-----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, GlJGW8l8WknYYcoqx3DAVpFm97lWoM7eDD7XuflavI4vObaMBeeZljfneDWW9+Ua pZYl+A/wWicZprdzEz2hjw== 0000912057-96-004966.txt : 19960325 0000912057-96-004966.hdr.sgml : 19960325 ACCESSION NUMBER: 0000912057-96-004966 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960322 SROS: NYSE 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04448 FILM NUMBER: 96537405 BUSINESS ADDRESS: STREET 1: ONE BAXTER PKWY CITY: DEERFIELD STATE: IL ZIP: 60015 BUSINESS PHONE: 7089482000 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-K 1 BAXTER INTERNATIONAL 10-K - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (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, 1995 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 - -------------------------------------------------------------------------------- [LOGO] Baxter International Inc. - -------------------------------------------------------------------------------- DELAWARE 36-0781620 - ----------------------- -------------------------------- State of Incorporation I.R.S. Employer Identification No.
ONE BAXTER PARKWAY, DEERFIELD, ILLINOIS 60015 (847) 948-2000 -------------------------------------------------- Address, including zip code, and telephone number, including area code, of principal executive offices 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 Chicago Stock Exchange Pacific Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange (currently traded with common Chicago Stock Exchange stock) Pacific Stock Exchange
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. Yes _X_ 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 the definitive proxy statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the voting stock held by non-affiliates of the registrant (based on the per share closing sale price of $43.88 on March 8, 1996, and for the purpose of this computation only, the assumption that all registrant's directors and executive officers are affiliates) was approximately $11.8 billion. The number of shares of the registrant's common stock, $1 par value, outstanding as of March 8, 1996, was 273,957,449. DOCUMENTS INCORPORATED BY REFERENCE Those sections or portions of the registrant's 1995 annual report to stockholders and of the registrant's proxy statement for use in connection with its annual meeting of stockholders to be held on May 6, 1996, 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................................................. 3(2) (b) Financial Information about Industry Segments................................... 3(3) (c) Narrative Description of Business............................................... 3(4) (d) Financial Information about Foreign and Domestic Operations and Export Sales.... 8(5) Item 2. Properties................................................................................. 9 Item 3. Legal Proceedings.......................................................................... 9(6) Item 4. Submission of Matters to a Vote of Security Holders........................................ 9 Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................................................................................... 10(7) Item 6. Selected Financial Data.................................................................... 10(8) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................................. 10(9) Item 8. Financial Statements and Supplementary Data................................................ 10(10) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................................................... 10 Item 10. Directors and Executive Officers of the Registrant (a) Identification of Directors..................................................... 11(11) (b) Identification of Executive Officers............................................ 11 (c) Compliance with Section 16(a) of the Securities Exchange Act of 1934............ 13(12) Item 11. Executive Compensation..................................................................... 13(13) Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 13(14) Item 13. Certain Relationships and Related Transactions............................................. 13 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 14 (a) Financial Statements............................................................ 14 (b) Reports on Form 8-K............................................................. 14 (c) Exhibits........................................................................ 14
- ------------------------ (1) Information incorporated by reference to the Company's Annual Report to Stockholders for the year ended December 31, 1995 ("Annual Report") and the board of directors' proxy statement for use in connection with the Registrant's annual meeting of stockholders to be held May 6, 1996 ("Proxy Statement"). (2) Annual Report, pages 50-70, section entitled "Notes to Consolidated Financial Statements" and pages 30-43, section entitled "Management's Discussion and Analysis." (3) Annual Report, pages 68-69, section entitled "Notes to Consolidated Financial Statements-- Industry and Geographic Information." (4) Annual Report, pages 30-43, section entitled "Management's Discussion and Analysis" and pages 68-69, section entitled "Notes to Consolidated Financial Statements--Industry and Geographic Information." (5) Annual Report, pages 68-69, section entitled "Notes to Consolidated Financial Statements-- Industry and Geographic Information." (6) Annual Report, page 62-68, section entitled "Notes to Consolidated Financial Statements-- Legal Proceedings." (7) Annual Report, page 70, section entitled "Notes to Consolidated Financial Statements--Quarterly Financial Results and Market for the Company's Stock." (8) Annual Report, inside back cover, section entitled "Five-Year Summary of Selected Financial Data." (9) Annual Report, pages 30-43, section entitled "Management's Discussion and Analysis." (10) Annual Report, pages 45-70, sections entitled "Report of Independent Accountants," "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Cash Flows," "Consolidated Statements of Stockholders' Equity" and "Notes to Consolidated Financial Statements." (11) Proxy Statement, pages 2-5, sections entitled "Board of Directors" and "Election of Directors." (12) Proxy Statement, page 18, section entitled "Section 16 Reporting." (13) Proxy Statement, pages 6-12, sections entitled "Compensation of Directors" and "Compensation of Named Executive Officers," and page 17-18, section entitled "Pension Plan, Excess Plans and Supplemental Plans." (14) Proxy Statement, pages 18-20, section entitled "Ownership of Company Securities." - -------------------------------------------------------------------------------- [BAXTER LOGO] 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" means Baxter International Inc. and the "Company" means Baxter and its subsidiaries. The Company is engaged in the worldwide development, distribution and manufacture of a diversified line of products, systems and services used primarily in the health-care field. Products are manufactured by the Company in 23 countries and sold in approximately 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. The Company's more than 200,000 products are used by hospitals, clinical and medical research laboratories, blood and dialysis centers, rehabilitation centers, nursing homes, doctors' offices and at home under physician supervision. See "Recent Developments." For information regarding acquisitions, investments in affiliates and divestitures, see the Company's Annual Report to Stockholders for the year ended December 31, 1995 (the "Annual Report"), page 53, section entitled "Notes to Consolidated Financial Statements--Acquisitions, Investments in Affiliates and Divestitures" which is incorporated by reference. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. Incorporated by reference from the Annual Report, pages 68-69, section entitled "Notes to Consolidated Financial Statements--Industry and Geographic Information." (c) NARRATIVE DESCRIPTION OF BUSINESS. Recent Developments SPIN-OFF OF HEALTH CARE COST MANAGEMENT BUSINESS On November 28, 1995, the board of directors of Baxter approved in principle a plan to distribute to Baxter stockholders all of the outstanding stock of its health-care cost management business in a spin-off transaction (the "Distribution") which is expected to be tax-free. The creation of two independent companies will enable Baxter and the new company to devote management time, attention and investments directly to the core strategies of each business. The new health-care cost management business will consist of the Company's cost management services, United States distribution, surgical products and respiratory-therapy operations and will operate as a medical supplier focused on helping customers manage the total cost of providing patient care. The Distribution is expected to occur in late 1996 and will result in the health-care cost management business operating as an independent entity with publicly-traded common stock. OFFER TO ACQUIRE NATIONAL MEDICAL CARE; SUBSEQUENT WITHDRAWAL On February 1, 1996, Baxter publicly announced its proposal to acquire the National Medical Care ("NMC") subsidiary of W.R. Grace and Company ("Grace") in a tax-free transaction for $3.8 billion, consisting of $1.8 billion of Baxter common stock and a payment to Grace of $2.0 billion comprised of cash, notes and assumed debt. Grace had previously announced its intention to spin-off or divest NMC. Completion of this transaction in 1996 would have resulted in a dilution of Baxter's net earnings, but 3 would have been accretive after approximately six quarters of combined results. The Company's net-debt-to-net-capital ratio would have risen to approximately 42% (compared to 36.3% at December 31, 1995) but was expected to decline to approximately 40% within two years of the acquisition, all else remaining constant. On February 5, 1996, Grace announced that it had agreed to combine its NMC subsidiary with the worldwide dialysis business of Fresenius A.G. (a German company) to form a new company called Fresenius Medical Care in a transaction designed to be tax-free. Fresenius A.G. is a major competitor of the Company's renal division and NMC is a large United States customer of the renal division. Under the proposed transaction with Fresenius A.G., Grace shareholders would receive a 44.8% equity interest in Fresenius Medical Care and Grace would receive $2.3 billion in cash provided by proceeds of debt financing by Fresenius Medical Care. This transaction is subject to the approval of the shareholders of Grace, Fresenius U.S.A. and Fresenius A.G. If the transaction with Grace is consummated with Fresenius A.G., there will be an increased competitive threat to the Company's renal division. However, management believes that this would not have a material adverse effect on Baxter's financial condition or results of operations in 1996. Since the management of Grace refused to discuss the Company's proposed transaction, Baxter withdrew its offer on February 22, 1996. RESTRUCTURING PROGRAMS The Company currently has two restructuring programs in process. In November 1993, the Company initiated a restructuring program designed to accelerate growth and reduce costs in the Company's businesses worldwide, including reorganizations and consolidations in the United States, Europe, Japan and Canada. In the third quarter of 1995, the Company initiated a second restructuring program to consolidate manufacturing operations in Puerto Rico in order to eliminate excess capacity and reduce manufacturing costs. Since the announcement of the 1993 restructuring program, the Company has implemented, or is in the process of implementing, all of the major strategic actions associated therewith and is satisfied that the program is progressing on schedule and will meet previously established financial targets. During 1995, the Company utilized $60 million of restructuring reserves related to its continuing operations, including $36 million in cash payments. Cash outflows pertain primarily to employee-related costs for severance, outplacement assistance, relocation and retention. The Company has eliminated from continuing operations approximately 1,250 positions of the approximately 1,640 positions affected by the program. The majority of the remaining reductions will occur in 1996 and 1997, as facility closures and consolidations are completed as planned. During 1995, the Company realized approximately $90 million in continuing operations savings which represents a shortfall of approximately $20 million from its estimated savings target. This shortfall is primarily due to timing delays in the implementation of a number of projects. Management has forecasted continuing operations savings of approximately $110 million in 1996, $130 million in 1997 and exceeding $140 million in 1998. Management anticipates that these savings will be partially invested in increased research and development and expansion into growing international markets. Management further believes that its remaining restructuring reserves are adequate to complete the actions contemplated by the 1993 restructuring program. Management is at the very early stages of implementing the 1995 restructuring program, which is expected to be completed by the end of 1998. The pretax restructuring charge of $93 million includes approximately $67 million for valuation adjustments as a result of the Company's decision to close facilities. The Company expects to spend approximately $26 million in cash over the next two years, including severance related to the approximately 1,450 positions that will be eliminated in connection with the 1995 plan. The plant closures and consolidations in Puerto Rico will lower the Company's manufacturing costs. Management believes these actions will help mitigate the Company's exposure to future gross 4 margin erosion arising from pricing pressure, primarily in the United States. In addition to the consolidation of the Company's manufacturing operations in Puerto Rico, the Company has initiated plans for other organizational structure changes which have resulted in a $10 million provision for cash payments related to employee severance. Management anticipates that future cash expenditures related to both the 1993 and 1995 restructuring programs will be funded from cash generated from operations. Industry Overview The Company operates in a single industry segment as a world leader in providing health-care products for use in hospitals and other health-care settings. On a global basis, the Company develops, manufactures and markets intravenous solutions and