Note 5 to the Consolidated Financial Statements for further information regarding the company's credit facilities, long-term debt and lease obligations, and related restrictions and covenants. 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 is substantially complete as of December 31, 1999. In November 1999, the board of directors authorized the repurchase of an additional $500 million over a period of several years. As the company's net- debt-to-capital ratio is now in the targeted low 40 percent range, management has resumed its stock repurchase program, and expects to continue to repurchase common stock in 2000. As of December 31, 1999, the company can issue up to $550 million in aggregate principal amount of additional senior unsecured debt securities under effective registration statements filed with the Securities and Exchange Commission. The company's debt ratings on senior debt are A3 by Moody's, A by Standard & Poor's and A- by Duff & Phelps. 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. In December 1999, the Baxter board of directors declared a quarterly dividend on the company's common stock of 29.10 cents per share (annualized rate of $1.164 per share), which was paid in January 2000. This is expected to be the last cash dividend payable prior to the spin-off of the CardioVascular business. Subsequent to the spin-off, Baxter expects to continue to pay a dividend at the current rate and will do so on an annual basis, with the first annual dividend expected to be declared in December 2000 and paid in January 2001. The company presently anticipates that the dividend payout ratio will decrease over time in order to optimize the company's capital structure and become more consistent with the payout ratios of peer companies. EURO CONVERSION On January 1, 1999, 11 of the 15 countries that are members of the European Union introduced a new currency called the "Euro." The conversion rates between the Euro and the participating nations' currencies were fixed irrevocably as of January 1, 1999. Prior to full implementation of the new currency on January 1, 2002, there is a transition period during which parties may use either the existing currencies or the Euro for financial transactions. Baxter International 1999 Annual Report 27 Management's Discussion and Analysis Action plans are currently being implemented which are expected to result in compliance with all laws and regulations relating to the Euro conversion. Management expects that the adaptation of its information technology and other systems to accommodate Euro-denominated transactions as well as the requirements of the transition period will not have a material impact on the company's results of operations. The company is also addressing the impact of the Euro on currency exchange-rate risk, taxation, contracts, competition and pricing. While it is not possible to accurately predict the impact the Euro will have on the company's business or on the economy in general, management currently does not anticipate that the Euro conversion will have a material adverse impact on the company's results of operations or financial condition. FINANCIAL INSTRUMENT MARKET RISK The company's business and financial results are affected by fluctuations in world financial markets, including currency exchange rates and interest rates. The company's hedging policy attempts to manage these risks to an acceptable level based on management's judgment of the appropriate trade-off between risk, opportunity and costs. In hedging its currency and interest rate risks, the company utilizes primarily forward contracts, options and swaps. The company does not hold financial instruments for trading or speculative purposes. Currency Risk The company is primarily exposed to currency exchange-rate risk with respect to its transactions and net assets denominated in Japanese Yen, the Euro and Swiss Franc. Business activities in various currencies expose the company to the risk that the eventual net dollar cash inflows resulting from transactions with foreign customers and suppliers denominated in foreign currencies may be adversely affected by changes in currency exchange rates. The company manages these risks utilizing various types of foreign exchange contracts. The company also enters into foreign exchange contracts to hedge anticipated, but not yet committed sales expected to be denominated in foreign currencies. In addition, the company hedges certain of its net investments in international affiliates. Such contracts hedge the U.S. dollar value of foreign currency denominated net assets from the effects of volatility in currency exchange rates by creating debt denominated in the respective currencies of the underlying net assets. Any changes in the carrying value of these net investments that are a result of fluctuations in currency exchange rates are offset by changes in the carrying value of the foreign currency denominated debt that are a result of the same fluctuations in currency exchange rates. As part of its risk-management process, the company uses a value-at-risk (VAR) model related to its foreign currency financial instruments to measure a potential loss in earnings as a result of adverse movements in currency exchange rates. The company utilizes a Monte Carlo simulation, with a 95 percent confidence level, using implied volatilities and correlations (as of the measurement date) to estimate this potential loss. The company's calculated VAR as of fiscal year-end 1999 and 1998, assuming a one-year holding period, is $72 million and $42 million, respectively. These amounts exclude the potential effects of any changes in the value of the underlying transactions or balances. The VAR increased in 1999 primarily due to a larger portfolio of instruments as a result of an increase in the amount of underlying transactions denominated in foreign currencies and a lengthening of the future period hedged, higher implied volatilities with respect to the Japanese Yen and the Euro, and a higher volume of sold call options. As part of the strategy to manage risk while minimizing hedging costs, the company utilizes sold call options in conjunction with purchased put options to create collars. Actual future gains or losses may differ from these estimates based upon actual fluctuations in market rates, operating exposures and the timing thereof, and changes in the company's portfolio of derivatives during the measured periods. In addition, the assumption within the value-at-risk model is that changes in currency exchange rates are adverse, which may not be the case. Any loss incurred on the financial instruments is expected to be offset by the effects of currency movements on the respective underlying hedged transactions and balances. However, since the company's risk-management program does not require the hedging of all exposures, there may be currency exchange-rate gains or losses in the future. The company's actual experience in 1999 and 1998 was favorable as compared to the VAR calculated as of fiscal year-end 1998 and 1997, respectively. Interest Rate Risk As part of its risk-management program, the company performs sensitivity analyses to assess potential gains and losses in earnings and changes in fair value relating to hypothetical movements in interest rates. A 45 basis-point increase in interest rates (approximately 10 percent of the company's weighted average interest rate) affecting the company's financial instruments, including debt obligations and related derivatives, and investments, would have an immaterial effect on the company's 1999 and 1998 pretax earnings and on the fair value of the company's fixed-rate financial instruments as of the end of such fiscal years. 28 Baxter International 1999 Annual Report As discussed in Note 6 to the Consolidated Financial Statements, the fair values of the company's long-term litigation liabilities and related insurance receivables were computed by discounting the expected cash flows based on currently available information. A 10 percent movement in the assumed discount rate would have an immaterial effect on the fair values of those assets and liabilities. Other Risks With respect to the company's unconsolidated investments, management believes any reasonably possible near-term losses in earnings, cash flows and fair values would not be material. YEAR 2000 The company implemented a comprehensive program to address Year 2000 issues and all necessary implementation efforts were completed as of December 31, 1999. There have been no material Year 2000 issues associated with the company's internal systems, customers, products and services, or suppliers and other critical business partners. Management does not expect any material Year 2000 issues in the future. None of the company's systems were upgraded or replaced solely to address Year 2000 issues, although in some cases the timing of the system upgrades and replacements was accelerated. The total cost of these system upgrades was approximately $150 million. No critical projects were deferred due to the Year 2000 program. Incremental out-of-pocket costs of the Year 2000 program, which were required to be expensed as incurred, were immaterial to the company's financial results. LEGAL PROCEEDINGS See Note 12 to the Consolidated Financial Statements 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, as well as other matters. Upon resolution of any of these uncertainties, the company may incur charges in excess of presently established reserves. While such a future charge could have a material adverse effect on the company's net income or cash flows in the period in which it is recorded or paid, based on the advice of counsel, management believes that any outcome of these actions, individually or in the aggregate, will not have a material adverse effect on the company's consolidated financial position. Based on the company's assessment of the costs associated with its environmental responsibilities, including recurring administrative costs, capital expenditures and other compliance costs, such costs have not had, and in management's opinion, will not have in the foreseeable future, a material effect on the company's financial position, results of operations, cash flows or competitive position. FORWARD-LOOKING INFORMATION The matters discussed in this section include forward-looking statements that involve risks and uncertainties, including, but not limited to, currency exchange rates, technological advances in the medical field, unforeseen information technology issues related to the company or third parties, economic conditions, demand and market acceptance risks for new and existing products, technologies and health-care services, the impact of competitive products and pricing, manufacturing capacity, new plant start-ups, global regulatory, trade and tax policies, continued price competition, product development risks, including technological difficulties, ability to enforce patents, unforeseen commercialization and regulatory factors, and other risks more completely reflected in the company's filings with the Securities and Exchange Commission. 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. It is not possible to predict the extent to which the company or the health-care industry might be adversely affected by these factors in the future. NEW ACCOUNTING AND DISCLOSURE STANDARD In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement No. 133), 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". Statement No. 133, as amended, requires companies to record derivatives on the balance sheet date 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 derivative and whether it qualifies for hedge accounting. The company will adopt SFAS No. 133, as amended, as required no later than January 1, 2001, and is currently assessing the impact of adoption on its consolidated financial statements. Baxter International 1999 Annual Report 29 Management's Responsibilities for Financial Reporting The accompanying financial statements and other financial data have been prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with accounting principles generally accepted in the United States and include amounts that are based upon management's best estimates and judgments. Management is responsible for establishing and maintaining a system of internal control over financial reporting and safeguarding assets against unauthorized acquisition, use or disposition. This system is designed to provide reasonable assurance as to the integrity and reliability of financial reporting and asset safeguarding. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal control, and that the cost of such systems should not exceed the benefits to be derived from them. Management believes that the foundation of an appropriate system of internal control is a strong ethical company culture and climate. The Corporate Responsibility Office, which reports to the Public Policy Committee of the board of directors, is responsible for developing and communicating appropriate business practices, policies and initiatives; maintaining independent channels of communication for providing guidance and reporting potential business practice violations; and monitoring compliance with the company's business practices, including annual compliance certifications by senior managers worldwide. Additionally, a professional staff of corporate auditors reviews the design of the related internal control system and the accounting policies and procedures supporting this system and compliance with them. The results of these reviews are reported at least annually to the Public Policy and/or Audit Committees of the board of directors. PricewaterhouseCoopers LLP performs audits, in accordance with generally accepted auditing standards, which include a review of the system of internal controls and result in assurance that the financial statements are, in all material respects, fairly presented. The board of directors, through its Audit Committee comprised solely of non- employee directors, is responsible for overseeing the integrity and reliability of the company's accounting and financial reporting practices and the effectiveness of its system of internal controls. PricewaterhouseCoopers LLP and the corporate auditors meet regularly with, and have access to, this committee, with and without management present, to discuss the results of the audit work. /s/ Harry M. Jansen Kraemer, Jr. /s/ Brian P. Anderson - -------------------------------- ---------------------- Harry M. Jansen Kraemer, Jr. Brian P. Anderson Chairman and Chief Executive Senior Vice President and Chief Financial Officer Officer - -------------------------------------------------------------------------------- Report of Independent Accountants Board of Directors and Stockholders of Baxter International Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, cash flows and stockholders' equity and comprehensive income present fairly, in all material respects, the financial position of Baxter International Inc. (the company) and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP - ------------------------------- PricewaterhouseCoopers LLP Chicago, Illinois February 16, 2000 30 Baxter International 1999 Annual Report Consolidated Balance Sheets
as of December 31 (in millions, except share information) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ CURRENT ASSETS Cash and equivalents $ 606 $ 709 Accounts receivable 1,504 1,429 Notes and other current receivables 148 317 Inventories 1,116 1,167 Short-term deferred income taxes 216 453 Prepaid expenses 229 220 ---------------------------------------------------------------------------------------- Total current assets 3,819 4,295 - ------------------------------------------------------------------------------------------------------------------------ PROPERTY, PLANT AND EQUIPMENT, NET 2,650 2,445 - ------------------------------------------------------------------------------------------------------------------------ OTHER ASSETS Net assets of discontinued operation 1,231 1,275 Goodwill and other intangible assets 921 930 Insurance receivables 301 378 Other 722 550 ---------------------------------------------------------------------------------------- Total other assets 3,175 3,133 ---------------------------------------------------------------------------------------- Total assets $9,644 $9,873 ======================================================================================================================== CURRENT LIABILITIES Short-term debt $ 125 $ 156 Current maturities of long-term debt and lease obligations 130 115 Accounts payable and accrued liabilities 1,805 2,024 Income taxes payable 640 536 ---------------------------------------------------------------------------------------- Total current liabilities 2,700 2,831 - ------------------------------------------------------------------------------------------------------------------------ LONG-TERM DEBT AND LEASE OBLIGATIONS 2,601 3,096 - ------------------------------------------------------------------------------------------------------------------------ LONG-TERM DEFERRED INCOME TAXES 311 461 - ------------------------------------------------------------------------------------------------------------------------ LONG-TERM LITIGATION LIABILITIES 273 246 - ------------------------------------------------------------------------------------------------------------------------ OTHER LONG-TERM LIABILITIES 411 400 - ------------------------------------------------------------------------------------------------------------------------ COMMITMENTS AND CONTINGENCIES - ------------------------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY Common stock, $1 par value, authorized 350,000,000 shares, issued 294,363,251 shares in 1999 and 291,248,251 shares in 1998 294 291 Common stock in treasury, at cost, 4,163,737 shares in 1999 and 4,919,141 shares in 1998 (269) (210) Additional contributed capital 2,282 2,064 Retained earnings 1,415 990 Accumulated other comprehensive loss (374) (296) ---------------------------------------------------------------------------------------- Total stockholders' equity 3,348 2,839 ---------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $9,644 $9,873 ========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. Baxter International 1999 Annual Report 31 Consolidated Statements of Income
years ended December 31 (in millions, except per share data) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATIONS Net sales $6,380 $5,706 $5,259 Costs and expenses Cost of goods sold 3,568 3,142 2,877 Marketing and administrative expenses 1,311 1,208 1,145 Research and development expenses 332 323 339 In-process research and development - 116 220 Exit and other reorganization costs - 122 - Net litigation charge - 178 - Interest, net 87 124 131 Goodwill amortization 19 18 11 Other expense (income) 11 (18) (34) --------------------------------------------------------------------------------------------- Total costs and expenses 5,328 5,213 4,689 Income from continuing operations before income taxes and cumulative effect of accounting change 1,052 493 570 Income tax expense 273 218 199 --------------------------------------------------------------------------------------------- Income from continuing operations before cumulative effect of accounting change 779 275 371 Discontinued operation Income (loss) from discontinued operation, net of applicable income tax expense of $19 in 1999, $16 in 1998 and $24 in 1997 64 40 (71) Net costs associated with effecting the business distribution (19) - - --------------------------------------------------------------------------------------------- Total discontinued operation 45 40 (71) --------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 824 315 300 Cumulative effect of accounting change, net of income tax benefit of $7 (27) - - --------------------------------------------------------------------------------------------- Net income $ 797 $ 315 $ 300 ==================================================================================================================================== PER SHARE DATA Earnings per basic common share Continuing operations, before cumulative effect of accounting change $ 2.69 $ .97 $ 1.34 Discontinued operation .15 .14 (.26) Cumulative effect of accounting change (.09) - - --------------------------------------------------------------------------------------------- Net income $ 2.75 $ 1.11 $ 1.08 ============================================================================================= Earnings per diluted common share Continuing operations, before cumulative effect of accounting change $ 2.64 $ .95 $ 1.31 Discontinued operation .15 .14 (.25) Cumulative effect of accounting change (.09) - - --------------------------------------------------------------------------------------------- Net income $ 2.70 $ 1.09 $ 1.06 ============================================================================================= Weighted average number of common shares outstanding Basic 290 284 278 Diluted 295 289 282 ====================================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 32 Baxter International 1999 Annual Report Consolidated Statements of Cash Flows
years ended December 31 (in millions) (brackets denote cash outflows) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM Income from continuing operations before cumulative CONTINUING OPERATIONS effect of accounting change $ 779 $ 275 $ 371 Adjustments Depreciation and amortization 372 344 318 Deferred income taxes 92 (56) 3 Gain (loss) on asset dispositions 13 (23) (48) In-process research and development - 116 220 Exit and other reorganization costs - 122 - Net litigation charge - 178 - Other 20 2 8 Changes in balance sheet items Accounts receivable (103) (153) (59) Inventories 17 (79) (112) Accounts payable and accrued liabilities 30 165 83 Net litigation payments and other (243) (54) (312) --------------------------------------------------------------------------------------------- Cash flows from continuing operations 977 837 472 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM DISCONTINUED OPERATION 106 102 86 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATIONS 1,083 939 558 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM Capital expenditures (529) (461) (367) INVESTING ACTIVITIES Additions to the pool of equipment leased or rented to customers (102) (95) (87) Acquisitions (net of cash received) and investments in affiliates (179) (319) (606) Divestitures and other asset dispositions 75 3 (23) --------------------------------------------------------------------------------------------- Cash flows from investing activities (735) (872) (1,083) - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM Issuances of debt and lease obligations 764 1,143 855 FINANCING ACTIVITIES Redemption of debt and lease obligations (481) (598) (465) Increase (decrease) in debt with maturities of three months or less, net (552) (159) 81 Common stock cash dividends (338) (331) (316) Stock issued under Shared Investment Plan 198 - - Stock issued under employee benefit plans 148 118 110 Purchases of treasury stock (184) - - --------------------------------------------------------------------------------------------- Cash flows from financing activities (445) 173 265 - ------------------------------------------------------------------------------------------------------------------------------------ EFFECT OF CURRENCY EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS (6) 4 (36) - ------------------------------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN CASH AND EQUIVALENTS (103) 244 (296) - ------------------------------------------------------------------------------------------------------------------------------------ CASH AND EQUIVALENTS AT BEGINNING OF YEAR 709 465 761 - ------------------------------------------------------------------------------------------------------------------------------------ CASH AND EQUIVALENTS AT END OF YEAR $ 606 $ 709 $ 465 ==================================================================================================================================== Supplemental information Interest paid, net of portion capitalized $ 150 $ 191 $ 174 Income taxes paid $ 197 $ 143 $ 170 ====================================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. Baxter International 1999 Annual Report 33 Consolidated Statements of Stockholders' Equity and Comprehensive Income
years ended December 31 (in millions) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK Beginning of year $ 291 $ 288 $ 288 Common stock issued for acquisitions - 3 - Stock issued under Shared Investment Plan 3 - - - -------------------------------------------------------------------------------------------------------------------------------- End of year $ 294 $ 291 $ 288 - -------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK IN TREASURY Beginning of year $ (210) $ (329) $ (611) Common stock issued for acquisitions - - 178 Purchases of common stock (184) - - Common stock issued under employee benefit plans 125 119 104 - -------------------------------------------------------------------------------------------------------------------------------- End of year $ (269) $ (210) $ (329) - -------------------------------------------------------------------------------------------------------------------------------- ADDITIONAL CONTRIBUTED CAPITAL Beginning of year $2,064 $1,876 $1,825 Common stock issued for acquisitions - 189 45 Stock issued under Shared Investment Plan 195 - - Common stock issued under employee benefit plans 23 (1) 6 - -------------------------------------------------------------------------------------------------------------------------------- End of year $2,282 $2,064 $1,876 - -------------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Beginning of year $ 990 $1,006 $1,022 Net income 797 315 300 Elimination of reporting lag for certain international operations (34) - - Common stock cash dividends (338) (331) (316) - -------------------------------------------------------------------------------------------------------------------------------- End of year $1,415 $ 990 $1,006 - -------------------------------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE LOSS Beginning of year $ (296) $ (222) $ (20) Other comprehensive loss (78) (74) (202) - -------------------------------------------------------------------------------------------------------------------------------- End of year $ (374) $ (296) $ (222) - -------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity $3,348 $2,839 $2,619 ================================================================================================================================ COMPREHENSIVE INCOME Currency translation adjustments, net of tax (benefit) of $87 in 1999 and ($56) in 1998 $ (80) $ (75) $ (202) Unrealized net gain on marketable equity securities, net of tax of $1 in 1999 and $1 in 1998 2 1 - - -------------------------------------------------------------------------------------------------------------------------------- Other comprehensive loss (78) (74) (202) Net income 797 315 300 Elimination of reporting lag for certain international operations, net of tax benefit of $22 (34) - - - -------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income $ 685 $ 241 $ 98 ================================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 34 Baxter International 1999 Annual Report Notes to Consolidated Financial Statements ================================================================================ 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial statement presentation The preparation of the financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Basis of consolidation The consolidated financial statements include the accounts of Baxter International Inc. and its majority-owned, controlled subsidiaries (Baxter or the company). 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 reporting lag for the remainder of the international operations will be eliminated in 2001. Foreign currency translation The results of operations for non-U.S. subsidiaries, other than those located in highly inflationary countries, are translated into U.S. dollars using the average exchange rates during the year, while assets and liabilities are translated using period-end rates. Resulting translation adjustments are recorded as currency translation adjustments within other comprehensive income. Where foreign affiliates operate in highly inflationary economies, non-monetary amounts are remeasured at historical exchange rates while monetary assets and liabilities are remeasured at the current rate with the related adjustments reflected in the consolidated statements of income. Revenue recognition The company's practice is to recognize revenues from product sales when title transfers. Inventories
as of December 31 (in millions) 1999 1998 - ------------------------------------------------- Raw materials $ 251 $ 282 Work in process 193 226 Finished products 672 659 - ------------------------------------------------- Total inventories $1,116 $1,167 =================================================
Inventories are stated at the lower of cost (first-in, first-out method) or market value. Market value for raw materials is based on replacement costs and, for other inventory classifications, on net realizable value. Reserves for excess and obsolete inventory were $78 million and $97 million at December 31, 1999 and 1998 respectively. Property, plant and equipment