related administration equipment, and highly specialized medical products for treating kidney and heart disease, blood disorders, and for collecting and processing blood. These products include intravenous solutions and pumps; dialysis equipment and supplies; prosthetic heart valves and cardiac catheters; blood-clotting therapies; and machines and supplies for collecting, separating and storing blood. These products require extensive research and development and investment in worldwide manufacturing, marketing and administrative infrastructure. Information about segment operating results is incorporated by reference from the Annual Report, pages 30-43, section entitled "Management's Discussion and Analysis" and pages 68-69, section entitled "Notes to Consolidated Financial Statements--Industry and Geographic Information." UNITED STATES MARKETS Though the federal government failed to enact health-care reform, fundamental change continued to be a part of the United States health-care system in 1995. Competition for patients among health-care providers continues to intensify. Increasingly, providers are looking for ways to better manage costs in areas such as materials handling, supply utilization, product standardization for specific procedures and capital expenditures. The new health-care cost management business is being distributed to stockholders to more optimally meet these emerging market needs, remove limitations, and improve the competitiveness of both Baxter and the new company. There has also been consolidation in the Company's customer base and by its competitors. These trends are expected to continue. In recent years, the Company's overall price increases have been below the Consumer Price Index, and industry trends and competition may inhibit the Company's ability to increase prices in the future. INTERNATIONAL MARKETS Throughout the world, as developing countries create more wealth, improving the health and well-being of their citizens becomes a much higher social priority and usually leads to increased per-capita spending on health care. The world's largest developing markets in the Pacific Rim countries and Latin America are all poised for significant economic growth. Based on these factors, management believes there will be improved expansion opportunities for the Company with its broad portfolio of proven cost-effective products, services and therapies to meet the demands of these markets. In the developed world--especially in Western Europe and Japan--there continues to be strong demand for more technologically advanced and cost-effective therapies, products and services, and the Company has long been a leader in these markets. In view of these conditions, management believes the Company's best opportunities for growth are outside the United States. Consequently, the Company's strategies emphasize international expansion to capitalize on the Company's strong global positions in intravenous products, renal therapy, biotechnology and cardiovascular therapies. HEALTH-CARE COST ENVIRONMENT Accelerating cost pressures on United States hospitals are resulting in increased out-patient and alternate-site health-care service delivery and a focus on cost-effectiveness and quality. In addition, technological advances in health-care product and service offerings are increasingly evaluated on their ability to both improve the quality of care and provide more cost-effective outcomes. These forces increasingly shape the demand for, and supply of, medical care. 5 Many private health-care payers are providing incentives for consumers to seek lower cost care outside the hospital. Many corporations' employee health plans have been restructured to provide financial incentives for patients to utilize the most cost-effective forms of treatment (managed care programs, such as health maintenance organizations, have become more common), and physicians have been encouraged to provide more cost-effective treatments. The future financial success of health-care product and service companies, such as the Company, will depend on their ability to work with health-care customers to help them enhance their competitiveness. The Company believes it can help its customers achieve savings in the total health-care system by automating supply-ordering procedures, optimizing distribution networks, improving materials management and achieving economies of scale associated with aggregating purchases. The Company continues to believe that its strategy of providing unmatched service to its health-care customers and achieving the best overall cost in its delivery of health-care products and services is compatible with any realignment of the United States health-care system which may ultimately occur. Joint Ventures The Company conducts a portion of its business through joint ventures, including a joint venture with Nestle, S.A. to develop, market and distribute clinical nutrition products worldwide. This joint venture is accounted for under the equity method of accounting and therefore, is excluded from the Company's segment results. Methods of Distribution The Company 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 independent distributors, dealers and sales agents. Distribution centers, which may serve more than one division, are 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. International sales and distribution are made in approximately 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, Brunei, Canada, China, Colombia, Ecuador, Denmark, Finland, France, Germany, Hong Kong, India, Indonesia, Italy, Japan, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Pakistan, the Philippines, Singapore, Spain, Sweden, Switzerland, Taiwan, Thailand and the United Kingdom. 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, including its latex 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. 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. The Company does not always recover cost increases through customer pricing due to contractual limits and market pressure on such price increases. See "Contractual Arrangements." 6 Patents and Trademarks The Company owns a number of patents and trademarks throughout the world and is licensed under patents owned by others. While it seeks patents on new developments whenever feasible, the Company does not consider any one or more of its patents, or the licenses granted to or by it, to be essential to its business. Products manufactured by the Company 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. 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 the Company, the Company believes that its research and development effort will permit it to remain competitive in all presently material product areas. Although no single company competes with the Company in all of its businesses, the Company 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 health-care suppliers. Competition is focused on price, service and product performance. Pressure in these areas is expected to continue. See "Health-Care Cost Environment" and "United States Markets." In part through its restructuring programs, the Company continues to increase its efforts to minimize costs and better meet accelerating 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 continues to emphasize its investments in innovative and cost-effective technologies and the quality of its product and services. Credit and Working Capital Practices The Company's debt ratings of A3 on senior debt by Moody's, A- by Standard & Poor's and A by Duff & Phelps were reaffirmed by each rating agency in 1995. However, the rating agencies have placed the Company on credit watch pending clarification of the Company's capital structure in conjunction with the Distribution of the health-care cost management business. 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. Customers may return defective merchandise for credit or replacement. In recent years, such returns have been insignificant. Quality Control The Company places great emphasis on providing quality products and services to its customers. An integrated network of 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 raw material and finished goods suppliers to provide the highest value to customers. On a statistical sampling basis, a quality assurance organization tests components and finished goods at different stages in the manufacturing process to assure that exacting standards are met. Research and Development The Company is actively engaged in research and development programs to develop and improve products, systems and manufacturing methods. These activities are performed at 21 research and development centers located around the world and include facilities in Australia, Belgium, Germany, 7 Italy, Japan, Malta, the Netherlands, Sweden, the United Kingdom and the United States. Expenditures for Company-sponsored research and development activities related to continuing operations were $345 million in 1995, $303 million in 1994 and $280 million in 1993. 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. Principal areas of strategic focus for research are biotechnology, renal therapy and transplantation, blood disorders and cardiovascular disease. Government Regulation Most products manufactured or sold by the Company in the United States are subject to regulation by the Food and Drug Administration ("FDA"), as well as by other federal and state agencies. The FDA regulates the introduction and advertising of new drugs and devices as well as manufacturing procedures, labeling and record keeping with respect to drugs and devices. The FDA has the power to seize adulterated or misbranded drugs and devices or to require the manufacturer to remove them from the market and the power to publicize relevant facts. 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. Product regulatory laws exist in most other countries where the Company does business. 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 the Company during 1995 and similar expenditures are planned for 1996. See Item 3.--"Legal Proceedings." Employees As of December 31, 1995, the Company employed approximately 56,580 people, including approximately 31,430 in the United States and Puerto Rico. Contractual Arrangements A substantial portion of the Company's products are sold through contracts with purchasers, both international and domestic. 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. (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 68-69, section entitled "Notes to Consolidated Financial Statements--Industry and Geographic Information." 8 - -------------------------------------------------------------------------------- ITEM 2. PROPERTIES. The Company owns or has long-term leases on substantially all of its major manufacturing facilities. The Company maintains 33 manufacturing facilities in the United States, including seven in Puerto Rico, and also manufactures in Australia, Belgium, Brazil, Canada, the Czech Republic, Chile, China, Colombia, Costa Rica, the Dominican Republic, France, Ireland, Italy, Japan, Malaysia, Malta, Mexico, the Netherlands, Singapore, Spain, Russia, Turkey and the United Kingdom. The Company owns or operates 83 distribution centers in the United States and Puerto Rico and 66 located in 22 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 with the current state of technology and government regulations. Capital expenditures related to continuing operations were $309 million in 1995, $308 million in 1994 and $276 million in 1993. In addition, the Company added to the continuing operations pool of equipment leased or rented to customers, spending $90 million in 1995, $72 million in 1994 and $56 million in 1993. - -------------------------------------------------------------------------------- ITEM 3. LEGAL PROCEEDINGS. Incorporated by reference from the Annual Report, pages 62-68, section entitled "Notes to Consolidated Financial Statements--Legal Proceedings." Additionally, in March 1996, and after the Annual Report was printed, the courts in Osaka and Tokyo issued second settlement plans and second interim opinions in the Japanese Factor Concentrate cases. Those plans and opinions supplement the courts' original plans for resolution of the litigation by confirming the approximate $450,000 up-front payment to each plaintiff, which is to be funded 60% by the corporate defendants and 40% by the Japanese government. The courts' plans and opinions also establish on-going payments to AIDS-manifested hemophiliacs at $1,500 per month and set attorneys' fees at $35,000 per current plaintiff and $15,000 per future plaintiff. The courts' plans provide that the Japanese government will fund 40% of those amounts, and that the corporate defendants will fund 60% with the corporate defendants funding their amounts in proportion to their 1983 market shares, resulting in the Company paying 12.5% of the overall corporate defendants' share. The courts' plans also provide for the continuation of the Yuai Zaidan for non-plaintiffs through March 2001, for the Japanese government to fund 40% of the aggregate amount required for the Yuai Zaidan, for 100% credit of future Yuai Zaidan payments to individuals against settlement amounts paid after the settlement is approved, and for the entry of future plaintiffs into the fund. On March 13, 1996, the Company accepted the basic terms of the courts' imposed settlement. Negotiations on the details of the settlement are continuing. - -------------------------------------------------------------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 9 PART II - -------------------------------------------------------------------------------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Incorporated by reference from the Annual Report, page 70, section entitled "Notes to Consolidated Financial Statements--Quarterly Financial Results and Market for the Company's Stock." - -------------------------------------------------------------------------------- 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 30-43, section entitled "Management's Discussion and Analysis." - -------------------------------------------------------------------------------- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Incorporated by reference from the Annual Report, pages 45-70, sections entitled "Report of Independent Accountants," "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Cash Flows," "Consolidated Statements of Stockholders' Equity," and "Notes to Consolidated Financial Statements." - -------------------------------------------------------------------------------- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 10 PART III - -------------------------------------------------------------------------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (a) IDENTIFICATION