as of December 31 (in millions) 1999 1998 - ----------------------------------------------------------------- Land $ 93 $ 92 Buildings and leasehold improvements 987 1,009 Machinery and equipment 2,615 2,526 Equipment with customers 489 444 Construction in progress 525 437 - ----------------------------------------------------------------- Total property, plant and equipment, at cost 4,709 4,508 Accumulated depreciation and amortization (2,059) (2,063) - ----------------------------------------------------------------- Property, plant and equipment, net $ 2,650 $ 2,445 =================================================================
Depreciation and amortization are principally calculated on the straight-line method over the estimated useful lives of the related assets, which range from 20 to 50 years for buildings and improvements and from three to 15 years for machinery and equipment. Leasehold improvements are amortized over the life of the related facility lease or the asset, whichever is shorter. Straight-line and accelerated methods of depreciation are used for income tax purposes. Accumulated amortization for assets under capital lease was $10 million and $5 million at December 31, 1999 and 1998, respectively. Depreciation expense was $290 million, $269 million and $266 million in 1999, 1998 and 1997, respectively. Repairs and maintenance expense was $97 million, $93 million and $96 million in 1999, 1998 and 1997, respectively. Goodwill and other intangible assets
as of December 31 (in millions) 1999 1998 - ----------------------------------------------------- Goodwill $ 737 $ 684 Accumulated amortization (113) (94) - ----------------------------------------------------- Net goodwill 624 590 - ----------------------------------------------------- Other intangible assets 677 688 Accumulated amortization (380) (348) - ----------------------------------------------------- Net other intangible assets 297 340 - ----------------------------------------------------- Goodwill and other intangible assets $ 921 $ 930 =====================================================
Intangible assets are amortized on a straight-line basis. Goodwill is amortized over estimated useful lives ranging from 15 to 40 years; other intangible assets, consisting of purchased patents, trademarks and other identified rights, are amortized over their legal or estimated useful lives, whichever is shorter (generally not exceeding 17 years). The company's policy is to review the carrying amounts of goodwill and other intangible assets whenever events or changes in Baxter International 1999 Annual Report 35 Notes to Consolidated Financial Statements circumstances indicate that the carrying amount of an asset may not be recoverable. Such events or circumstances might include a significant decline in market share, a significant decline in profits, rapid changes in technology, significant litigation or other items. In evaluating the recoverability of goodwill and other intangible assets, management's policy is to compare the carrying amounts of such assets with the estimated undiscounted future operating cash flows. In the event an impairment exists, an impairment charge would be determined by comparing the carrying amounts of the asset to the applicable estimated future cash flows, discounted at a risk-adjusted interest rate. In addition, the remaining amortization period for the impaired asset would be reassessed and revised if necessary. Management does not believe the carrying amounts of goodwill and other intangible assets are impaired at December 31, 1999. Earnings per share (EPS) The numerator for both basic and diluted 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:
years ended December 31 (in million of shares) 1999 1998 1997 - -------------------------------------------------------------------------------- Basic EPS 290 284 278 - -------------------------------------------------------------------------------- Effect of dilutive securities Employee stock options 4 5 4 Employee stock purchase plans and equity forward agreements 1 - - - -------------------------------------------------------------------------------- Diluted EPS 295 289 282 ================================================================================
Comprehensive income Comprehensive income encompasses all changes in stockholders' equity other than those arising from stockholders, and generally consists of net income, currency translation adjustments and unrealized net gains and losses on marketable equity securities. Accumulated currency translation adjustments were ($377) million, ($297) million, and ($222) million at December 31, 1999, 1998 and 1997, respectively. Accumulated unrealized net gains on marketable equity securities were immaterial in each year. 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 required that the 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. Derivatives Realized gains and losses on hedges of existing assets or liabilities are included in the carrying amounts of those assets or liabilities and ultimately are recognized in other income or expense. Gains and losses and option premiums relating to qualifying hedges of firm commitments or anticipated transactions are deferred and recognized in income as offsets of gains and losses resulting from the underlying hedged transactions. Gains and losses relating to terminations of qualifying hedges are included in the carrying amounts and amortized over the remaining expected lives of the underlying assets or liabilities. In circumstances where the underlying assets or liabilities are sold or no longer exist, any remaining carrying value adjustments are recognized in other income or expense. Gains and losses on hedges of net investments are reported as currency translation adjustments in stockholders' equity. The interest rate differential relating to interest rate swaps used to hedge debt obligations and net investments in foreign affiliates is reflected as an adjustment to interest expense over the lives of the swaps. Equity forward agreements are accounted for in accordance with their settlement terms and are recorded directly to equity. Cash flows from derivatives are classified in the same category as the cash flows from the related investment, borrowing or foreign exchange activity. Cash and equivalents Cash and equivalents include cash, certificates of deposit and marketable securities with an original maturity of three months or less. Reclassifications Certain reclassifications have been made to conform the 1998 and 1997 financial statements and notes to the 1999 presentation. New accounting pronouncement In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement No. 133), 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". Statement No. 133, as amended, 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 will depend on the use of the derivative and whether it qualifies for hedge accounting. The company will adopt SFAS No. 133, as amended, no later than January 1, 2001, as required, and is currently assessing the impact of adoption on its consolidated financial statements. 36 Baxter International 1999 Annual Report =============================================================================== 2 DISCONTINUED OPERATION On July 11, 1999, the board of directors of Baxter approved a plan to spin off to Baxter stockholders its CardioVascular business, to be named Edwards Lifesciences Corporation (Edwards), which provides a comprehensive line of products and services to treat late-stage cardiovascular disease. Management expects that shares of Edwards will be distributed in a tax-free distribution to Baxter stockholders on March 31, 2000. The distribution will result in Edwards operating as an independent entity with publicly traded common stock. 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 is presented for informational purposes only and does not necessarily reflect what the results of operations and financial position would have been had the business operated as a stand- alone entity.
years ended December 31 (in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Net sales $906 $893 $879 ================================================================================
Income from discontinued operation in 1999 included $19 million in net costs directly associated with effecting the business distribution. Basic and diluted EPS in 1999 relating to the net-of-tax net cost was $.07 and $.06.
as of December 31 (in millions) 1999 1998 - -------------------------------------------------------------------------------- Net current assets $ 207 $ 200 Net noncurrent assets 1,024 1,075 - -------------------------------------------------------------------------------- Total net assets $1,231 $1,275 ================================================================================
Through the issuance of new third-party debt, approximately $550 million of Baxter's existing debt will be indirectly assumed by Edwards. ================================================================================ 3 ACQUISITIONS AND DIVESTITURES Accounting for acquisitions All acquisitions during the three years ended December 31, 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. Pro forma information is not presented with respect to the acquisitions as it is not material. 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, and is being amortized on a straight-line basis over periods ranging from 15 to 40 years. As further discussed below, a portion of the purchase price for certain of the acquisitions was allocated to in-process research and development (IPR&D) which, under GAAP, was immediately expensed. Significant acquisitions The following is a summary of the company's significant recent acquisitions along with the purchase price and the allocation of the purchase price to IPR&D and intangible assets.
Acquisition Purchase Intangible assets ----------------- (in millions) date price IPR&D Goodwill Other - -------------------------------------------------------------------------------- May Somatogen, Inc. 1998 $206 $116 $2 $3 December Bieffe Medital S.p.A. 1997 188 - 124 15 Immuno December International AG 1996 569 220 96 125 ================================================================================
Somatogen, Inc. (Somatogen) was a developer of recombinant hemoglobin-based technology, which was acquired for approximately 3.5 million shares of Baxter International Inc. common stock. Somatogen shareholders are entitled to a contingent deferred cash payment of up to $2.00 per Somatogen share, or approximately $42 million, based on a percentage of sales of future products through the year 2007. Bieffe Medital S.p.A. (Bieffe) was a manufacturer of dialysis and intravenous solutions and containers. Immuno International AG (Immuno) was a manufacturer of biopharmaceutical products and services for transfusion medicine. In addition, Research Medical, Inc., which is part of the discontinued operation, was acquired in March 1997 for approximately 4.8 million shares of Baxter International Inc. common stock. In November 1999, the company entered into a definitive agreement to acquire North American Vaccine, Inc. (NAV), a developer of vaccines for the prevention of infectious diseases, for approximately $390 million. Prior to the closing of the acquisition, Baxter has guaranteed a $30 million NAV credit facility, of which $10 million of NAV borrowings were outstanding at December 31, 1999. It is expected that a substantial portion of the purchase price of NAV will be allocated to IPR&D and immediately expensed. In December 1999, the company entered into a definitive agreement to acquire Althin Medical, a manufacturer of hemodialysis products, for approximately $130 million, including assumed debt. Management is in the process of estimating the portion of the purchase price which will be allocated to IPR&D. The closings of the acquisitions are subject to certain terms and conditions. Both transactions are expected to close in the first six months of 2000. Baxter International 1999 Annual Report 37 Notes to Consolidated Financial Statements IPR&D Amounts allocated to IPR&D were determined on the basis of independent appraisals using the income approach, which measures the value of an asset by the present value of its future economic benefits. Estimated cash flows were discounted to their present values at rates of return that incorporate the risk- free rate, the expected rate of inflation, and risks associated with the particular projects, including their stages of completion. Projected revenue and cost assumptions were determined 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:
(in millions) Somatogen Immuno - -------------------------------------------------------------------------------- Oxygen-carrying therapeutics $116 Plasma-based therapies $142 Vaccines 78 - -------------------------------------------------------------------------------- Total $116 $220 ================================================================================
Somatogen was a development-stage company and no revenue had ever been generated from commercial product sales. The development of oxygen-carrying therapeutics is a strategic priority to Baxter. At the time of the acquisition, Baxter was in final-stage (Phase III) clinical trials with its HemAssist(R) (DCLHb) product. Baxter acquired Somatogen to advance the development of new generations of recombinant oxygen-carrying technology-based products with enhanced attributes. Subsequent to the date of the acquisition, Baxter decided to end its HemAssist (DCLHb) program and focus on Somatogen's next-generation program. Material net cash inflows relating to Somatogen's IPR&D were forecasted in the valuation to begin in 2004. Estimated research and development (R&D) costs to be incurred prior to 2004 were forecasted in the valuation to total approximately $100 million. A discount rate of 22 percent was used in the valuation. As the R&D efforts progress, it is currently forecasted that material net cash inflows relating to Somatogen's IPR&D as of acquisition date will not begin until after 2005. Also, it is currently estimated that over $250 million of R&D costs will be incurred between the date of acquisition and 2006, with increasing levels of spending to be incurred each year. Approximately $18 million and $10 million of R&D costs were expensed in 1999 and 1998, respectively. With respect to Immuno, the two project categories were comprised of 18 projects, many of which were comprised of multiple sub-projects. 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. Discount rates of 18 percent and 35 percent were used for plasma-based therapies and vaccines, respectively. Material net cash inflows for the most significant projects were forecasted to commence between 1998 and 2000. Assumed additional research and development expenditures prior to the various dates of project introductions totaled approximately $77 million. The projects are currently at various stages of development and virtually all of the significant projects that were in-process at the acquisition date are ongoing at December 31, 1999. As part of the post-acquisition integration and R&D rationalization process, management reassessed all of Immuno's ongoing R&D projects in conjunction with a re-evaluation of Baxter's existing R&D projects, and re-prioritized certain projects, resulting in modifications to originally planned timetables for certain of the projects. Such changes in timetables were also significantly influenced by marketplace trends and competitive factors occurring since the acquisition date. Most significantly, the timetables for certain of the plasma-based therapies projects have been delayed in order to accelerate the development of the next-generation recombinant Factor VIII concentrate for hemophilia treatment, given the strong and accelerating demand for recombinant products in the marketplace. In general, projects are not currently projected to be delayed by more than two to four years from the acquisition date timetables. Total additional R&D expenditures prior to the various dates of product introductions are not currently forecasted to be substantially different from that assumed in the model. Approximately $24 million, $25 million and $36 million of R&D costs have been expensed in 1999, 1998 and 1997, respectively. With respect to Somatogen and Immuno IPR&D, the products currently under development are at various stages of development, and substantial further research and development, pre-clinical testing and clinical trials will be required to determine their technical feasibility and commercial viability. 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 market-place 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. Acquisition reserves Based on plans formulated at acquisition date, as part of the allocation of purchase price, reserves have been established for certain acquisitions. The following is a summary of significant reserves and related activity for recent acquisitions. Actions executed to date and anticipated in the future with respect to these acquisitions are substantially consistent with the original plans. Management expects the plans to be substantially complete in accordance with the originally established timetable. Management believes remaining reserves are adequate to complete the actions contemplated by the plans. 38 Baxter International 1999 Annual Report
as of or for the years ended December 31 (in millions) Bieffe Immuno Clintec - -------------------------------------------------------------------------------- Original reserve Employee-related costs $ 6 $38 $18 Contract termination and other costs 13 41 5 ----------------------------------------------------------------------------- Total original reserve $19 $79 $23 - -------------------------------------------------------------------------------- 1997 reserve utilization n/a (4) (1) 1998 reserve utilization (3) (22) (3) 1999 reserve utilization (2) (11) (1) - -------------------------------------------------------------------------------- Balance at December 31, 1999 $14 $42 $18 ================================================================================
Employee-related costs consisted principally of employee severance associated with headcount reductions in Europe impacting various functions at the acquired companies. The headcount reductions for Immuno primarily impacted the sales and marketing functions, and for Clintec Nutrition Company (Clintec), primarily impacted the manufacturing function. Utilization of reserves for employee- related costs totaled $2 million in 1998 for Bieffe, $6 million, $16 million and $2 million in 1999, 1998 and 1997, respectively, for Immuno, and $3 million and $1 million in 1998 and 1997, respectively, for Clintec. Contract termination and other costs related principally to the exiting of activities and termination of distribution, lease and other contracts of the acquired companies that existed prior to the acquisition date that either continued with no economic benefit or required payment of a cancellation penalty. Divestiture In December 1997, the company sold certain assets of its Immunotherapy division to Nexell Therapeutics Inc. (Nexell) and recognized a pretax gain of $32 million. Proceeds received included publicly traded common stock, convertible preferred stock and warrants to acquire additional common stock in the future. Sale of the common stock is subject to certain restrictions. ================================================================================ 4 EXIT AND OTHER REORGANIZATION COSTS In September 1998, the company decided to end the clinical development of the Blood Therapies' segment's first-generation oxygen-carrying therapeutic, HemAssist (DCLHb), which was based on human hemoglobin, and focus on the next- generation program, which is based on genetically engineered hemoglobin molecules. The company also decided to exit certain non-strategic investments, primarily in Asia, and reorganize certain other activities. As a result of these decisions, the company recorded a $122 million pretax charge in the third quarter of 1998. Included in the total charge was a $74 million charge to write down certain assets to estimated sales or salvage value due to impairment. The majority of the asset writedowns related to assets located in a manufacturing facility in Neuchatel, Switzerland, that were used solely in the development and manufacture of HemAssist (DCLHb), and had no alternative future use. Activities ceased upon the decision to end the clinical development of HemAssist (DCLHb). In 1999, the company began modifications to this manufacturing facility, which was designed to manufacture a human hemoglobin product, to produce recombinant biopharmaceutical products. Such alternate production is expected to commence at the Neuchatel facility in the next two to three years. The following is a summary of the components of the remainder of the charge and utilization of such reserves to date:
as of or for the years ended Employee- Other December 31 (in millions) related costs costs Total - -------------------------------------------------------------------------------- Original charge $34 $14 $48 1998 utilization (12) (6) (18) 1999 utilization (16) (7) (23) - -------------------------------------------------------------------------------- Reserves at December 31, 1999 $ 6 $ 1 $ 7 ================================================================================
Employee-related costs consisted principally of employee severance resulting from the elimination of approximately 375 positions worldwide. The headcount reductions affected various functions and pertained principally to the Blood Therapies and I.V. Systems/Medical Products segments. Approximately 340 positions have been eliminated through December 31, 1999. The other costs related principally to contractual obligations that existed prior to the date of the charge that either continued with no economic benefit or required payment of a cancellation penalty. The majority of such costs related to the terminated HemAssist (DCLHb) program and included cancellation costs associated with a minimum purchase agreement. In September 1995, the company recorded a pretax charge of $103 million primarily to eliminate excess plant capacity and reduce manufacturing costs. The charge predominantly related to the closure and disposal of the intravenous- solutions plant and warehouse in Carolina, Puerto Rico, which was part of the I.V. Systems/Medical Products segment. Management's plan entailed transferring production to other facilities in Puerto Rico and the United States upon receipt of the necessary approvals from the United States Food and Drug Administration, and then selling or otherwise disposing of the facility. All production and warehousing was consolidated into other facilities as of year-end 1998 in accordance with the original plan. The total charge included a $67 million charge to write down the facility to estimated sales value due to impairment. Suspended depreciation on the facility totaled approximately $6 million per year since the date of the charge. Baxter International 1999 Annual Report 39 Notes to Consolidated Financial Statements The following is a summary of the components of the remainder of the charge and utilization of such reserves by year and category:
as of or for the years ended Employee- Other December 31 (in millions) related costs costs Total - -------------------------------------------------------------------------------- Original charge $27 $9 $ 36 1995 utilization (1) - (1) 1996 utilization (10) (1) (11) 1997 utilization (1) (2) (3) 1998 utilization (5) (6) (11) 1999 utilization (10) - (10) - -------------------------------------------------------------------------------- Reserves at December 31, 1999 $ - $- $ - ================================================================================
Employee-related costs consisted principally of employee severance resulting from the elimination of approximately 1,200 positions, principally in Puerto Rico. Certain positions, primarily direct labor, were added to other facilities to support the increased production levels at those sites. Other costs principally related to contractual obligations that existed prior to the date of the charge and either continued with no economic benefit or required payment of a cancellation penalty. The reserves were fully utilized during 1999 as employee severance was paid and other wind-down activities were completed. Management's objectives for the plan were met substantially in accordance with the originally estimated cost and timetable.
================================================================================ 5 LONG-TERM DEBT, CREDIT FACILITIES & LEASE OBLIGATIONS Effective as of December 31 (in millions) interest rate 1999 1998 - -------------------------------------------------------------------------------- Commercial paper 5.3% $ 668 $ 800 - -------------------------------------------------------------------------------- Short-term notes 3.0% 646 659 - -------------------------------------------------------------------------------- 9.25% notes due 1999 9.6% - 99 - -------------------------------------------------------------------------------- Zero coupon notes due 2000 (unamortized original issue discounts of $9 and $24, respectively) 10.9% 120 123 - -------------------------------------------------------------------------------- 8.125% notes due 2001 6.2% 155 158 - -------------------------------------------------------------------------------- 7.625% notes due 2002 7.5% 151 151 - -------------------------------------------------------------------------------- 7.125% notes due 2007 7.1% 251 251 - -------------------------------------------------------------------------------- 7.25% notes due 2008 7.5% 198 198 - -------------------------------------------------------------------------------- 9.5% notes due 2008 9.5% 75 75 - -------------------------------------------------------------------------------- 7.65% debentures due 2027 7.6% 202 202 - -------------------------------------------------------------------------------- 6.625% debentures due 2028 6.7% 249 249 - -------------------------------------------------------------------------------- Other 16 246 - -------------------------------------------------------------------------------- Total long-term debt and lease obligations 2,731 3,211 Current portion (130) (115) - -------------------------------------------------------------------------------- Long-term portion $2,601 $3,096 ================================================================================
The company leases certain facilities and equipment under capital and operating leases expiring at various dates. Most of the operating leases contain renewal options. Rent expense under operating leases was $91 million, $79 million and $77 million in 1999, 1998 and 1997, respectively.
Future minimum lease payments and debt maturities Aggregate debt maturities as of or for the years ended Operating and capital December 31 (in millions) leases leases - -------------------------------------------------------------------------------- 2000 $ 73 $ 138 2001 56 61 2002 42 154 2003 28 1,388/1/ 2004 25 3 Thereafter 58 1,013 - -------------------------------------------------------------------------------- Total obligations and commitments $ 282 $ 2,757 ========================================================= Amounts representing interest, discounts, premiums and deferred financing costs (26) - -------------------------------------------------------------------------------- Total long-term debt and present value of lease obligations $ 2,731 ================================================================================