OF DIRECTORS Incorporated by reference from the board of directors' proxy statement for use in connection with Baxter's annual meeting of stockholders to be held on May 6, 1996 (the "Proxy Statement"), pages x-x, sections entitled "Board of Directors" and "Election of Directors." (b) IDENTIFICATION OF EXECUTIVE OFFICERS Following are the names and ages, as of March 1, 1996, of the executive officers of Baxter International Inc. ("Baxter"), 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 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 after 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) may be taken by written consent in lieu of a meeting. (1) BAXTER INTERNATIONAL INC. EXECUTIVE OFFICERS VERNON R. LOUCKS JR., age 61, has been chairman of the board of directors since 1987 and chief executive officer of Baxter since 1980. Mr. Loucks was first elected an officer of Baxter in 1971. MANUEL A. BAEZ, age 54, has been an executive vice president of Baxter since 1995, and a group vice president of World Trade since 1994. Between 1990 and 1994, Mr. Baez was a group vice president of Baxter. Mr. Baez was first elected an officer of Baxter in 1989. LESTER B. KNIGHT, age 37, has been an executive vice president of Baxter since 1992, and a corporate vice president since 1990, when he was first elected an officer. HARRY M. JANSEN KRAEMER, Jr., age 41, has been a senior vice president and chief financial officer of Baxter since 1993. Mr. Kraemer previously was the vice president of finance and operations for a subsidiary of Baxter. Prior to that he was employed as controller, group controller, and president of various divisions of subsidiaries of Baxter. ARTHUR F. STAUBITZ, age 56, has been senior vice president and general counsel of Baxter since 1993. From 1993 to 1994, he was also secretary of Baxter. Mr. Staubitz previously was vice president/general manager of the ventures group of a subsidiary of Baxter. Prior to that he was senior vice president, secretary and general counsel of Amgen, Inc. Prior to that he was a vice president of a Baxter subsidiary, and prior to that he was a vice president and deputy general counsel of Baxter. MICHAEL J. TUCKER, age 43, has been senior vice president of Baxter since 1995. From 1994 to 1995, he was a corporate vice president of World Trade. Mr. Tucker previously was a vice president of a division of World Trade, and prior to that, was a vice president of another division of a subsidiary of Baxter. HERBERT E. WALKER, age 61, has been senior vice president of Baxter since 1993. Mr. Walker previously was vice president of human resources of a division of Healthcare. FABRIZIO BONANNI, age 49, has been a vice president of Baxter since 1995. From 1994 to 1995, he was a corporate vice president of World Trade. Mr. Bonanni previously was a vice president of a division of World Trade. 11 JOHN F. GAITHER, Jr., age 46, has been a vice president of Baxter since 1994. Between 1991 and 1994, 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. DAVID C. MCKEE, age 48, has been a vice president of Baxter since 1996. Between 1994 and 1996, Mr. McKee was Baxter's deputy general counsel, and prior to that, was associate general counsel of a subsidiary of Baxter. KSHITIJ MOHAN, age 51, has been a vice president of Baxter since 1995. In 1995, Mr. Mohan also was a corporate vice president of World Trade. Mr. Mohan previously was a vice president of a division of Healthcare. JOHN L. QUICK, age 51, has been a vice president of Baxter since 1995. From 1994 to 1995, he was a corporate vice president of Healthcare. Mr. Quick previously was a vice president of a division of Healthcare, and prior to that, was a vice president of another division of that subsidiary. KATHY B. WHITE, age 46, has been vice president and chief information officer of Baxter since 1995. Ms. White previously was vice president of information systems of Allied Signal Corporation, and prior to that, was a corporate officer responsible for human resources and information systems with Guilford Mills, Inc. BRIAN P. ANDERSON, age 45, has been controller of Baxter since 1993. Mr. Anderson previously was the vice president of corporate audit of a subsidiary of Baxter, and prior to that was a partner in the international accounting firm of Deloitte & Touche. LAWRENCE D. DAMRON, age 49, has been treasurer of Baxter since 1992. Mr. Damron previously was a vice president and controller of a division of a subsidiary of Baxter, and prior to that was the corporate auditor of another subsidiary. Prior to that, he was vice president and controller of a division of that subsidiary. A. GERARD SIECK, age 39, has been secretary of Baxter since 1994. Between 1992 and 1994, Mr. Sieck was assistant secretary of Baxter, and prior to that, was corporate counsel in the law department of Healthcare. (2) HEALTHCARE AND WORLD TRADE EXECUTIVE OFFICERS TIMOTHY B. ANDERSON, age 49, has been a group vice president of Healthcare and World Trade since 1994. Between 1992 and 1994, Mr. Anderson was a vice president of Baxter. Mr. Anderson previously was president of several divisions of a subsidiary of Baxter. JOSEPH F. DAMICO, age 42, has been a group vice president of Healthcare since 1994. Between 1992 and 1994, Mr. Damico was a vice president of Baxter. Mr. Damico previously was president of a division of Healthcare, and prior to that was a vice president - general manager of that division. DONALD W. JOSEPH, age 58, has been a group vice president of Healthcare and World Trade since 1994. Between 1990 and 1994, Mr. Joseph was a vice president of Baxter. JACK L. MCGINLEY, age 49, has been a group vice president of Healthcare since 1994. Between 1992 and 1994, Mr. McGinley was a vice president of Baxter. Mr. McGinley previously was president of a division of Healthcare, and prior to that was president of the Japanese subsidiary of World Trade. TERRENCE J. MULLIGAN, age 50, has been a group vice president of Healthcare since 1994. Between 1990 and 1994, Mr. Mulligan was a senior vice president of Baxter. Mr. Mulligan was first elected an officer of Baxter in 1985. MICHAEL A. MUSSALLEM, age 43, has been a group vice president of Healthcare since 1994. From 1993 to 1994, Mr. Mussallem was president of a division of Healthcare, and from 1990 to 1993, was president of another division of that subsidiary. 12 CARLOS DEL SALTO, age 53, has been a corporate vice president of World Trade since 1994. Between 1992 and 1994, Mr. del Salto was a vice president of Baxter. Mr. del Salto previously was president-- Latin America/Switzerland/Austria of a subsidiary of Baxter, and prior to that, he was vice president-- Latin America of that subsidiary. J. ROBERT HURLEY, age 46, has been a corporate vice president of World Trade since 1993. Mr. Hurley previously was vice president of a division of World Trade. ROBERTO E. PEREZ, age 46, has been a corporate vice president of Healthcare and World Trade since March 3, 1995. Between 1992 to 1995, Mr. Perez was president of a division of a subsidiary of Baxter, and prior to that was a vice president of that division. (c) COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934. Incorporated by reference from Proxy Statement, page 18, section entitled "Section 16 Reporting." - -------------------------------------------------------------------------------- ITEM 11. EXECUTIVE COMPENSATION. Incorporated by reference from the Proxy Statement, pages 6-16, sections entitled "Compensation of Directors" and "Compensation of Named Executive Officers," and pages 17-18, section entitled "Pension Plan, Excess Plans and Supplemental Plans." - -------------------------------------------------------------------------------- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Incorporated by reference from the Proxy Statement, pages 18-20, section entitled "Ownership of Company Securities." - -------------------------------------------------------------------------------- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. 13 - -------------------------------------------------------------------------------- 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 46 Consolidated Statements of Income Annual Report, page 47 Consolidated Statements of Cash Flows Annual Report, page 48 Consolidated Statements of Stockholders' Equity Annual Report, page 49 Annual Report, pages Notes to Consolidated Financial Statements 50-70 Report of Independent Accountants Annual Report, page 45 SCHEDULES REQUIRED BY ARTICLE 12 OF REGULATION S-X Report of Independent Accountants on Financial Statement Schedule page 15 II Valuation and Qualifying Accounts page 16 All other schedules have been omitted because they are not applicable or not required.
(b) Reports on Form 8-K A report on Form 8-K, dated November 14, 1995, was filed with the SEC under Item 5, Other Events, to file a press release which announced, among other things, a $500 million stock repurchase program and participation in a revised settlement of mammary-implant litigation. A report on Form 8-K, dated November 28, 1995, was filed with the SEC under Item 5, Other Events, to file a press release which announced a plan to distribute to Baxter shareholders publicly-traded stock for a new health-care cost management company. A report on Form 8-K, dated February 2, 1996, was filed with the SEC under Item 5, Other Events, to file a press release which announced an offer to acquire the National Medical Care, Inc. subsidiary of W. R. Grace & Co. A report on Form 8-K, dated February 29, 1996, was filed with the SEC under Item 5, Other Events, to file a press release which announced the withdrawal of a February 2, 1996 offer to acquire the National Medical Care, Inc. subsidiary of W. R. Grace & Co. (c) Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated herein by reference.
14 REPORT OF INDEPENDENT ACCOUNTS ON THE 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 14, 1996 appearing on page 45 of the 1995 Annual Report to Stockholders of Baxter International Inc. (which report and consolidated financial statements are incorporated by reference in the 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. PRICE WATERHOUSE LLP Chicago, Illinois February 14, 1996 15 SCHEDULE II - -------------------------------------------------------------------------------- VALUATION AND QUALIFYING ACCOUNTS (In millions of dollars)
- ----------------------------------------------------------------------------------------------------------------------------- ADDITIONS ------------------------------ BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER DEDUCTIONS END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(A) FROM RESERVES PERIOD - ----------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1995: Accounts receivable $ 21 $ 9 $ 1 $ (9) $ 22 -- -- --- --- --- --- --- --- --- --- - ----------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1994: Accounts receivable $ 19 $ 7 $ 1 $ (6) $ 21 -- -- --- --- --- --- --- --- --- --- - ----------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1993: Accounts receivable $ 16 $ 6 $ (1) $ (2) $ 19 -- -- --- --- --- --- --- --- --- --- - -----------------------------------------------------------------------------------------------------------------------------
(A) Valuation accounts of acquired or divested companies and foreign currency translation adjustments. Reserves are deducted from assets to which they apply. 16 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. By: /s/ VERNON R. LOUCKS JR. ---------------------------------- Vernon R. Loucks Jr. CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Date: March 21, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. (i) Principal Executive Officer: (iv) A Majority of the Board of Directors Silas S. Cathcart /S/ VERNON R. LOUCKS JR. Pei-yuan Chia ----------------------- Vernon R. Loucks Jr. John W. Colloton DIRECTOR, CHAIRMAN OF THE BOARD Susan Crown AND CHIEF EXECUTIVE OFFICER Mary Johnston Evans Frank R. Frame David W. Grainger Martha R. Ingram Lester B. Knight Harry M. Jansen Kraemer, Jr. (ii) Principal Financial Officer: Arnold J. Levine Georges C. St. Laurent, Jr. Monroe E. Trout, M.D. /S/ HARRY M. JANSEN KRAEMER, JR. Fred L. Turner -------------------------------- Harry M. Jansen Kraemer, Jr. SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (iii) Controller: /s/ BRIAN P. ANDERSON By: /s/ VERNON R. LOUCKS JR. --------------------- ---------------------------- Brian P. Anderson Vernon R. Loucks Jr. CONTROLLER DIRECTOR AND ATTORNEY-IN-FACT
17 - -------------------------------------------------------------------------------- APPENDICES
DESCRIPTION PAGE - ------------------------------------------------------------------------------------------------------ --------- Computation of Primary Earnings per Common Share (Exhibit 11.1) 22 Computation of Fully Diluted Earnings per Common Share (Exhibit 11.2) 23 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 Form 10-Q for the quarter ended September 30, 1994, file number 1-4448. 4. Instruments defining the rights of security holders, including indentures 4.1* Indenture for 4 3/4% Convertible Subordinated Debentures due January 1, 2001, filed under the Securities Act of 1933 as exhibit 2(d) to the Company's registration statement on Form S-7 (No. 2-55622). 4.2* Indenture dated November 15, 1985 between the Company and Bankers Trust Company, filed as exhibit 4.8 to the Company's current report on Form 8-K dated December 16, 1985, file no. 1-4448. 4.3* Amended and Restated Indenture dated November 15, 1985, between the Company and Continental Illinois National Bank and Trust Company of Chicago, filed under the Securities Act of 1933 as exhibit 4.1 to the Company's registration statement on Form S-3 (No. 33-1665). 4.4* First Supplemental Indenture to Amended and Restated Indenture dated November 15, 1985, between the Company and Continental Illinois National Bank and Trust Company of Chicago, 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). 4.5* Indenture dated as of August 15, 1977, between the Company and Midlantic National Bank, as supplemented, filed as exhibit 4.7 to the Company's annual report on Form 10-K for the year ended December 31, 1985, file no. 1-4448 (the "1985 Form 10-K"). 4.6* Fiscal and Paying Agency Agreement dated as of April 26, 1984, among American Hospital Supply International Finance N.V., the Company and The Toronto-Dominion Bank, as amended, filed as exhibit 4.9 to the 1985 Form 10-K. 4.7* 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"). 4.8* Specimen Medium-Term Note, filed as exhibit 4.10 to the 1985 Form 10-K. 4.9* Specimen Extendible Note, filed as exhibit 4.11 to the 1985 Form 10-K.