1. Includes $1,314 million of commercial paper and short-term notes supported by long-term credit facilities expiring in 2003. The company maintains two revolving credit facilities which total $1.2 billion. Of this total, $400 million will expire in 2000 and another $800 million facility will expire in 2003. The facilities enable the company to borrow funds on an unsecured basis at variable interest rates and contain various covenants, including a maximum debt-to-capital ratio and a minimum interest coverage ratio. There were no borrowings outstanding under these facilities at December 31, 1999 or 1998. Baxter also maintains or guarantees other short-term credit arrangements which totaled approximately $447 million at December 31, 1999. Approximately $93 million and $94 million of borrowings were outstanding under these facilities at December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998, commercial paper and short-term notes together totaling $718 million and $800 million, respectively, have been classified with long-term debt as they are supported by the long-term credit facilities, which management intends to continue to refinance. During 1998, a wholly-owned subsidiary of the company entered into an $800 million revolving credit facility, which Expires in 2003 and enables the subsidiary to borrow funds at variable interest rates. The agreement contains various covenants, including a minimum interest coverage ratio, a maximum debt- to-adjusted earnings ratio and a minimum adjusted net worth amount. There were $596 million and $659 million in borrowings outstanding under this facility at 40 Baxter International 1999 Annual Report December 31, 1999 and 1998, respectively, and they were denominated in Swiss Francs. These borrowings are secured and guaranteed by a pledge of the shares of the borrower and certain of its subsidiaries. ================================================================================ 6 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Concentrations of credit risk In the normal course of business, the company provides credit to customers in the health-care industry, performs credit evaluations of these customers and maintains reserves for potential credit losses which, when realized, have been within the range of management's allowance for doubtful accounts. The allowance for doubtful accounts was $34 million and $37 million at December 31, 1999 and 1998, respectively. The company invests the majority of its excess cash in certificates of deposit or money market accounts and, where appropriate, diversifies the concentration of cash among different financial institutions. With respect to financial instruments, where appropriate, the company has diversified its selection of counterparties, and has arranged collateralization and master-netting agreements to minimize the risk of loss. Interest rate risk management Baxter uses forward contracts, options and interest rate swaps generally from one to three years in duration to manage the company's exposure to adverse movements in interest rates. The book values of debt at December 31, 1999 and 1998 reflect deferred hedge gains of $11 million and $16 million, respectively, offset by $2 million and $2 million of deferred hedge losses, respectively. Foreign exchange risk management The company principally hedges the following currencies: Japanese Yen, the Euro and Swiss Franc. The company enters into various types of foreign exchange contracts to protect the company from the risk that the eventual net dollar cash flows resulting from transactions with foreign customers and suppliers may be adversely affected by changes in currency exchange rates. The company also enters into foreign exchange contracts, with terms generally less than two years, to hedge anticipated but not yet committed sales expected to be denominated in foreign currencies. Deferred hedging gains on hedges of anticipated but not yet committed sales totaled $7 million and $2 million at December 31, 1999 and 1998, respectively. The company has entered into foreign exchange contracts, for up to 10 years, to hedge certain of its net investments in foreign affiliates. These contracts hedge the U.S. dollar value of foreign currency denominated net assets from the effects of volatility in currency exchange rates by creating debt denominated in the respective currencies of the underlying net assets. The increase or decrease in the debt balance is directly offset by a corresponding fluctuation in the underlying net assets. Interest rate and foreign exchange contracts
as of December 31 (in millions) 1999 1998 - -------------------------------------------------------------------------- Notional Market Notional Market amounts values amounts values - -------------------------------------------------------------------------- Interest rate contracts Floating to fixed rate hedges $ 300 $ 3 $ 600 $ (3) Average pay rate 7.4% in 1999 and 5.4% in 1998 Average receive rate 5.8% in 1999 and 5.6% in 1998 ========================================================================== Foreign exchange contracts Forwards and options primarily used to hedge anticipated sales Japanese Yen $ 714 $ (2) $ 489 $ (1) Euro 672 17 220 2 Other currencies 40 - 88 2 ----------------------------------------------------------------------- Total $1,426 $ 15 $ 797 $ 3 - -------------------------------------------------------------------------- Forwards and swaps used to hedge net investments in foreign affiliates Japanese Yen $ 315 $(113) $ 315 $ (58) Euro 2,650 175 2,250 (144) Other currencies 15 - 82 - ----------------------------------------------------------------------- Total $2,980 $ 62 $2,647 $(202) - -------------------------------------------------------------------------- Forwards used to hedge certain receivables and payables (primarily Japanese Yen, Euro and Swiss Franc) $ 58 $ - $ 274 $ - ==========================================================================
In conjunction with the spin-off of Edwards, it is expected that certain of the foreign exchange contracts summarized above, principally those used to hedge anticipated sales, will be transferred to Edwards. The estimated total notional amount and market value of such contracts totaled $350 million and $1 million, respectively, at December 31, 1999. Baxter International 1999 Annual Report 41 Notes to Consolidated Financial Statements Fair values of financial instruments
Approximate Carrying amounts fair values -------------------------------- as of December 31 (in millions) 1999 1998 1999 1998 - ------------------------------------------------------------------------ Assets Long-term insurance receivables $ 301 $ 408 $ 248 $ 351 Investments in affiliates 145 118 158 115 Foreign exchange hedges 25 8 15 4 Liabilities Short-term debt 125 156 125 156 Short-term borrowings classified as long term 1,314 1,459 1,312 1,462 Other long-term debt and lease obligations 1,417 1,752 1,326 1,854 Long-term litigation liabilities 273 246 237 217 ========================================================================
Although the company's litigation remains unresolved by final orders or settlement agreements in some cases, the estimated fair values of insurance receivables and long-term litigation liabilities were computed by discounting the expected cash flows based on currently available information. The approximate fair values of other assets and liabilities are based on quoted market prices, where available. The carrying values of all other financial instruments approximate their fair values due to the short-term maturities of these assets and liabilities. ================================================================================ 7 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
as of December 31 (in millions) 1999 1998 - ------------------------------------------------------------------------- Accounts payable, principally trade $ 612 $ 507 Employee compensation and withholdings 260 222 Litigation 183 475 Pension and other deferred benefits 40 18 Property, payroll and other taxes 105 85 Other 605 717 - ------------------------------------------------------------------------- Accounts payable and accrued liabilities $1,805 $2,024 =========================================================================
================================================================================ 8 COMMON AND PREFERRED STOCK Baxter has several stock-based compensation plans, which are described below. The company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans and its stock purchase plans. The compensation expense recognized for continuing operations for performance-based, restricted and other stock plans was $26 million, $15 million and $11 million in 1999, 1998 and 1997, respectively. Had compensation cost for all of the company's stock-based compensation plans been determined based on the fair value at the grant dates consistent with the method of FASB Statement No. 123, "Accounting for Stock- Based Compensation," the company's income from continuing operations before cumulative effect of accounting change and related earnings per share (EPS) would have been reduced to the pro forma amounts indicated below: Pro forma income and EPS
years ended December 31 (in millions, except per share data) 1999 1998 1997 - ----------------------------------------------------------- Pro forma income $ 728 $ 222 $ 340 Pro forma basic EPS $2.51 $ .78 $1.22 Pro forma diluted EPS $2.48 $ .77 $1.21 ===========================================================
Pro forma compensation expense for stock options and employee-stock subscriptions was calculated using the Black-Scholes model. Fixed stock option plans Stock options have been granted at various dates. All grants have a 10-year initial term and have an exercise price at least equal to 100% of market value on the date of grant. Vesting terms vary, with most outstanding options vesting 100% in three years, 100% in five years, or ratably over three years. Employees of Edwards will be required to exercise any vested options within 90 days from the date of spin-off, which is currently anticipated to occur on March 31, 2000. All unvested options will be canceled 90 days after the date of spin- off. Stock options outstanding at December 31, 1999
(option shares in thousands) Options outstanding Options exercisable - ------------------------------------------------------------------------------ Weighted- average remaining Weighted- Weighted- Range of contractual average average exercise life exercise exercise prices Outstanding (years) price Exercisable price - ------------------------------------------------------------------------------ $19 - 26 1,346 3.7 $24.32 1,346 $24.32 27 - 40 2,222 4.6 34.17 2,222 34.17 41 - 51 5,947 7.2 47.48 4,717 47.57 52 - 84 9,294 8.7 63.58 470 56.34 - ------------------------------------------------------------------------------ $19 - 84 18,809 6.1 $52.20 8,755 $41.06 ==============================================================================
As of December 31, 1998 and 1997, there were 4,565,000 and 6,314,000 options exercisable, respectively, at weighted-average exercise prices of $30.27 and $29.84, respectively. 42 Baxter International 1999 Annual Report Stock option activity
Weighted- average (option shares in thousands) Shares exercise price - --------------------------------------------------------------------- Options outstanding at January 1, 1997 12,501 $34.89 Granted 4,208 47.59 Exercised (2,406) 29.04 Forfeited (421) 38.76 - --------------------------------------------------------------------- Options outstanding at December 31, 1997 13,882 39.64 Granted 4,806 59.83 Exercised (1,728) 28.69 Forfeited (587) 49.51 - --------------------------------------------------------------------- Options outstanding at December 31, 1998 16,373 46.37 Granted 5,013 66.73 Exercised (1,958) 39.18 Forfeited (619) 56.73 - --------------------------------------------------------------------- Options outstanding at December 31, 1999 18,809 $52.20 =====================================================================
Included in the tables above are grants of certain premium-priced options. During 1998, approximately 450,000 premium-priced stock options were granted with a weighted-average exercise price of $76.78 and a weighted-average fair value of $12.70. During 1996, approximately 2.4 million premium-priced stock options were granted with an exercise price of $51 and a weighted-average fair value of $11.01. All of such options granted in 1998 and 1.7 million of such options granted in 1996 are outstanding at December 31, 1999. Pro forma compensation expense was calculated with the following weighted- average assumptions for grants in 1999, 1998, and 1997, respectively: dividend yield of 1.5%, 1.5% and 2.1%; expected life of six, six and seven years; expected volatility of 29%, 29% and 28%; and risk-free interest rates of 5.4%, 5.3% and 6.2%. The weighted-average fair value of options granted during the year were $22.59, $18.58 and $15.95 in 1999, 1998 and 1997, respectively. Stock options had also been granted to The Baxter Allegiance Foundation (a philanthropic organization). A total of 2,198,478 options had been granted in 1991 and 1992 at a weighted-average exercise price of $31.44. All of the 1,952,253 options outstanding at December 31, 1998 were either exercised or forfeited during 1999. Employee stock purchase plans The company has employee stock purchase plans whereby it is authorized, as of December 31, 1999, to issue up to 10 million shares of common stock to its employees, nearly all of whom are eligible to participate. The purchase price is the lower of 85% of the closing market price on the date of subscription or 85% of the closing market price as defined by the plans. The total subscription amount for each participant cannot exceed 25% of current annual pay. Under the plans, the company sold 777,618, 810,855 and 760,490 shares to employees in 1999, 1998 and 1997, respectively. Pro forma compensation expense was estimated with the following weighted-average assumptions for 1999, 1998 and 1997, respectively: dividend yield of 1.5%, 1.5% and 2.1%; expected life of one year for all periods; expected volatility of 33% for all periods, and risk- free interest rates of 5.4%, 4.4% and 5.7%. The weighted-average fair value of those purchase rights granted in 1999, 1998 and 1997 was $20.09, $15.16 and $13.27, respectively. Restricted stock and performance-share plans Under various plans, the company has made grants of restricted stock and performance shares in the form of the company's common stock to provide incentive compensation to key employees and non-employee directors. Under the long-term incentive plan, grants are generally made annually and are earned based on the achievement of financial performance targets, adjusted up or down by the company's stock performance against the change in the Standard & Poor's Medical Products and Supplies Index. The restricted shares vest one year after they are earned. At December 31, 1999, 589,950 shares were subject to restrictions, which lapse between 2000 and 2002, and 348,553 shares were subject to restrictions that lapse upon achievement of future performance objectives and related vesting periods. During 1999, 1998 and 1997, 542,500, 242,740 and 24,930 shares, respectively, of restricted stock and performance shares were granted at weighted-average grant-date fair values of $63.99, $58.74 and $51.29 per share, respectively. Shared investment plan In 1999, the company sold approximately 3.1 million shares of the company's common stock to 142 of Baxter's senior managers for approximately $198 million in cash. This plan, which is similar to one implemented in 1994, directly aligns management and shareholder interests. The Baxter managers used full-recourse personal bank loans to purchase the stock at the May 3, 1999 closing price of $63.625. Baxter has agreed to guarantee repayment to the banks in the event of default by a participant in the plan. The total outstanding participant loan amount relating to the 1999 Shared Investment Plan at December 31, 1999 was $195 million. Baxter International 1999 Annual Report 43 Notes to Consolidated Financial Statements Stock repurchase programs In November 1995, the company's board of directors authorized the repurchase of up to $500 million of common stock over a period of several years, of which $451 million has been repurchased as of December 31, 1999. The remainder of the authorized amount is expected to be repurchased in 2000. In November 1999, the board of directors authorized the repurchase of an additional $500 million over a period of several years. Equity forward agreements In order to partially offset the dilutive effect of stock issuances under the company's employee stock option plans, the company entered into forward agreements during 1999 with independent third parties related to approximately 7.5 million shares of Baxter 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. In conjunction with its stock repurchase program, the company terminated one of the agreements during 1999 prior to original maturity date, delivering approximately $33 million in cash to the counterparty for 500,000 shares of its common stock. As of December 31, 1999, agreements related to approximately 3.3 million shares mature in 2000 at exercise prices ranging from $68 to $71 per share and agreements related to approximately 3.7 million shares mature in 2002 at exercise prices ranging from $73 to $81 per share. Other Approximately 100 million shares of no par value preferred stock are authorized for issuance in series with varying terms as determined by the board of directors. In March 1999, common stockholders received a dividend of one preferred stock purchase right (collectively, the "Rights") for each share of common stock. These Rights replaced similar rights that expired in March 1999. The Rights may become exercisable at a specified time after (1) a person or group acquires 15% or more of the company's common stock or (2) a tender or exchange offer for 15% or more of the company's common stock. Once exercisable, the holder of each Right is entitled to purchase, upon payment of the exercise price, shares of the company's common stock having a market value equal to two times the exercise price of the Rights. The Rights have a current exercise price of $275. The Rights expire on March 23, 2009, unless earlier redeemed by the company under certain circumstances at a price of $0.01 per Right. ================================================================================ 9 RETIREMENT AND OTHER BENEFIT PROGRAMS The company sponsors several qualified and nonqualified pension plans and other postretirement benefit plans for its employees. Reconciliation of plans' benefit obligations, assets and funded status
Pension Other as of or for the years ended benefits benefits -------------------------------------- December 31 (in millions) 1999 1998 1999 1998 - ------------------------------------------------------------------------------ Benefit obligation Beginning of year $1,427 $1,305 $ 200 $ 202 Service cost 48 41 3 3 Interest cost 103 96 13 14 Participant contributions 2 2 3 3 Actuarial (gain) loss (148) 60 (30) (12) Acquisitions 1 - - - Curtailment gain (7) (3) (3) - Benefit payments (76) (74) (11) (10) Currency exchange-rate changes and other (6) - - - - ------------------------------------------------------------------------------ End of year 1,344 1,427 175 200 - ------------------------------------------------------------------------------ Fair value of plan assets Beginning of year 1,472 1,309 - - Actual return on plan assets 302 179 - - Employer contributions 13 53 8 7 Participant contributions 2 2 3 3 Acquisitions 11 - - Benefit payments (76) (74) (11) (10) Currency exchange-rate changes and other - 3 - - - ------------------------------------------------------------------------------ End of year 1,724 1,472 - - - ------------------------------------------------------------------------------ Funded status Funded status at December 31 380 45 (175) (200) Unrecognized transition obligation 9 18 - - Unrecognized net gains (390) (66) (98) (75) Unrecognized prior-service cost (3) 2 - - - ------------------------------------------------------------------------------ Net amount recognized $ (4) $ (1) $(273) $(275) - ------------------------------------------------------------------------------ Prepaid benefit cost $ 121 $ 119 $ - $ - Accrued benefit liability (125) (120) (273) (275) - ------------------------------------------------------------------------------ Net amount recognized $ (4) $ (1) $(273) $(275) ==============================================================================
The accumulated benefit obligation is in excess of plan assets for certain of the company's pension plans. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for these plans was $140 million, $128 million and $23 million, respectively, at December 31, 1999, and $146 million, $123 million and $18 million, respectively, at December 31, 1998. 44 Baxter International 1999 Annual Report Net periodic benefit cost years ended December 31 (in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Pension benefits Service cost 48 $41 $36 Interest cost 102 96 90 Expected return on plan assets (133) (117) (109) Amortization of prior service cost 1 1 2 Amortization of transition obligation 6 6 6 - -------------------------------------------------------------------------------- Net periodic pension benefits cost $24 $27 $25 - -------------------------------------------------------------------------------- Other benefits Service cost $ 3 $ 3 $ 3 Interest cost 12 14 14 Recognized actuarial gain (7) (6) (6) - -------------------------------------------------------------------------------- Net periodic other benefits cost $ 8 $11 $11 ================================================================================ The net periodic benefit cost amounts pertain to both continuing and discontinued operations. Assumptions used in determining benefit obligations Pension Other benefits benefits ----------------------------------- 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Discount rate U.S. and Puerto Rico plans 8.25% 7.25% 8.25% 7.25% International plans (average) 5.7% 5.4% n/a n/a Expected return on plan assets U.S. and Puerto Rico plans 10.5% 10.5% n/a n/a International plans (average) 6.9% 7.0% n/a n/a Rate of compensation increase U.S. and Puerto Rico plans 4.5% 4.5% n/a n/a International plans (average) 4.1% 4.2% n/a n/a Annual rate of increase in the per-capita cost n/a n/a 7.5% 8.0% Rate decreased to n/a n/a 5.5% 5.0% By the year ended n/a n/a 2002 2002 ================================================================================ Effect of a one percent change in assumed health-care cost trend rate One percent One percent increase decrease (in millions) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Effect on total of service and interest cost components $2 $3 $2 $2 Effect on postretirement benefit obligation 21 28 18 22 ================================================================================ Most U.S. employees are eligible to participate in a qualified defined contribution plan. Company matching contributions relating to continuing operations were $14 million, $14 million and $11 million in 1999, 1998 and 1997, respectively. With respect to employees of the CardioVascular business, the company has announced its intent to freeze benefits at the date of spin-off under the U.S. defined benefit pension plan and under other plans that provide retirees with health-care and life insurance benefits. The pension liability related to such employees' service prior to the spin-off date will remain with Baxter. Included in net costs associated with effecting the business distribution in 1999 was a $5 million gain (net of tax of $4) relating to these benefit plan curtailments. ================================================================================ 10 INTEREST AND OTHER (INCOME) EXPENSE Interest expense, net years ended December 31 (in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Interest, net Interest costs $165 $198 $206 Interest costs capitalized (13) (5) (8) - -------------------------------------------------------------------------------- Interest expense 152 193 198 Interest income (35) (32) (35) - -------------------------------------------------------------------------------- Total interest, net $117 $161 $163 - -------------------------------------------------------------------------------- Allocated to discontinued operation $ 30 $ 37 $ 32 Allocated to continuing operations $ 87 $124 $131 - -------------------------------------------------------------------------------- The allocation of interest to continuing and discontinued operations was based on relative net assets of these operations. Other expense (income) years ended December 31 (in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Equity in (income) losses of affiliates $ 5 $ 3 $ (2) Asset dispositions, net 13 (23) (48) Foreign exchange (8) - (22) Other 1 2 38 - -------------------------------------------------------------------------------- Total other expense (income) $11 $(18) $(34) ================================================================================ 11 INCOME TAXES U.S. federal income tax returns filed by Baxter International Inc. through December 31, 1994, have been examined and closed by the Internal Revenue Service. The company has ongoing audits in U.S. and international jurisdictions. In the opinion of management, the company has made adequate provisions for tax expenses for all years subject to examination. Baxter International 1999 Annual Report 45 Notes to Consolidated Financial Statements Income before income tax expense by category years ended December 31 (in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- U.S. $ 330 $ 78 $167 International 722 415 403 - -------------------------------------------------------------------------------- Income from continuing operations before income taxes and cumulative effect of accounting change $1,052 $493 $570 ================================================================================ Income tax expense years ended December 31 (in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Current U.S. Federal $(12) $119 $ 91 State and local 35 3 (19) International 151 151 125 - -------------------------------------------------------------------------------- Current income tax expense 174 273 197 - -------------------------------------------------------------------------------- Deferred U.S. Federal 68 (3) (49) State and local 17 5 25 International 14 (57) 26 - -------------------------------------------------------------------------------- Deferred income tax expense (benefit) 99 (55) 2 - -------------------------------------------------------------------------------- Income tax expense $273 $218 $199 ================================================================================ The income tax for continuing operations was calculated as if Baxter were a stand-alone entity (without income from the discontinued operation). Deferred tax assets and liabilities years ended December 31 (in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Deferred tax assets Accrued expenses $389 $349 $280 Accrued postretirement benefits 102 103 103 Alternative minimum tax credit 162 164 114 Tax credits and net operating losses 100 179 136 Valuation allowances (43) (34) (45) - -------------------------------------------------------------------------------- Total deferred tax assets 710 761 588 - -------------------------------------------------------------------------------- Deferred tax liabilities Asset basis differences 471 473 510 Subsidiaries' unremitted earnings 160 188 91 Other 35 13 4 - -------------------------------------------------------------------------------- Total deferred tax liabilities 666 674 605 - -------------------------------------------------------------------------------- Net deferred tax asset (liability) $ 44 $ 87 $(17) ================================================================================ There are $4 million and $15 million of foreign tax credit carryforwards which expire in 2002 and 2003, respectively. Income tax expense rate reconciliation years ended December 31 (in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Income tax expense at statutory rate $368 $172 $200 Tax-exempt operations (134) (120) (114) State and local taxes 23 (3) (7) Repatriation of foreign earnings - 87 - Foreign tax expense 18 46 43 IPR&D expense - 41 77 Other factors (2) (5) - - -------------------------------------------------------------------------------- Income tax expense $273 $218 $199 ================================================================================ The company has received a tax-exemption grant from Puerto Rico, which provides that its manufacturing operations will be partially exempt from local taxes until the year 2002. Appropriate taxes have been provided for these operations assuming repatriation of all available earnings. In addition, the company has other manufacturing operations outside the United States, which benefit from reductions in local tax rates under tax incentives that will continue at least until 2002. U.S. federal income taxes, net of available foreign tax credits, on unremitted earnings deemed permanently reinvested would be approximately $371 million as of December 31, 1999. - -------------------------------------------------------------------------------- 12 LEGAL PROCEEDINGS, COMMITMENTS & CONTINGENCIES 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 Baxter. These cases and claims raise difficult and complex factual and legal issues and are subject to many uncertainties and complexities, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is brought, and differences in applicable law. Accordingly, in many cases, the company is not able to estimate the amount of its liabilities with respect to such matters. Upon resolution of any pending legal 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. Following is a summary of certain legal matters pending against the company. For a more extensive description of such matters and other lawsuits, claims and proceedings against the company, see Baxter's Annual Report on Form 10-K for the year ended December 31, 1999. 