18
NUMBER AND DESCRIPTION OF EXHIBIT - -------------------------------------------------------------------------------------------------------------------- 4.10* Specimen 13 1/8% Note, filed as exhibit 4.12 to the 1985 Form 10-K. 4.11* Specimen 9 5/8% Note, filed as exhibit 4.13 to the 1987 Form 10-K. 4.12* Specimen 8 7/8% Debenture, filed as exhibit 4.2(a) to the Company's current report on Form 8-K dated June 15, 1988, file no. 1-4448. 4.13* 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. 4.14* 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. 4.15* 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. 10. Material Contracts 10.1* Employment Agreement between William B. Graham and the Company, filed as exhibit 10.1 to the 1985 Form 10-K. 10.2* 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. 10.3* Stock Option Plan of 1977 (as amended and restated), filed as exhibit 19.3 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1984, file no. 1-4448. 10.4* 1988 Long-Term Incentive Plan, filed as exhibit 10.12 to the 1987 Form 10-K. 10.5* 1987-1989 Long-Term Performance Incentive Plan, filed as exhibit 10.15 to the Company's annual report on Form 10-K for the year ended December 31,1986 (the "1986 Form 10-K"). 10.6* 1989 Long-Term Incentive Plan, filed as exhibit 10.12 to the Company's annual report on Form 10-K for the year ended December 31, 1988, file no. 1-4448 (the "1988 Form 10-K"). 10.7* Stock Option Plan Adopted July 25, 1988, filed as exhibit 10.13 to the 1988 Form 10-K. 10.8* 1991 Officer Incentive Compensation Plan, filed as exhibit 10.11 to the Company's annual report on Form 10-K for the year ended December 31, 1990, file number 1-4448 (the "1990 Form 10-K"). 10.9* Baxter International Inc. and Subsidiaries Incentive Investment Excess Plan, filed as exhibit 10.17 to the 1988 Form 10-K. 10.10* Baxter International Inc. and Subsidiaries Supplemental Pension Plan, filed as exhibit 10.18 to the 1988 Form 10-K. 10.11* Amendment to Stock Option Plan of 1977, filed as exhibit 19.2 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"). 10.12* Limited Rights Plan, filed as exhibit 19.6 to the September, 1989 Form 10-Q. 10.13* Amendments to various plans regarding disability, filed as exhibit 19.9 to the September, 1989 Form 10-Q. 10.14* Amendments to 1987-1989 Long-Term Performance Incentive Plan and 1988 Long-Term Incentive Plan, filed as exhibit 19.10 to the September, 1989 Form 10-Q.
19
NUMBER AND DESCRIPTION OF EXHIBIT - -------------------------------------------------------------------------------------------------------------------- 10.15* 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. 10.16* Rights Agreement between the Company and The First National Bank of Chicago, filed as exhibit 1 to a registration statement on Form 8-A dated March 21, 1989, file no. 1-4448. 10.17* Amendment to 1987 Incentive Compensation Program, filed as exhibit 19.1 to September, 1989 Form 10-Q. 10.18* Deferred Compensation Plan (1990), filed as exhibit 10.24 to the 1990 Form 10-K. 10.19* 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"). 10.20* Vernon R. Loucks Restricted Stock Grant Terms and Conditions, filed as exhibit 10.26 to the 1991 Form 10-K. 10.21* Deferred Compensation Plan (1990), as amended in 1992, filed as exhibit 10.27 to the 1992 Form 10-K. 10.22* Restricted Stock Plan for Non-Employee Directors (as amended and restated in 1992), filed as exhibit 10.28 to the 1992 Form 10-K. 10.23* Restricted Stock Grant Terms and Conditions (as amended), filed as exhibit 10.31 to the 1992 Form 10-K. 10.24* 1992 Officer Incentive Compensation Plan, filed as exhibit 10.29 to the 1992 Form 10-K. 10.25* 1993 Officer Incentive Compensation Plan, filed as exhibit 10.30 to the 1992 Form 10-K. 10.26* 1994 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, 1993, file number 1-4448 (the "1993 Form 10-K"). 10.27* Corporate Aviation Policy, filed as exhibit 10.33 to the 1992 Form 10-K. 10.28* Plan and Agreement of Reorganization Between Baxter and Caremark International Inc., filed as exhibit 10.34 to the 1992 Form 10-K 10.29* 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. 10.30* 1994 Shared Investment Plan and Terms and Conditions, filed as exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1994. 10.31* 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"). 10.32* 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. 10.33 1996 Officer Incentive Compensation Plan. 10.34 1995 Stock Option Plan Terms and Conditions. 10.35 Separation Agreement: Tony L. White. 10.36 Separation Agreement: Manuel A. Baez
20
NUMBER AND DESCRIPTION OF EXHIBIT - -------------------------------------------------------------------------------------------------------------------- 11. Statement re: computation of per share earnings. 11.1 Computation of primary earnings per common share. 11.2 Computation of fully diluted earnings per common share. 12. Statements re: computation of ratios. 13. 1995 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 the Company. 23. Consent of Price Waterhouse. 24. Powers of Attorney. 27. Financial Statement Schedule.
- ------------------------ * Incorporated herein by reference. (All other exhibits are inapplicable.)
21 EX-10.33 2 EXHIBIT 10.33 BAXTER INTERNATIONAL INC. 1996 OFFICER INCENTIVE COMPENSATION PLAN This 1996 Officer Incentive Compensation Plan ("Plan") of Baxter International Inc. ("Baxter") and its subsidiaries (collectively, the "Company") is adopted pursuant to the Baxter International Inc. 1987 Incentive Compensation Program (the "Program") for the purposes stated in the Program. The Plan is intended to comply with the requirements of Section 162(m)(4)(C) of the Internal Revenue Code of 1986 ("IRC"), as amended, and the related income tax regulations issued thereunder. 1. ELIGIBILITY Officers of the Company are eligible to participate in the Plan during 1996 ("Plan Year") if the officer's participation is approved by the Compensation Committee of the Board of Directors of Baxter (the "Committee"). Officers so approved by the Committee shall be referred to herein as "Participants". 2. BONUS AWARD 2.1 Each Participant shall be eligible to receive a "Bonus Award" in accordance with the terms provided herein and any other terms established by the Committee. To determine a Participant's Bonus Award, the Committee shall establish a) Company performance goals for the Plan Year ("Company Performance Criteria"), b) a "Bonus Range" for each Participant, and c) the amount within a Participant's Bonus Range that will be payable to a Participant based upon the achievement of the Company Performance Criteria. The terms described in the preceding sentence must be established by April 1, 1996, and such terms shall not thereafter be changed, except as permitted by paragraph 2.2. 2.2 By March 31, 1997, the Committee shall assess the extent to which the Company has achieved the Company Performance Criteria based on the Company's publicly reported results for the Plan Year. The Committee shall exclude the effect of acquisitions, divestitures, changes in accounting principles, and other extraordinary or non-recurring events occurring in 1996 when assessing the extent to which the Company has achieved the Company Performance Criteria, but only if such exclusion would enhance the Company's performance relative to the Company Performance Criteria. The exclusion authorized by the preceding sentence shall only apply to the extent it is consistent with IRC Section 162(m)(4)(C) and the related regulations described above. The Committee shall then determine each Participant's Bonus Award based upon the terms described in paragraph 2.1 above. The Committee, however, has the discretion to reduce the amount of a Participant's Bonus Award determined under the preceding sentence. The Committee's determination shall be consistent with IRC Section 162(m)(4)(C) and the related regulations described above. In addition, the committee may exercise discretion in the determination of the Bonus Awards earned under the Plan with respect to participants who are not subject to IRC Section162(m). 2.3 If an officer becomes a Participant in the Plan during 1996, but after January 1, 1996, the Committee shall establish a prorated Bonus Range for such Participant based on the number of full months remaining in 1996 after he or she becomes a Participant. To the extent applicable, the determination of a prorated Bonus Range shall be consistent with IRC Section 162(m)(4)(C) and the related regulations described above. 3. PAYMENT 3.1 Except as otherwise determined by the Committee and except with respect to Participants who have filed deferral elections pursuant to paragraph 4, all bonuses will be paid in cash as soon as possible following determination of Bonus Awards by the Committee. 3.2 No Participant will be eligible to receive a Bonus Award unless he or she continues to be employed by the Company through February 1, 1997, except as otherwise determined by the Committee. The Committee's Bonus Award determination with respect to such participant may be determined in the same manner as provided in paragraphs 2.1 and 2.2 above. 4. DEFERRAL OF PAYMENT Participants may elect to defer payment in accordance with the Baxter International Inc. and Subsidiaries Deferred Compensation Plan. EX-10.34 3 EXHIBIT 10.34 BAXTER INTERNATIONAL INC. STOCK OPTION PLAN ADOPTED JULY 31, 1995 TERMS AND CONDITIONS 1. PURPOSE This Stock Option Plan ("Plan") is adopted pursuant to the Baxter International Inc. 1994 Incentive Compensation Program ("Program") for the purposes stated in the Program. 2. PARTICIPANTS Participants in this Plan ("Optionee") shall be valued employees of Baxter International Inc. or its subsidiaries ("Company") who have been selected by the Committee, as defined in the Program ("Committee"), and to whom the Committee makes an award of an option ("Option") under this Plan. 3. AWARDS Each Option shall consist of a Stock Option as defined in the Program and is granted under the terms and conditions contained in the Program and this Plan. To the extent that any of the terms and conditions contained in this Plan are inconsistent with the Program, the terms of the Program shall control. Terms defined in the Program shall have the same meaning in these terms and conditions. The Option is not intended to qualify as an Incentive Stock Option within the meaning of section 422 of the United States Internal Revenue Code. Residents of the United Kingdom may also be subject to additional terms and conditions in the form contained in the Baxter International Inc. Rules of the Baxter International United Kingdom Stock Option, to the extent deemed necessary by the Committee. 4. VESTING, EXERCISE AND EXPIRATION 4.1 The Option becomes vested five years from the date of grant, subject to acceleration in accordance with the following. One hundred percent of the Option shall become vested on the first Business Day (as defined in section 4.4) after the ninetieth consecutive calendar day during which the average Fair Market Value (as defined in the Program) of the Common Stock (as defined in the Program) equals or exceeds $50.00 per share. The Option shall not vest more than three years after the Optionee's employment is terminated by retirement at or after age 55 but shall otherwise continue to vest until the Option expires pursuant to section 4.4. 4.2 When vested and until it expires, the Option may be exercised in whole or in part in the manner specified by the Stockholder Services Department of Baxter International Inc. If exercised in part, the Option must be exercised in installments consisting of at least 100 shares or, if options for less than 100 shares are then exercisable, for the number of shares then exercisable. Shares of Common Stock may not be used to pay the exercise price of the Option unless certificates representing such shares have been issued and are delivered by the Optionee in accordance with the requirements specified by the Stockholder Services Department. Residents of the United Kingdom may not use shares of Common Stock to pay the exercise price of the Option in any circumstances. 4.3 If the Optionee's employment by the Company is terminated by death or disability more than 12 months after the date on which the Option is granted, the Optionee or the Optionee's legal representative or the person or persons to whom the Optionee's rights under the Option are transferred by will or the laws of descent and distribution shall have the right to exercise the Option until it expires in accordance with its terms with respect to all or any part of the shares remaining subject to the Option (whether or not such shares were purchasable by the Optionee under section 4.1 at the time of death.) 