46 Baxter International 1999 Annual Report Mammary implant litigation 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 (Heyer-Schulte) of American Hospital Supply Corporation (AHSC). AHSC, which was acquired by the company in 1985, divested its Heyer-Schulte division in 1984. A class action on behalf of all women with silicone mammary implants was filed in March 1994. The class action was certified for settlement purposes only by the federal court in which it was filed in September 1994, and the settlement terms were subsequently revised and approved in December 1995. The monetary provisions of the settlement provide compensation for all present and future plaintiffs and claimants through a series of specific funds and a disease- compensation program involving certain specified medical conditions. All appeals directly challenging the settlement have been dismissed. In January 1996, Baxter, Bristol-Myers Squibb Company and Minnesota Mining and Manufacturing Company each paid $125 million into the court-established fund as an initial fund to pay claims under the settlement. In addition to the class action, there are a large number of individual suits currently pending against the company, primarily consisting of plaintiffs who have opted-out of the class action. In 1993, Baxter accrued $556 million for its estimated liability resulting from the settlement of the mammary related class action and recorded a receivable for estimated insurance recoveries totaling $426 million, resulting in a net charge of $130 million. In 1995, based on a continuing evaluation of this litigation, the company accrued an additional $298 million for its estimated liability to litigate or settle cases and claims involving opt-outs and recorded an additional receivable for estimated insurance recoveries totaling $258 million, resulting in an additional net charge of $40 million. In 1998, the company accrued an additional $250 million for its estimated liability resulting from the class action settlement and remaining opt-out cases and claims, and recorded a receivable for related estimated insurance recoveries of $121 million, resulting in an additional net charge of $129 million. In December 1998, a panel of independent medical experts appointed by a federal judge announced their findings that reported medical studies contained no clear evidence of a connection between silicone mammary implants and traditional or atypical systemic diseases. In June 1999, a similar conclusion was announced by a committee of independent medical experts from the Institute of Medicine, an arm of the National Academy of Sciences. The mammary implant litigation includes issues related to which of Baxter's insurers are responsible for covering each matter and the extent of the company's claims for contribution against third parties. Baxter believes that a substantial portion of its liability and defense costs for mammary implant litigation will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. Plasma-based therapies litigation 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 antihemophilic 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. In addition, Immuno has unsettled claims for damages for injuries allegedly caused by its plasma-based 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 (or approximately $16 million at December 31, 1999) in consideration for an April 1999 payment by the company of 29 million Swiss Francs to Immuno as additional purchase price. Based on management's estimates, the company has recorded an appropriate liability and related insurance receivable with regard to the matters above. Baxter is also currently a defendant in a number of claims and lawsuits, including one certified class action in the U.S.D.C. for the Central District of California, brought by individuals who infused the company's Gammagard(R) IVIG (intravenous immunoglobulin), all of whom are seeking damages for Hepatitis C infections allegedly caused by infusing Gammagard(R) IVIG. 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. Baxter believes that a substantial portion of the liability and defense costs related to its plasma-based therapies litigation will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. Baxter International 1999 Annual Report 47 Notes to Consolidated Financial Statements In 1993, the company accrued $131 million for its estimated worldwide liability for litigation and settlement expenses involving factor concentrates cases and recorded a receivable for insurance coverage of $83 million, resulting in a net charge of $48 million. In 1995, significant developments occurred, primarily in the United States, Europe and Japan relative to claims and litigation pertaining to Baxter's plasma-based therapies. The company revised its estimated exposure from the $131 million previously recorded for factor concentrates litigation to $378 million for all litigation relating to plasma-based therapies, including the factor concentrates litigation and the Gammagard (R) IVIG litigation. Related estimated insurance recoveries were revised from $83 million for factor concentrates to $274 million for all plasma-based therapies. This resulted in a net charge of $56 million in 1995. The company further revised its estimate of liabilities and insurance recoveries in 1998, and accrued an additional $180 million for its estimated liability for plasma-based therapies litigation and other litigation and recorded a receivable for related estimated insurance recoveries of $131 million, for a net charge of $49 million. Other litigation As of September 30, 1996, Allegiance Corporation (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. In addition to the cases discussed above, Baxter is a defendant in a number of other claims, investigations and lawsuits, including certain environmental proceedings. Based on the advice of counsel, management does not believe that, individually or in the aggregate, these other claims, investigations and lawsuits will have a material adverse effect on the company's results of operations, cash flows or consolidated financial position. Commitment In November 1999, the company and Nexell entered into an agreement whereby Baxter agreed to guarantee certain amounts, up to a maximum of $63 million, associated with a private placement by Nexell of preferred stock and other securities. 13 SEGMENT INFORMATION Baxter's continuing operations are comprised of 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 are as follows: I.V. Systems/Medical Products, technologies and systems to provide intravenous fluid and drug delivery; Blood Therapies, biopharmaceutical and blood-collection and separation products and technologies; and Renal, products and services to treat end-stage kidney disease. As discussed in Note 2, the company plans to spin off Edwards to Baxter shareholders. Financial information for Edwards, which is substantially the same as the former CardioVascular segment, is now being reported as a discontinued operation. The three segments' principal products include intravenous solutions and infusion pumps; blood-clotting therapies, vaccines, and machines for collecting, separating and storing blood; and dialysis equipment, solutions and supplies. The company's products and services are used in more than 100 countries, with the principal markets being the United States, Europe, Japan and Latin America. Management utilizes more than one measurement and multiple views of data to measure segment performance and to allocate resources to the segments. However, the dominant measurements are consistent with the company's consolidated financial statements and, accordingly, are reported on the same basis herein. Management evaluates the performance of its segments and allocates resources to them primarily based on pretax income along with cash flows and overall economic returns. Intersegment sales are generally accounted for at amounts comparable to sales to unaffiliated customers, and are eliminated in consolidation. The accounting policies of the segments are substantially the same as those described in the summary of significant accounting policies, as discussed in Note 1. Certain items are maintained at the company's 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, certain foreign currency fluctuations, hedging activities, and certain litigation liabilities and related insurance receivables. 48 Baxter International 1999 Annual Report
I.V. Systems/ as of or for the years ended Medical Blood December 31 (in millions) Products Therapies Renal Other Total - --------------------------------------------------------------------------------------------- 1999 Net sales $2,524 $2,176 $1,680 - $6,380 Depreciation and amortization 145 114 81 $ 32 372 Pretax income 424 435 318 (125) 1,052 Assets 2,447 2,632 1,342 3,223 9,644 Expenditures for long-lived assets 175 235 125 96 631 - --------------------------------------------------------------------------------------------- 1998 Net sales $2,314 $1,862 $1,530 - $5,706 Depreciation and amortization 137 101 81 $ 25 344 Pretax income 392 404 223 (526) 493 Assets 2,257 2,655 1,353 3,608 9,873 Expenditures for long-lived assets 146 212 129 69 556 - --------------------------------------------------------------------------------------------- 1997 Net sales $2,110 $1,765 $1,384 - $5,259 Depreciation and amortization 128 98 67 $ 25 318 Pretax income 331 375 301 (437) 570 Assets 1,937 2,305 1,055 3,215 8,512 Expenditures for long-lived assets 135 191 100 28 454 =============================================================================================
Included in 1997 pretax income for the Blood Therapies segment is a $17 million gain relating to the disposal of a non-strategic investment, and a $32 million gain relating to the divestiture of certain assets of the Immunotherapy division.
as of or for the years ended December 31 (in millions) 1999 1998 1997 - ------------------------------------------------------------------- Pretax income Total pretax income from segments $1,177 $1,019 $1,007 Unallocated amounts In-process research and development expense - (116) (220) Charge for exit and other reorganization costs - (122) - Net litigation charge - (178) - Interest expense, net (87) (124) (131) Certain currency exchange rate fluctuations 25 27 41 Gain on disposal of investment - 20 - Other Corporate items (63) (33) (127) - ------------------------------------------------------------------- Consolidated income from continuing operations before income taxes and cumulative effect of accounting change $1,052 $ 493 $ 570 ===================================================================
1999 1998 1997 - ------------------------------------------------------------------- Assets Total segment assets $6,421 $6,265 $5,297 Unallocated assets Cash and equivalents 606 709 465 Deferred income taxes 417 583 280 Insurance receivables 417 639 735 Net assets of discontinued operation 1,231 1,275 1,337 Other Corporate assets 552 402 398 - ------------------------------------------------------------------- Consolidated total assets $9,644 $9,873 $8,512 ===================================================================
With respect to depreciation and amortization, and expenditures for long-lived assets, the difference between the segment totals and the consolidated totals related to assets maintained at Corporate. Geographic information The following geographic area data include net sales based on product shipment destination and long-lived assets based on physical location.
as of or for the years ended December 31 (in millions) 1999 1998 1997 - ------------------------------------------------------------------- Net sales United States $2,921 $2,609 $2,371 Japan 482 405 416 Other countries 2,977 2,692 2,472 - ------------------------------------------------------------------- Consolidated totals $6,380 $5,706 $5,259 - ------------------------------------------------------------------- Long-lived assets United States $1,361 $1,250 $1,078 Austria 344 326 304 Other countries 945 869 761 - ------------------------------------------------------------------- Consolidated totals $2,650 $2,445 $2,143 ===================================================================
Baxter International 1999 Annual Report 49 Notes to Consolidated Financial Statements ================================================================================ 14 QUARTERLY FINANCIAL RESULTS AND MARKET FOR THE COMPANY'S STOCK (UNAUDITED) years ended December 31 (in millions, except per share First Second Third Fourth Total data) quarter quarter quarter quarter year - -------------------------------------------------------------------------------- 1999 Net sales $1,462 $1,560 $1,589 $1,769 $6,380 Gross profit 625 690 713 784 2,812 Income from continuing operations before cumulative effect of accounting change 162 189 197 231 779 Net income 151 207 210 229 797 Per common share Income from continuing operations before cumulative effect of accounting change Basic .56 .65 .67 .80 2.69 Diluted .55 .64 .67 .78 2.64 Net income /1, 2/ Basic .53 .71 .72 .79 2.75 Diluted .52 .70 .71 .77 2.70 Dividends .2910 .2910 .2910 .2910 1.164 Market price High 75.94 68.63 70.75 68.75 75.94 Low 62.56 60.38 58.69 59.31 58.69 - -------------------------------------------------------------------------------- 1998 Net sales $1,256 $1,419 $1,427 $1,604 $5,706 Gross profit 563 654 633 714 2,564 Income (loss) from continuing operations /3, 4/ 148 52 (127) 202 275 Net income (loss) /3, 4/ 164 63 (124) 212 315 Per common share Income (loss) from continuing operations /3, 4/ Basic .53 .18 (.44) .70 .97 Diluted .52 .18 (.44) .69 .95 Net income (loss) /3, /4 Basic .59 .22 (0.43) .74 1.11 Diluted .58 .22 (0.43) .73 1.09 Dividends .2910 .2910 .2910 .2910 1.164 Market price High 62.44 59.56 63.50 66.00 66.00 Low 48.50 51.50 52.38 56.38 48.50 ================================================================================ 1. The first quarter includes a $27 million charge for the cumulative effect of an accounting change. 2. The fourth quarter includes $19 million in net costs associated with effecting the distribution of the CardioVascular business. 3. The second quarter includes a $116 million charge for in-process research and development relating to the acquisition of Somatogen. 4. The third quarter includes a $178 million net litigation charge and a $122 million charge for exit and other reorganization costs. Baxter common stock is listed on the New York, Chicago and Pacific Stock Exchanges, on the London Stock Exchange and on the Swiss stock exchanges of Zurich, Basel and Geneva. The New York Stock Exchange is the principal market on which the company's common stock is traded. At January 31, 2000, there were approximately 60,800 holders of record of the company's common stock. 50 Baxter International 1999 Annual Report