4.4 The Option shall expire at the close of business on the earlier of a date determined as follows or, if such date is not a Business Day, then the last Business Day preceding such date: (i) one year after the date on which employment of the Optionee by the Company shall have been terminated by his death or disability; (ii) five years after the date on which employment of the Optionee by the Company shall have been terminated by retirement at or after age 55; (iii) three months after the date on which employment of the Optionee by the Company shall have terminated except as provided in subsection 4.4(i) and (ii), unless the Optionee dies or becomes disabled during said three-month period, in which case the relevant date shall be one year after the termination; or (iv) ten years from the date on which the Option was granted. "Business Day" shall mean any day, other than Saturday or Sunday, when the corporate headquarters of the Company is open for the transaction of business and when the Common Stock is traded on the New York Stock Exchange. A transfer of an Optionee from employment by one corporation to another among Baxter International Inc. and its subsidiaries, or a transfer of an Optionee to employment by another corporation which assumes the Option or issues a substitute option in a transaction to which section 424 of the Internal Revenue Code applies, shall not be considered a termination of employment for purposes of the Option. EX-10.35 4 EXHIBIT 10.35 Exhibit 10-35 [BAXTER LETTERHEAD] September 18, 1995 Mr. Tony L. White 575 Stable Lane Lake Forest, IL 60045 Dear Tony: This letter confirms our agreement concerning your termination of employment with Baxter International Inc. and its affiliates ("Company"). You and the Company acknowledge that your employment termination is by mutual agreement, and that it is completely independent of the reduction in force the Company announced in the fourth quarter of 1993. You will cease to be a director and officer of the Company effective September 18, 1995 ("Transition Date"). You will continue to be an employee of the Company through December 31, 1995 ("Termination Date"). Between your Transition Date and your Termination Date, you will assist the Company in the smooth transition of your responsibilities to your successors. If you satisfy your obligation to assist the Company in the smooth transition of your responsibilities to your successors, you will receive a cash bonus ("Cash Bonus") of up to $300,000. The Cash Bonus is payable to you within thirty days after your Termination Date. I will determine both whether you are eligible to receive the Cash Bonus and the final amount at year end. If the Cash Bonus is paid to you, it will be deemed eligible 1995 compensation for purposes of calculating the Pension Supplement described on page 2 of the Agreement. You will continue to receive your monthly car allowance, flexible spending allowance, home security system and club reimbursements until your Termination Date. You will not receive any bonus under the 1995 Officer Incentive Compensation Plan. You are not eligible to participate in any Company bonus plans which are adopted after the date of this Agreement. You will not earn any restricted shares for 1995 performance under the Company's 1989 Long-Term Incentive Plan (LTI-3). Before your Termination Date, you will receive a total of $35,288, in a single sum, for all of your accrued but unused vacation time, in accordance with the Company's policy. You will not accrue any vacation time after your Termination Date. You are eligible to receive medical coverage through the Company's retiree medical plan, in accordance with the plan's provisions. You may postpone retiree medical coverage and elect, in accordance with a federal statute (COBRA), to continue your medical and dental benefits under the Company's Flexible Benefits Program for up to 18 months after your Termination Date. You may not obtain medical coverage through the retiree medical plan and COBRA simultaneously. You are eligible to continue your active participation in the Company's Incentive Investment Plan until your Termination Date, in accordance with the Plan's provisions. Your vested accrued benefits in the Incentive Investment Plan will be distributed in accordance with its provisions. Your active participation in the Baxter International Inc. and Subsidiaries Pension Plan ("Pension Plan") will continue until your Termination Date, in accordance with the Plan's provisions. Your vested accrued benefit in the Pension Plan will be distributed in accordance with its provisions. In addition, the Company will provide you with a non-qualified and unfunded supplemental pension benefit ("Pension Supplement") equal to the difference between a) your accrued benefit calculated under the provisions of the Pension Plan and b) the accrued benefit which you would have under the Pension Plan if you had ten additional years of participation in the Pension Plan. Your Pension Supplement is payable at the same time and in the same form as your benefit under the Pension Plan. In consideration of your receipt of the Pension Supplement, you have agreed to postpone payment of the Pension Supplement and your benefit under the Pension Plan until September 1, 1996 or later. The ten additional years of Pension Plan participation provided in this paragraph will not be counted when determining the amount you must pay for coverage through the Company's retiree medical plan. Your participation, if any, in the Company's Employee Stock Purchase Plan will cease on your Termination Date. You will receive a cash refund of the balance, if any, in your subscription account, in accordance with the Plan's provisions. Your participation in the Company's split-dollar life insurance plan will cease on your Termination Date. You may elect to continue your split-dollar life insurance coverage in accordance with the Plan's provisions. 2 Your options and restricted shares will be vested or forfeited as listed below:
OPTIONS # OF OPTIONS EXPIRATION DATE GRANTED TYPE GRANTED OPTION PRICE DATE(2) VESTING - -------------------------------------------------------------------------------------------------- 11/21/88 NQ 10,470(1) $15.89(1) 3/29/96 All are vested; may exercise before expiration date - -------------------------------------------------------------------------------------------------- 11/19/89 NQ 10,993(1) $22.21(1) 3/29/96 all are vested; may exercise before expiration date - -------------------------------------------------------------------------------------------------- 7/30/90 NQ 11,517(1) $24.36(1) 3/29/96 all are vested; may exercise before expiration date - -------------------------------------------------------------------------------------------------- 8/9/91 NQ 4,397(1) $34.15(1) 3/29/96 all are vested; may exercise before expiration date - -------------------------------------------------------------------------------------------------- 8/3/92 NQ 13,296(1) $36.66(1) 3/29/96 all are vested; may exercise before expiration date - -------------------------------------------------------------------------------------------------- 8/2/93 NQ 27,000 $26.00 3/29/96 18,000 are vested; may exercise before expiration date; remainder will be forfeited on your Termination Date - -------------------------------------------------------------------------------------------------- 7/31/95 NQ 44,800 $37.25 3/29/96 None are vested; all will be forfeited on your Termination Date unless accelerated vesting occurs, in accordance with the option grant terms and conditions, before the expiration date - --------------------------------------------------------------------------------------------------
(1) As equitably adjusted in connection with the Caremark spin-off (2) Option expiration dates consistent with option grant terms and conditions relating to employment termination 3
RESTRICTED SHARES # of Options Date Granted Granted Vesting Date Disposition 11/21/88 25,100 1 year after earned 24,262 shares have been earned, vested and distributed; 838 were earned in 1994 and will be allowed to vest on 12/31/95 8/9/91 10,040 1 year after earned All were earned in 1994; 6,787 will be allowed to vest on 12/31/95; remaining 3,253 will be forfeited on your Termination Date 12/7/92 19,400 1 year after earned 4,247 were earned in 1994; all 19,400 will be forfeited on your Termination Date 11/14/94 8,580 1 year after earned none have ben earned or vested; all will be forfeited on your Termination Date
You will not receive any additional grants of options or restricted shares. Your participation in the Shared Investment Plan will continue in accordance with the Plan's provisions. To preserve your rights to make various elections under the Company's Flexible Benefits Program, Pension Plan and Incentive Investment Plan, you must contact the Human Resources Department before your Termination Date. You acknowledge that the compensation and benefits provided in this Agreement exceed the compensation and benefits which you would normally receive in connection with your employment termination. In exchange for the compensation and benefits under this Agreement, you waive your right to file or participate as a class member in any claims or lawsuits (whether or not you now know of the basis for the claims or lawsuits) with federal or state agencies or courts against the Company and its employee benefit plans, including their present and former directors, officers, employees, agents and fiduciaries. This general waiver and release includes, but is not limited to, all claims of unlawful discrimination in regard to age, race, sex, color, religion, national origin and handicap under Title VII of the Civil Rights Act, the Age Discrimination in Employment Act or any other federal or state statutes, all claims for wrongful employment termination or breach of contact and any other claims relating to your employment or termination of 4 employment with the Company. This waiver and release also apply to your heirs, assigns, executors and administrators. This waiver and release do not waive rights or claims which may arise after the date this Agreement is signed except as stated in the next sentence. To be eligible to receive the Pension Supplement described above, you agree that this waiver and general release will be deemed to be signed by you again when your Pension Supplement begins to be paid. You agree: (a) not to intentionally disparage the Company, its employees or products; (b) not to intentionally engage in actions contrary to the interest of the Company; provided, however, that this subsection (b) shall not apply to conduct otherwise permissible under your employment agreement with the Company; (c) not to disclose or allow disclosure of any provisions of this Agreement, except to your attorney or pursuant to subpoena or court order (although the Company may be required to disclose this Agreement in its 1996 proxy statement and as an exhibit to its Form 10-K for 1995); (d) to conduct the transition period in a constructive and positive manner; (e) to remain bound by the non- compete and confidentiality provisions of your employment agreement with the Company (the Company acknowledges that your employment with The Perkin-Elmer Corporation does not violate the non-compete provisions of your employment agreement); (f) to refrain from soliciting any Company employees for employment at The Perkin-Elmer Corporation, or any other future employer of you, until January 1, 1997 and (g) to return to the Company, by September 30, 1995, all Company property, including proprietary information. All amounts payable to you or on your behalf under this Agreement will be reported to appropriate governmental agencies as taxable income to the extent required, and appropriate withholding will be made where necessary. In addition, all amounts payable to you under this Agreement are expressed as amounts prior to payment or withholding of any taxes, and the Company will not gross-up the amounts or otherwise reimburse you for the taxes you pay relating to such amounts. The amounts payable to you under this Agreement are in lieu of all severance compensation and other severance benefits from the Company to which you might otherwise be entitled. The Company may terminate the Pension Supplement if you fail to comply with any of your obligations under the Agreement. You acknowledge that the Company has made no promises to you which are not included in this Agreement, and that this Agreement contains the entire understanding between you and the Company relating to your employment termination. You acknowledge that the terms of this Agreement are contractually binding. If any portion of this Agreement is declared invalid or unenforceable, the remaining portions of this Agreement will continue in force. 5 You acknowledge that you carefully read the terms of this Agreement, you know and understand its content and meaning, you were given 21-day period to review it, you were encouraged to consult with an attorney before accepting it, and you accept it voluntarily. If this letter accurately reflects our agreement, please sign two copies, and return one of them to me by October 6, 1995. The terms of this Agreement are subject to the approval of the Compensation Committee of the Baxter International Inc. Board of Directors. Sincerely. /S/ Vernon R. Loucks Jr. - ---------------------------- Vernon R. Loucks Jr. ACCEPTED AND AGREED: /S/ Tony L. White - ---------------------------- (Signature) 9/23/95 - ---------------------------- (Date) EX-10.36 5 EXHIBIT 10.36 Exhibit 10-36 March 18, 1996 Mr. Manuel A. Baez 3502 Derby Lane Ft. Lauderdale, FL 33331 Dear Manny: This letter confirms our agreement concerning your termination of employment with Baxter International Inc. and its affiliates ("Company"). You and the Company acknowledge that your employment termination is by mutual agreement, and that it is completely independent of the reduction in force the Company announced in the fourth quarter of 1993. You will cease to be an employee and an officer of the Company effective May 3, 1996 ("Termination Date"). Until your Termination Date, you will assist the Company in the smooth transition of your responsibilities to your successors. You will continue to receive your current salary, monthly car allowance, and flexible spending allowance until your Termination Date. You will be eligible to receive a pro-rated bonus, up to a maximum of $78,000, under the 1996 Officer Incentive Compensation Plan. Your bonus will be determined based on the extent to which the Company achieves the 1996 performance criteria under the Plan and based on the extent to which you satisfy your obligation to assist the Company in the smooth transition of your responsibilities to your successors. Your 1996 bonus will be determined and paid at the same time and in the same manner applicable to all other participants in the Plan. You will not earn any restricted shares for 1996 performance under the Company's 1989 Long-Term Incentive Plan (LTI-3). Before your Termination Date, you will receive a total of $42,560, in a single sum, for all of your accrued but unused vacation time, in accordance with the Company's policy. You will not accrue any vacation time after your Termination Date. You are eligible to receive medical coverage through the Company's retiree medical plan, in accordance with the plan's provisions. You may postpone retiree medical coverage and elect, in accordance with a federal statute (COBRA), to continue your medical and dental benefits under the Company's Flexible Benefits Program for up to 18 months after your Termination Date. You may not obtain medical coverage through the retiree medical plan and COBRA simultaneously. You are eligible to continue your active participation in the Company's Incentive Investment Plan until your Termination Date, in accordance with the Plan's provisions. Your vested accrued benefits in the Incentive Investment Plan will be distributed in accordance with its provisions. Your active participation in the Baxter International Inc. and Subsidiaries Pension Plan ("Pension Plan") will continue until your Termination Date, in accordance with the Plan's provisions. Your vested accrued benefit in the Pension Plan will be distributed in accordance with its provisions. In addition, the Company will provide you with a non-qualified and unfunded supplemental pension benefit ("Pension Supplement") equal to the difference between your accrued benefit under the qualified Pension Plan determined as of your Termination Date and the accrued benefit you would have under the qualified Pension Plan if on your Termination Date you were five years older, and had five additional years of benefit service. Your non-qualified and unfunded supplemental pension benefit will be paid to you at the same time and in the same manner as your benefit under the qualified Pension Plan. In the event of your death prior to your Termination Date, the provisions of this paragraph will be applied as if your Termination Date were the day before your death and you selected a pension payment option of 100% Joint and Survivor. The five additional years of benefit service and the five additional years of age provided in this paragraph will not be counted when determining the amount you must pay for coverage through the Company's retiree medical plan. Your participation, if any, in the Company's Employee Stock Purchase Plan will cease on your Termination Date. You will receive a cash refund of the balance, if any, in your subscription account, in accordance with the Plan's provisions. You are eligible to continue your participation in the Company's split-dollar life insurance plan. Your participation will continue in accordance with the plan's provisions as they apply to participants whose employment terminates after accumulating 65 age and years of participation points under the Company's Pension Plan. Your stock options and restricted shares will be vested or forfeited as listed below: - 2 - OPTIONS
- -------------------------------------------------------------------------------------------------------------- # of Date Options Option Expiration Granted Type Granted Price Date(2) Vesting - -------------------------------------------------------------------------------------------------------------- 7/30/90 NQ 11,517(1) $24.36(1) 8/2/96 all are vested; may exercise before expiration date - -------------------------------------------------------------------------------------------------------------- 8/9/91 NQ 8,794(1) $34.15(1) 8/2/96 all are vested; may exercise before expiration date - -------------------------------------------------------------------------------------------------------------- 8/3/92 NQ 2,303(1) $36.66(1) 8/2/96 all are vested; may exercise before expiration date - -------------------------------------------------------------------------------------------------------------- 8/2/93 NQ 16,500 $26.00 8/2/96 11,000 are vested; may exercise before expiration date; remainder will be vested on 8/2/96 and you may exercise them on 8/2/96 only - -------------------------------------------------------------------------------------------------------------- 7/31/95 NQ 23,700 $37.25 8/2/96 None are vested; all will be forfeited on the expiration date unless accelerated vesting occurs, in accordance with the option grant terms and conditions, before the expiration date - --------------------------------------------------------------------------------------------------------------
(1)As equitably adjusted in connection with the Caremark spin-off (2)Option expiration dates consistent with option grant terms and conditions relating to employment termination. RESTRICTED SHARES
- --------------------------------------------------------------------------------------------------------- Date # of Shares Granted Granted Vesting Date Disposition - --------------------------------------------------------------------------------------------------------- 9/7/90 15,580 1 year after 12,453 shares have been earned, vested and earned distributed; 3,127 shares were earned in 1995 and will be allowed to vest on 12/31/96 - --------------------------------------------------------------------------------------------------------- 12/7/92 9,200 1 year after 5,189 shares were earned in 1995 and will be earned allowed to vest on 12/31/96; remaining 4,011 will be forfeited on your Termination Date - --------------------------------------------------------------------------------------------------------- 2/17/92 19,115 12/31/98 12,743 shares will be allowed to vest on 12/31/96; you may elect to have shares withheld to pay the taxes due on 12/31/96, but the 12,743 shares (less the shares withheld to pay taxes) will not be distributed to you until 12/31/98, the original vesting date. The remaining 6,372 shares will be forfeited on your Termination Date. - ---------------------------------------------------------------------------------------------------------
You will not receive any additional grants of options or restricted shares. - 3 - Your participation in the Shared Investment Plan will continue in accordance with the Plan's provisions. To preserve your rights to make various elections under the Company's Flexible Benefits Program, Pension Plan and Incentive Investment Plan, you must contact the Human Resources Department before your Termination Date. To exercise your stock options, you must contact the Stockholder Services Department. You acknowledge that the compensation and benefits provided in the Agreement exceed the compensation and benefits which you would normally receive in connection with your employment termination. In exchange for the compensation and benefits under this Agreement, you waive your right to file or participate as a class member in any claims or lawsuits (whether or not you now know of the basis for the claims or lawsuits) with federal or state agencies or courts against the Company and its employee benefit plans, including their present and former directors, officers, employees, agents and fiduciaries. This general waiver and release includes, but is not limited to, all claims of unlawful discrimination in regard to age, race, sex, color, religion, national origin and handicap under Title VII of the Civil Rights Act, the Age Discrimination in Employment Act or any other federal or state statutes, all claims for wrongful employment termination or breach of contract and any other claims relating to your employment or termination of employment with the Company. This waiver and release also apply to your heirs, assigns, executors and administrators. This waiver and release do not waive rights or claims which may arise after the date this Agreement is signed except as stated in the next three sentences. To be eligible to receive the Pension Supplement described above, you agree that this waiver and general release will be deemed to be signed by you again when your Pension Supplement begins to be paid. To be eligible to receive the restricted stock which was earned in 1995 and allowed to vest on December 31, 1996, you agree that this waiver and general release will be deemed to be signed by you again when those shares are distributed to you. To be eligible to receive the additional shares of restricted stock which are distributable to you on December 31, 1998, you agree that this waiver and general release will be deemed to be signed by you again when those shares are distributed to you. You agree: (a) not to intentionally disparage the Company, its employees or products; (b) not to intentionally engage in actions contrary to the interests of the Company; (c) not to disclose or allow disclosure of any provisions of this Agreement, except to your attorney or pursuant to subpoena or court order (although the Company may be required to disclose this Agreement in its 1996 proxy statement and as an exhibit to its Form 10-K for 1995); (d) to conduct the transition period in a constructive and positive manner; (e) to remain bound by the non-compete and confidentiality provisions of your employment agreement with the Company; and (f) to return to the company, by May 10, 1996, all Company property, including proprietary information. In addition to the obligations under your employment agreement with the Company, you agree that, until one year from your Termination Date, you will not directly or indirectly, as a consultant, employee or owner, engage in any activity which is competitive with - 4 - the businesses of the Company, on your Termination Date, without the Company's prior approval. I assure you it is the Company's intention to be fair and reasonable in considering this issue and to grant such approval whenever your competition will not adversely affect one of the Company's major businesses. All amounts payable to you or on your behalf under this Agreement will be reported to appropriate governmental agencies as taxable income to the extent required, and appropriate withholding will be made where necessary. In addition, all amounts payable to you under this Agreement are expressed as amounts prior to payment or withholding of any taxes, and the Company will not gross-up the amounts or otherwise reimburse you for the taxes you pay relating to such amounts. The amounts payable to you under this Agreement are in lieu of all severance compensation and other severance benefits from the Company to which you might otherwise be entitled. The Company may terminate the Pension Supplement, forfeit all of your outstanding restricted stock and eliminate your 1996 cash bonus eligibility if you fail to comply with any of your obligations under this Agreement. You acknowledge that the compensation and benefits provided to you under this Agreement assume your continued employment with the Company until your Termination Date. If you die before your Termination Date, your employment, salary and perquisite allowances will cease on the date of your death, and the 1996 cash bonus which is payable to you as well as the restricted stock which is allowed to vest in accordance with this agreement will be paid to your surviving spouse, or to your estate if your spouse does not survive you. Your Pension Supplement will be administered as specified on page 2 of this Agreement. All other compensation and benefits for which you are eligible under this Agreement will be determined based on the death benefit provisions of the applicable plans. You acknowledge that the Company has made no promises to you which are not included in this Agreement, that this Agreement contains the entire understanding between you and the Company relating to your employment termination, and that it supersedes the pension supplement agreement between you and the Company dated October 4, 1995. You acknowledge that the terms of this Agreement are contractually binding. If any portion of this Agreement is declared invalid or unenforceable, the remaining portions of this Agreement will continue in force. You acknowledge that you carefully read the terms of this Agreement, you know and understand its content and meaning, you were given a 21-day period to review it, you were encouraged to consult with an attorney before accepting it, and you accept it voluntarily. If this letter accurately reflects our agreement, please sign two copies, and return one of them to me by April 8, 1996. The terms of this Agreement have been approved by the Compensation Committee of the Baxter International Inc. Board of Directors. Sincerely, - ------------------------- ACCEPTED AND AGREED: Vernon R. Loucks Jr. ------------------------ (Signature) ------------------------ (Date) - 5 - EX-11.1 6 COMPUTATION OF PRIMARY EARNINGS EXHIBIT 11.1 - -------------------------------------------------------------------------------- COMPUTATION OF PRIMARY EARNINGS PER COMMON SHARE (In millions, except per share data)
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- EARNINGS Income (loss) from continuing operations before cumulative effect of accounting changes applicable to common stock $ 371 $ 406 $ (193) Total discontinued operations 278 190 (75) Cumulative effect of accounting changes -- -- 70 - ------------------------------------------------------------------------------------------------------------------- Net income (loss) available for common stock $ 649 $ 596 $ (198) - ------------------------------------------------------------------------------------------------------------------- SHARES Average common shares outstanding 277 280 277 - ------------------------------------------------------------------------------------------------------------------- PRIMARY EARNINGS PER COMMON SHARE INCOME (LOSS) FROM CONTINUING OPERATIONS $ 1.34 $ 1.45 $ (0.70) TOTAL DISCONTINUED OPERATIONS 1.01 0.68 (0.27) CUMULATIVE EFFECT OF ACCOUNTING CHANGES -- -- 0.25 - ------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 2.35 $ 2.13 $ (0.72) - -------------------------------------------------------------------------------------------------------------------
22 EX-11.2 7 COMPUTATION OF FULLY DILUTED EARNINGS EXHIBIT 11.2 - -------------------------------------------------------------------------------- COMPUTATION OF FULLY DILUTED EARNINGS PER COMMON SHARE (In millions, except per share data)
YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------- 1995 1994 1993(A) 1993(A) - ---------------------------------------------------------------------------------------------------------------------- EARNINGS Income (loss) from continuing operations before cumulative effect of accounting changes applicable to common stock $ 371 $ 406 $ (193) $ (193) Total discontinued operations 278 190 (75) (75) Cumulative effect of accounting changes -- -- 70 70 - ---------------------------------------------------------------------------------------------------------------------- Net income (loss) available for common stock $ 649 $ 596 $ (198) $ (198) - ---------------------------------------------------------------------------------------------------------------------- SHARES Weighted average number of common shares outstanding 277 280 277 277 Additional shares assuming conversion of exercise of stock options, performance share awards and stock purchase plan subscriptions 5 2 -- 1 - ---------------------------------------------------------------------------------------------------------------------- Average common shares outstanding 282 282 277 278 - ---------------------------------------------------------------------------------------------------------------------- FULLY DILUTED EARNINGS (LOSS) PER COMMON SHARE INCOME FROM CONTINUING OPERATIONS $ 1.32 $ 1.44 $ (0.70) $ (0.69) TOTAL DISCONTINUED OPERATIONS 0.99 0.67 (0.27) (0.27) CUMULATIVE EFFECT OF ACCOUNTING CHANGES -- -- 0.25 0.25 - ---------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 2.31 $ 2.11 $ (0.72) $ (0.71) - ----------------------------------------------------------------------------------------------------------------------