Directors and Executive Officers BOARD OF DIRECTORS Walter E. Boomer Mary Johnston Evans Harry M. Jansen Kraemer, Jr. Monroe E. Trout, M.D. President and Former Director and Vice Chairman Chairman and Chairman of the Board Chief Executive Officer Amtrak Chief Executive Officer Cytyc Corporation Rogers Corporation Baxter International Inc. Frank R. Frame Fred L. Turner Pei-yuan Chia Retired Deputy Chairman Arnold J. Levine, Ph.D. Senior Chairman Retired Vice Chairman The Hongkong and Shanghai President McDonald's Corporation Citicorp and Citibank, N.A. Banking Corporation Limited The Rockefeller University HONORARY DIRECTOR John W. Colloton Martha R. Ingram Georges C. St. Laurent, Jr. Vice President for Statewide Chairman of the Board Retired Chief Executive Officer William B. Graham Health Services Ingram Industries Inc. Western Bank Chairman Emeritus of the Board The University of Iowa Baxter International Inc. Thomas T. Stallkamp Susan Crown Vice Chairman and Vice President Chief Executive Officer Henry Crown and Company MSX International EXECUTIVE OFFICERS Baxter International Inc. Baxter World Trade Corporation Baxter Healthcare Corporation Brian P. Anderson /1, 2/ Kshitij Mohan Eric A. Beard David F. Drohan Senior Vice President and Corporate Vice President Corporate Vice President Corporate Vice President Chief Financial Officer Corporate Research and and President and President Technical Services Global Hemodialysis and Europe I.V. Systems/Medical Products Timothy B. Anderson /1, 2/ Group Vice President John L. Quick Carlos del Salto J. Michael Gatling Corporate Strategy and Corporate Vice President Senior Vice President Corporate Vice President Development Quality/Regulatory Intercontinental/Asia and Global Manufacturing President Latin America Operations John F. Gaither, Jr. /1, 2/ Jan Stern Reed /1, 2/ Corporate Vice President Corporate Secretary and Thomas H. Glanzmann /1/ Jack L. McGinley /2/ Corporate Development Assistant General Counsel Corporate Vice President Group Vice President and President I.V. Systems/Medical Products, Harry M. Jansen Kraemer, Jr. /1, 2/ Thomas J. Sabatino, Jr. /1, 2/ Hyland Immuno Renal and Fenwal Chairman and Corporate Vice President Chief Executive Officer and General Counsel J. Robert Hurley David C. McKee /2/ Corporate Vice President Corporate Vice President Steven J. Meyer /1, 2/ Michael J. Tucker Japan/China and Deputy General Counsel Treasurer Senior Vice President Human Resources Donald W. Joseph /1/ Michael A. Mussallem /2/ Group Vice President Group Vice President Renal CardioVascular and Biopharmaceuticals 1. Also an executive officer of Baxter Healthcare Corporation 2. Also an executive officer of Baxter World Trade Corporation As of February 23, 2000
Baxter International 1999 Annual Report 51 Company Information CORPORATE HEADQUARTERS Baxter International Inc. One Baxter Parkway Deerfield, IL 60015-4633 Telephone: (847) 948-2000 Internet: www.baxter.com STOCK EXCHANGE LISTINGS Ticker Symbol: BAX Baxter common stock is listed on the New York, Chicago and Pacific Stock Exchanges, on the London Stock Exchange and on the Swiss stock exchanges of Zurich, Basel and Geneva. The New York Stock Exchange is the principal market on which the company's common stock is traded. ANNUAL MEETING The 2000 Annual Meeting of Stockholders will be held on Tuesday, May 2, at 10:00 a.m. at the Drury Lane Oak Brook in Oakbrook Terrace, Illinois. STOCK TRANSFER AGENT Correspondence concerning Baxter International stock holdings, lost or missing certificates or dividend checks, duplicate mailings or changes of address should be directed to: First Chicago Trust Company, a division of EquiServe P.O. Box 2500 Jersey City, NJ 07303-2500 Telephone: (800) 446-2617 or (201) 324-0498 Internet: www.equiserve.com Correspondence concerning Baxter International Contingent Payment Rights related to the acquisition of Somatogen, Inc. should be directed to: U.S. Bank Trust National Association Telephone: (800) 934-6802 or (312) 228-9455 DIVIDEND REINVESTMENT The company offers an automatic dividend-reinvestment program to all holders of Baxter International Inc. common stock. A detailed brochure is available on request from: First Chicago Trust Company, a division of EquiServe P.O. Box 2598 Jersey City, NJ 07303-2598 Telephone: (800) 446-2617 or (201) 324-0498 Internet: www.equiserve.com INFORMATION RESOURCES Internet www.baxter.com Please visit our Internet site for: . General company information . Corporate news or earnings releases . Annual report . Form 10-K . Form 10-Q . Proxy Statement . Annual environmental report Stockholders may elect to view future proxy materials and annual reports on line via the Internet instead of receiving them by mail. Simply provide your e-mail address to our stock transfer agent, First Chicago Trust Company, at (800) 446-2617. We then will discontinue mailing these materials to you and notify you via e-mail how to access them. Stockholders also may access personal account information on line via the Internet by visiting www.equiserve.com and selecting the "Account Access" menu. By Mail Information also is available by mail on request from: Baxter International Inc. Investor Relations One Baxter Parkway Deerfield, Illinois 60015-4633 Telephone: (847) 948-4550 INVESTOR RELATIONS Securities analysts, investment professionals and investors seeking additional investor information should contact: Baxter Investor Relations Telephone: (847) 948-4551 CUSTOMER INQUIRIES Customers who would like general information about Baxter's products and services may call the Center for One Baxter toll free in the United States at (800) 422-9837, or by dialing (847) 948-4770. (C) Baxter International Inc., 2000. All rights reserved. References in this report to Baxter are intended to refer collectively to Baxter International Inc. and its U.S. and international subsidiaries and their operating divisions. 52 Baxter International 1999 Annual Report Five-Year Summary of Selected Financial Data
as of or for the years ended December 31 1999 1998/1/ 1997/2/ 1996/3/ 1995/4/ - --------------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS Net sales $ 6,380 5,706 5,259 4,583 4,318 (in millions) Income from continuing operations $ 779 275 371 505 322 Depreciation and amortization $ 372 344 318 269 270 Research and development expenses/5/ $ 332 323 339 291 296 - --------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET AND Capital expenditures $ 631 556 454 362 357 CASH FLOW INFORMATION Total assets $ 9,644 9,873 8,511 7,407 9,282 (in millions) Long-term debt and lease obligations $ 2,601 3,096 2,635 1,695 2,372 Cash flows from continuing operations $ 977 837 472 530 479 Cash flows from discontinued operation $ 106 102 86 108 813 Cash flows from investing activities $ (735) (872) (1,083) (552) (308) Cash flows from financing activities $ (445) 173 265 216 (996) - --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK Average number of common shares INFORMATION outstanding (in millions)/6/ 290 284 278 272 277 Income from continuing operations per common share Basic $ 2.69 .97 1.34 1.85 1.16 Diluted $ 2.64 .95 1.31 1.82 1.15 Cash dividends declared per common share $ 1.164 1.164 1.139 1.17 1.11 Year-end market price per common share $62.8125 64.3125 50.44 41.00 41.88 - --------------------------------------------------------------------------------------------------------------------------------- OTHER INFORMATION Net-debt-to-capital ratio 40.2% 48.4% 46.9% 33.8% 36.3% "Operational cash flow" from continuing operations (in millions)/7/ $ 588 379 153 341 246 Total shareholder return/8/ (0.5%) 30.1% 25.9% 14.1% 52.6% Common stockholders of record at year-end 61,200 61,000 62,900 65,400 74,400 - ---------------------------------------------------------------------------------------------------------------------------------
1. Income from continuing operations includes charges for in-process research and development, net litigation, and exit and other reorganization costs of $116 million, $178 million and $122 million, respectively. 2. Income from continuing operations includes a charge for in-process research and development of $220 million. 3. Certain balance sheet and other data are affected by the spin-off of Allegiance Corporation, which occurred on September 30, 1996. 4. Income from continuing operations includes charges for net litigation of $96 million and exit and other reorganization costs of $103 million. 5. Excludes charges for in-process research and development, as noted above. 6. Excludes common stock equivalents. 7. The company's internal "operational cash flow" measurement is defined on page 27 and is not a measure defined by generally accepted accounting principles. 8. Represents the total of appreciation in market price plus cash dividends paid on common shares for the year. EX-21 4 SUBSIDIARIES OF BAXTER INTERNATIONAL INC. EXHIBIT 21 - -------------------------------------------------------------------------------- Subsidiaries of the Company, as of March 23, 2000
% owned by Organized under immediate Subsidiary laws of parent - ------------------------------------------------------------------------------- Baxter International Inc......................... Delaware Baxter Healthcare Corporation.................. Delaware 100 Baxter Pharmaceutical Products Inc........... Delaware 100 Nextran Inc.................................. Delaware 100 RMS Health Systems Inc....................... Delaware 100 RMS Disease Management Inc................. Delaware 97.39 Perfusion Services of Baxter Healthcare Corporation................................. Pennsylvania 100 Baxter World Trade Corporation................. Delaware 100 Baxter Pharmacy Services Corporation......... Delaware 100(3) Baxter Caribe Inc.......................... Delaware 100 Baxter Healthcare Corporation of Puerto Rico...................................... Alaska 100 Baxter Sales and Distribution Corp......... Delaware 100 Baxter Biotech Holding AG.................... Switzerland 100 Baxter Biotech Technology S.a.r.l.......... Switzerland 100(1) Baxter Healthcare Pte. Ltd................. Singapore 100 Baxter World Trade S.A................... Belgium 46.21(2) Baxter Healthcare S.A...................... Panama 100 Baxter World Trade S.A................... Belgium 53.78(2) Immuno International AG.................... Switzerland 100 Immuno--Canada Ltd....................... Canada 100 Baxter Aktiengesellschaft................ Austria 100(1) Baxter Hemoglobin Therapeutics S.A........... France 100(1) Baxter Corporation........................... Canada 100 Baxter Deutschland Holding GmbH.............. Germany 100 Baxter Deutschland GmbH.................... Germany 99.99(2) Baxter Edwards AG............................ Switzerland 100 Baxter, S.L................................ Spain 99.99(2) Baxter Export Corporation.................... Nevada 100 Baxter Healthcare (Holdings) Limited......... United Kingdom 99.99(2) Baxter Healthcare Limited.................. United Kingdom 99.99(2) Baxter Healthcare Pty. Ltd................... Australia 99.99(2) Baxter Limited............................... Japan 100 Baxter Representacoes Ltda................... Brazil 100 Baxter Hospitalar Ltda..................... Brazil 85.21(2) Baxter S.A................................... Belgium 98.43(2) Baxter S.A................................. France 64.58(1)(2) Baxter S.A. de C.V........................... Mexico 99.9(2) Baxter S.p.A................................. Italy 99.98(2) Bieffe Medital S.p.A....................... Italy 99 Laboratorios Baxter S.A...................... Delaware 100 Baxter Hemoglobin Therapeutics Inc............. Delaware 100 Edwards Lifesciences Research Medical, Inc..... Utah 100 - -------------------------------------------------------------------------------
Subsidiaries omitted from this list, considered in aggregate as a single subsidiary, would not constitute a significant subsidiary. All subsidiaries set forth herein are reported in the Company's financial statements through consolidation or under the equity method of accounting. * * * * * * (1) Including nominee shares. (2) Remaining shares owned by the Company, or other subsidiaries of the Company. (3) Of common stock, with preferred stock held by Baxter Healthcare Corporation. 25 EX-23 5 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23 - ------------------------------------------------------------------------------- Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-82667, 2-86993, 2-97607, 33-8812, 33-15523, 33- 15787, 33-28428, 33-33750, 33-54069, 333-43563, 333-47019, 333-71553, 333- 88257 and 333-80403) on Form S-3 (Nos. 33-5044, 33-23450, 33-27505, 33-31388, 33-49820 and 333-1902 and 333-94889) and on Form S-4 (Nos. 33-808, 33-15357, 33-53937, 333-21327, 333-47927 and 333-71553) of Baxter International Inc. of our report dated February 16, 2000 relating to the financial statements, which appears in the Annual Report to Stockholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated February 16, 2000 relating to the financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Chicago, Illinois March 20, 2000 26 EX-27.1 6 12/31/1999 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheet as of December 31, 1999 and the Consolidated Income Statement for the twelve months ended December 31, 1999 and is qualified in its entirety by reference to such financial statements. 1,000,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 606 0 1,686 34 1,116 3,819 4,709 2,059 9,644 2,700 2,601 0 0 294 3,054 9,644 6,380 6,380 3,568 3,568 351 7 123 1,052 273 779 45 0 (27) 797 2.75 2.70 Includes Research and Development Expenses and Goodwill Amortization.
EX-27.2 7 12/31/1998 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheet as of December 31, 1998 and the Consolidated Income Statement for the twelve months ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 709 0 1,783 37 1,167 4,295 4,508 2,063 9,873 2,831 3,096 0 0 291 2,548 9,873 5,706 5,706 3,142 3,142 341 14 152 493 218 275 40 0 0 315 1.11 1.09 Includes Research and Development Expenses and Goodwill Amortization.
EX-27.3 8 12/31/1997 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheet as of December 31, 1997 and the Consolidated Income Statement for the twelve months ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 1,000,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 465 0 1,582 26 1,050 3,496 3,959 1,816 8,511 2,416 2,635 0 0 288 2,331 8,511 5,259 5,259 2,877 2,877 350 9 166 570 199 371 (71) 0 0 300 1.08 1.06 Includes Research and Development Expenses and Goodwill Amortization.
EX-27.4 9 12/31/1996 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheet as of December 31, 1996 and the Consolidated Income Statement for the twelve months ended December 31, 1996 and is qualified in its entirety by reference to such financial statements. 1,000,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 761 0 1,327 22 721 3,116 3,380 1,739 7,407 2,302 1,695 0 0 288 2,216 7,407 4,583 4,583 2,567 2,567 297 5 98 693 188 505 164 0 0 669 2.46 2.41 Includes Research and Development Expenses and Goodwill Amortization.
EX-27.5 10 12/31/1995 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheet as of December 31, 1995 and the Consolidated Income Statement for the twelve months ended December 31, 1995 and is qualified in its entirety by reference to such financial statements. 1,000,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 476 0 1,075 18 743 2,575 3,071 1,515 9,282 2,043 2,372 0 0 288 3,416 9,282 4,318 4,318 2,413 2,413 299 9 82 455 133 322 49 0 0 371 1.34 1.33 Includes Research and Development Expenses and Goodwill Amortization.
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