(a) For the year ended December 31, 1993, fully diluted earnings (loss) per common share has been computed without and with anti-dilutive common stock equivalents. 23 EX-12 8 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, - -------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income tax expense (benefit) $ 524 $ 559 $ (74) $ 510 $ 431 Add: Interest costs 117 120 109 100 110 Estimated interest in rentals(1) 29 31 31 29 24 - -------------------------------------------------------------------------------------------------------------------------- Fixed charges as defined: 146 151 140 129 134 Interest costs capitalized (3) (2) (5) (5) (4) Losses of less than majority owned affiliates, net of dividends 10 18 27 34 32 - -------------------------------------------------------------------------------------------------------------------------- Income as adjusted $ 677 $ 726 $ 88 $ 668 $ 593 - -------------------------------------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges 4.64 4.80 0.63 5.18 4.42 - --------------------------------------------------------------------------------------------------------------------------
(1) Represents the estimated interest portion of rents. 24 EX-13 9 EXHIBIT 13 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") results of operations during the three years ended December 31, 1995, and the company's financial position at that date. Trends of a material nature are discussed to the extent known and considered relevant. COMPANY OBJECTIVES AND RESULTS In the 1994 Annual Report to Stockholders, management outlined key financial objectives for 1995. The objectives and the results achieved are summarized below: - -------------------------------------------------------------------------------- OBJECTIVES RESULTS - -------------------------------------------------------------------------------- - Generate $500 million in - The company generated "operational cash flow" in "operational cash flow" 1995. of $587 million in 1995. - -------------------------------------------------------------------------------- - Achieve net income growth in - The company's net income the high single-digit percentage growth was 9% for the year range. ended December 31, 1995. - -------------------------------------------------------------------------------- - Reduce marketing and - The company's marketing and administrative expenses as a administrative expenses as a percent of sales from 19.9% in percent of sales was 18.2% for 1994 to 18.0% in 1995. the year ended December 31, 1995. - -------------------------------------------------------------------------------- - Maintain a net-debt-to-net- - The company's net-debt-to- capital ratio between 35% to net-capital ratio was 36.3% 40%. at December 31, 1995, and net debt was reduced by $286 million. - -------------------------------------------------------------------------------- - Repurchase $500 million of - The company completed its Baxter stock over two years as $500 million stock repurchase authorized by the company's program during the first nine board of directors in February months of 1995. 1995. - -------------------------------------------------------------------------------- The above objectives were established based on total company results prior to the November 1995 announcement of the plan to spin-off the health-care cost management business as a distribution to stockholders. Accordingly, the results presented above reflect the combined results of both continuing and discontinued operations. See further discussion in Recent Events below. RECENT EVENTS SPIN-OFF OF HEALTH-CARE COST MANAGEMENT BUSINESS On November 28, 1995, the board of directors of Baxter International Inc. approved in principle a plan to distribute to Baxter stockholders all of the outstanding stock of its health-care cost management business in a spin-off transaction (the "Distribution") which is expected to be tax-free. The creation of two independent companies will enable Baxter and the new company to devote management time, attention and investments directly to the core strategies of each business. The new health-care cost 30 BAXTER INTERNATIONAL - -------------------------------------------------------------------------------- management business will consist of Baxter's cost-management services, U.S. distribution, surgical products and respiratory-therapy operations and will operate as a medical supplier focused on helping customers manage the total cost of providing patient care. The Distribution is expected to occur in late 1996 and will result in the health-care cost management business operating as an independent entity with publicly traded common stock. As a result of the board's approval of the plan, the company's financial statements have been adjusted and restated to reflect the results of operations and net assets of the health-care cost management business as a discontinued operation, in accordance with generally accepted accounting principles. The following selected financial information for the new health-care cost management business (including previously divested businesses) is presented for informational purposes only and does not necessarily reflect what the results of operations and financial position would have been had it operated as a stand- alone entity. INCOME STATEMENT DATA FOR HEALTH-CARE COST MANAGEMENT BUSINESS
YEARS ENDED DECEMBER 31 (IN MILLIONS) 1995 1994 1993 - -------------------------------------------------------------------------------- Net sales $4,682 $4,845 $4,763 Income before income taxes $ 392 $ 242 $ (256) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
In 1995, income before income taxes includes a $268 million net pretax gain resulting from the company's divestiture of its Industrial and Life Sciences division to VWR Corporation. NET ASSETS OF THE HEALTH-CARE COST MANAGEMENT BUSINESS
AS OF DECEMBER 31 (IN MILLIONS) 1995 1994 - -------------------------------------------------------------------------------- Net current assets $ 722 $1,071 Net non-current assets 1,897 2,014 - -------------------------------------------------------------------------------- TOTAL NET ASSETS $2,619 $3,085 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
It is estimated that, through an issuance of new third-party debt, a substantial portion of Baxter's existing debt will be indirectly assumed by the health-care cost management business. The amount of the debt will be determined when the capital structure for the new company is finalized. Costs associated with effecting the Distribution represent management's estimate of the transaction and other costs directly related to completing the spin-off. These costs do not benefit the future operations of the health-care cost management business. The following management discussion and analysis pertains to continuing operations, unless otherwise noted. 31 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- POTENTIAL ACQUISITION OF NATIONAL MEDICAL CARE On February 1, 1996, Baxter publicly announced its proposal to acquire the National Medical Care ("NMC") subsidiary of W.R. Grace and Company ("Grace") in a tax-free transaction for $3.8 billion, consisting of $1.8 billion of Baxter common stock and a payment to Grace of $2.0 billion comprised of cash, notes and assumed debt. Grace had previously announced its intention to spin-off or divest NMC. Completion of this transaction in 1996 would have resulted in a dilution of Baxter's net earnings, but would have been accretive after approximately six quarters of combined results. The company's net-debt-to-net-capital ratio would have risen to approximately 42% (compared to 36.3% at December 31, 1995) but was expected to decline to approximately 40% within two years of the acquisition, all else remaining constant. On February 5, 1996, Grace announced that it had agreed to combine its NMC subsidiary with the worldwide dialysis business of Fresenius A.G. (a German company) to form a new company called Fresenius Medical Care in a transaction designed to be tax-free. Fresenius A.G. is a major competitor of the company's renal division and NMC is a large U.S. customer of the renal division. Under the proposed transaction with Fresenius A.G., Grace shareholders would receive a 44.8% equity interest in Fresenius Medical Care and Grace would receive $2.3 billion in cash provided by proceeds of debt financing by Fresenius Medical Care. This transaction is subject to the approval of the shareholders of Grace and Fresenius A.G. If the transaction with Grace is consummated with Fresenius A.G., there would be an increased competitive threat to Baxter's renal division. However, management believes that this would not have a material adverse effect on Baxter's financial condition or results of operations in 1996. Since the management of Grace refused to discuss the company's proposed transaction, Baxter withdrew its offer on February 22, 1996. INDUSTRY OVERVIEW INTERNATIONAL MARKETS Throughout the world, as developing countries create more wealth, improving the health and well-being of their citizens becomes a much higher social priority and usually leads to increased per-capita spending on health care. The world's largest developing markets in the Pacific Rim countries and Latin America are all poised for significant economic growth. Based on these factors, management believes there will be improved expansion opportunities for Baxter with its broad portfolio of proven cost-effective products, services and therapies to meet the demands of these markets. In the developed world -- especially in Western Europe and Japan -- there continues to be strong demand for more technologically advanced and cost-effective therapies, products and services, and Baxter has long been a leader in these markets. In view of these conditions, management believes Baxter's best opportunities for growth are outside the United States. Consequently, the company's strategies emphasize international expansion to capitalize on the company's strong global positions in intravenous products, renal therapy, biotechnology and cardiovascular therapies. U.S. MARKET Though the U.S. government failed to enact health-care reform, fundamental change continued to be a part of the U.S. health-care system in 1995. Competition for patients among health-care providers continues to intensify. Increasingly, providers are looking for ways to better manage costs in areas such as materials handling, supply utilization, product standardization for specific procedures and capital 32 BAXTER INTERNATIONAL - -------------------------------------------------------------------------------- expenditures. The new health-care cost management business is being distributed to stockholders to more optimally meet these emerging market needs, remove limitations, and improve the competitiveness of both Baxter and the new company. There has also been consolidation in the company's customer base and by its competitors. These trends are expected to continue. In recent years, the company's overall price increases have been below the Consumer Price Index, and industry trends and competition may inhibit the company's ability to increase prices in the future. RESULTS OF CONTINUING OPERATIONS The company operates in a single industry segment as a world leader in providing health-care products for use in hospitals and other health-care settings. On a global basis, Baxter develops, manufactures and markets intravenous solutions and related administration equipment, and highly specialized medical products for treating kidney and heart disease, blood disorders, and for collecting and processing blood. These products include intravenous solutions and pumps; dialysis equipment and supplies; prosthetic heart valves and cardiac catheters; blood-clotting therapies; and machines and supplies for collecting, separating and storing blood. These products require extensive research and development and investment in worldwide manufacturing, marketing and administrative infrastructure. NET SALES TRENDS BY MAJOR PRODUCT LINE
Percent increase YEARS ENDED DECEMBER 31 (IN MILLIONS) 1995 1994 1993 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ Major product lines Renal $1,294 $1,160 $1,061 12% 9% Biotech 1,131 949 849 19% 12% Cardiovascular 730 632 562 16% 12% I.V. Systems/International Hospital 1,893 1,738 1,644 9% 6% - ------------------------------------------------------------------------------------------------------------------------ TOTAL SALES $5,048 $4,479 $4,116 13% 9% - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
Worldwide sales of renal products and services maintained steady growth, offsetting competitive and pricing pressures in the United States with increasing penetration in Japan and Latin America. Additionally, investments in Asia contributed slightly to growth in 1995 and are expected to be a source of future growth for renal products and services. Sales penetration of peritoneal- dialysis ("PD") therapy products continues to be especially strong in international markets, where many national governments recognize the therapy's low start-up and operating costs relative to traditional hemodialysis. The demand for the company's HomeChoice-Registered Trademark- automated PD system in North America, Japan and Europe continued to grow and helped offset competitive pressures in U.S. markets. Increased acceptance of PD therapy, sales of the HomeChoice-Registered Trademark- system and sales of the UltraBag-TM- system, which is designed to reduce the incidence of infection and improve convenience for the patient, all contributed to increased sales in 1994. Strong demand for the company's therapeutic blood products, including Recombinate -TM- Anti-hemophilic factor (Recombinant) and Gammagard-Registered Trademark- S/D, generated worldwide growth in the biotech unit in 1995. Gammagard-Registered Trademark- S/D, an immune globulin intravenous product introduced in the second quarter of 1994, is treated with a solvent and two detergents known to inactivate viruses such as hepatitis B, hepatitis C and HIV. In 1994, strong sales growth for Recombinate was somewhat offset by the 33 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- adverse effect of a voluntary market withdrawal of Gammagard-Registered Trademark- IGIV, due to reports of possible transmission of the hepatitis C virus. (See Note 14 to the Consolidated Financial Statements.) [GRAPH] The demand for automated collection products showed moderate growth in 1995 and 1994 with increased penetration into new markets, partially offset by pricing and competitive pressures. Demand for the company's blood-collection products was relatively flat in 1995 and 1994, due primarily to declining whole-blood collections in the U.S. and Europe. Sales growth of the company's cardiovascular products was strong in 1995 and 1994. Market share gains in pericardial tissue valves and continuous cardiac output monitoring catheters were important growth contributors in 1995. Growth was also augmented slightly by the company's acquisition of SETA, Inc. (a perfusion services business). In 1994, strong demand for tissue heart valves and the acquisition of Macchi Engenharia Biomedica Ltda. (a Brazilian-based manufacturer and marketer of oxygenators and other cardiovascular products used in open-heart surgery) improved sales growth. In January 1996, the company completed the acquisition of PSICOR, Inc. The acquisitions of SETA and PSICOR, both providers of perfusion and autotransfusion services, supplies and equipment to hospitals, position the company to offer a more fully capitated approach to open-heart surgery that includes services as well as a broad array of products. The company continues to explore strategies for expanding its perfusion services operations. Worldwide sales of the company's intravenous and other hospital products increased moderately in 1995 and 1994. Domestic intravenous ("IV") systems sales of pumps and administration sets increased in 1995 and 1994 as a result of the Columbia/HCA Healthcare Corporation contract signed in September 1994, and increases in sales into the homecare and alternate-care markets. Internationally, in 1995, increased penetration in Latin America and the Pacific Rim and stabilization of sales in Canada contributed to moderate sales growth. In 1994, increased penetration in Latin America and the Pacific Rim was partially offset by pricing pressures and sales mix issues in Europe and Canada. NET SALES TRENDS BY GEOGRAPHIC REGION
Percent increase YEARS ENDED DECEMBER 31 (IN MILLIONS) 1995 1994 1993 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ Geographic regions United States $2,492 $2,292 $2,112 9% 9% International 2,556 2,187 2,004 17% 9% - ------------------------------------------------------------------------------------------------------------------------ TOTAL SALES $5,048 $4,479 $4,116 13% 9% - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
The increase in U.S. sales in 1995 reflects growth in biotech and cardiovascular products, offset by pricing pressures experienced domestically for renal and IV products. In 1994, the increase in U.S. sales was due to growth in biotech and IV products, offset by the effect of the voluntary market withdrawal of Gammagard-Registered Trademark- IGIV. Sales in international markets increased in 1995 and 1994 due to increased unit volume, penetration and improved foreign currency rates. International sales growth in local currency was approximately 12%, 9% and 8% in 1995, 1994 and 1993, respectively. 34 BAXTER INTERNATIONAL - -------------------------------------------------------------------------------- GROSS MARGIN AND EXPENSE RATIOS
YEARS ENDED DECEMBER 31 (AS A PERCENT OF SALES) 1995 1994 1993 - -------------------------------------------------------------------------------- Gross margin 45.0% 44.1% 45.5% Marketing and administrative expenses 21.5% 21.3% 22.6% - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
The increase in the gross margin rate in 1995 to a level more consistent with 1993 reflects a heavier mix of higher margin sales, including sales of Gammagard-Registered Trademark- S/D discussed previously. The reduction in the gross margin rate in 1994 was predominantly due to the loss of sales associated with the voluntary market withdrawal of Gammagard-Registered Trademark- IGIV. Management anticipates no significant declines in the gross margin rate in 1996. Marketing and administrative expenses as a percent of sales remained relatively stable in 1995. The slight increase is the result of higher expenses associated with funding the company's expansion into developing markets. The decline of 1.3 percentage points in 1994 is a result of initiatives taken in connection with the 1993 restructuring program. The company expects to continue its focus on leveraging its marketing and administrative expenses in 1996. RESEARCH AND DEVELOPMENT
Percent increase YEARS ENDED DECEMBER 31 (IN MILLIONS) 1995 1994 1993 1995 1994 - ------------------------------------------------------------------------------------------ Total research and development expense $345 $303 $280 14% 8% - ------------------------------------------------------------------------------------------ As a percent of sales 7% 7% 7% - ----------------------------------------------------------------------- - -----------------------------------------------------------------------
The increase in research and development ("R&D") expenses reflects the company's continued emphasis on strategic initiatives such as blood substitutes, renal therapy and transplantation, immunotherapy, gene therapy and the Novacor- Registered Trademark- left-ventricular assist system. Included in R&D expense for 1995 is an $18 million charge related to the company's September 1995 acquisition of the remaining 30% of the Nextran joint venture that it did not previously own. The acquisition of in-process technology, related to transgenic (genetically altered) organs, was accounted for as purchased research and development. Significant R&D investments were made in 1994 and 1993 in these same areas. A pivotal protocol for blood substitutes began in Europe in June 1995, and the FDA is reviewing two phase III protocols in surgery and trauma for the U.S. Other active protocols include treatment for multiple [GRAPH] organ failure and stroke. Depending on the successful outcome of these protocols, the company anticipates being able to market the product in Europe in 1997, and in the U.S. in 1998. In September 1995, the company's board of directors approved capital expenditures of approximately $100 million for construction of a blood substitutes manufacturing facility in Neuchatel, Switzerland, which is expected to be operational in 1998. 35 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Baxter has submitted a premarket approval (PMA) application to the FDA for its wearable Novacor-Registered Trademark- left-ventricular assist system and hopes to attain final U.S. approval in 1997. The company received approval (CE mark) in 1994 for its wearable device in Europe and has begun commercial sale of the product. RESTRUCTURING PROGRAMS Baxter currently has two restructuring programs in process. In November 1993, the company initiated a restructuring program designed to accelerate growth and reduce costs in the company's businesses worldwide, including reorganizations and consolidations in the United States, Europe, Japan and Canada. In the third quarter of 1995, the company initiated a second restructuring program to consolidate manufacturing operations in Puerto Rico in order to eliminate excess capacity and reduce manufacturing costs. See Note 3 to the Consolidated Financial Statements for discussions related to the initial charges for the programs, components of the charges, cash and non-cash utilization, and remaining reserve balances. Since the announcement of the 1993 restructuring program, the company has implemented, or is in the process of implementing, all of the major strategic actions associated therewith and is satisfied that the program is progressing on schedule and will meet previously established financial targets. During 1995, the company utilized $60 million of restructuring reserves, including $36 million in cash payments. Cash outflows pertain primarily to employee-related costs for severance, outplacement assistance, relocation and retention. The company has eliminated approximately 1,250 positions of the approximately 1,640 positions affected by the program. The majority of the remaining reductions will occur in 1996 and 1997, as facility closures and consolidations are completed as planned. During 1995, the company realized approximately $90 million in savings which represents a shortfall of approximately $20 million from its estimated savings target. This shortfall is primarily due to timing delays in the implementation of a number of projects. Management has forecasted savings of approximately $110 million in 1996, $130 million in 1997 and exceeding $140 million in 1998. Management anticipates that these savings will be partially invested in increased research and development and expansion into growing international markets. Management further believes that its remaining restructuring reserves are adequate to complete the actions contemplated by the 1993 restructuring program. Management is at the very early stages of implementing the 1995 restructuring program, which is expected to be completed by the end of 1998. The pretax restructuring charge of $93 million includes approximately $67 million for valuation adjustments as a result of the company's decision to close facilities. The company expects to spend approximately $26 million in cash over the next two years, including severance related to the approximately 1,450 positions that will be eliminated in connection with the approved plan. The plant closures and consolidations in Puerto Rico will lower the company's manufacturing costs. Management believes these actions will help mitigate the company's exposure to future gross margin erosion arising from pricing pressure, primarily in the U.S. In addition to the consolidation of the company's manufacturing operations in Puerto Rico, the company has initiated plans for other organizational structure changes which have resulted in a $10 million provision for cash payments related to employee severance. Management anticipates that future cash expenditures related to both the 1993 and 1995 restructuring programs will be funded from cash generated from operations. 36 BAXTER INTERNATIONAL - -------------------------------------------------------------------------------- LITIGATION CHARGES
Patent Mammary Plasma settlement Total YEARS ENDED DECEMBER 31 (IN MILLIONS) implants based therapies and other litigation - ------------------------------------------------------------------------------------------------------------------------ 1995: Gross litigation charge $298 $247 - $545 Estimated insurance recoveries 258 191 - 449 - ------------------------------------------------------------------------------------------------------------------------ Net 1995 litigation charge $ 40 $ 56 - $ 96 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ 1993: Gross litigation charge $580 $131 $128 $839 Estimated insurance recoveries 426 83 - 509 - ------------------------------------------------------------------------------------------------------------------------ Net 1993 litigation charge $154 $ 48 $128 $330 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
The 1995 and 1993 provisions for mammary implant product liabilities pertain to the company's estimated share of the revised settlement of class action litigation and resolution of claims by claimants not participating in the revised class action settlement ("opt-outs"). Provisions for HIV/hemophilia and other plasma based therapy liabilities pertain to worldwide litigation and anticipated settlement expenses involving anti-hemophilic Factor Concentrate cases for HIV-positive hemophiliacs and resolution of other plasma based therapy claims. The 1993 patent settlement pertains primarily to a $105 million settlement with Scripps Clinic and Research Foundation and Rhone-Poulenc Rorer, Inc., relating to certain anti-hemophilic Factor VIII products manufactured and sold prior to January 1, 1993. See Note 14 to the Consolidated Financial Statements for a more detailed description of these issues. OTHER COSTS AND EXPENSES Other costs and expenses in 1995 include approximately $65 million in net gains associated with the disposal or discontinuance of minor, non-strategic businesses and investments, which is primarily related to the disposal of the company's remaining investment in MediSense, Inc. Net gains in 1994 and 1993 were $10 and $7 million, respectively. Foreign exchange losses were $22 million in 1995, $12 million in 1994 and $28 million in 1993. The company realized $10 million in gains related to the termination of an interest rate hedging contract due to the significant reduction in the debt during 1994. PRETAX INCOME FROM CONTINUING OPERATIONS
Percent increase (decrease) YEARS ENDED DECEMBER 31 (IN MILLIONS) 1995 1994 1993 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ Pretax income from continuing operations $524 $559 $(74) (6)% N/A - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
The decrease in pretax income for 1995 is attributable to the restructuring and litigation charges discussed previously, offset by the net gain associated with the disposal of the company's remaining investment of MediSense, Inc. Excluding the restructuring and litigation charges, and the pretax gain associated with the divestiture of MediSense, Inc., growth in pretax income from continuing operations would have been 18%. The increase in 1994 is primarily related to improved sales and expense leveraging, offset by temporary gross margin erosion due to rework costs related to the voluntary market withdrawal of Gammagard-Registered Trademark- 37 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- IGIV discussed above. Pretax income in 1993 was adversely affected by the impact of the restructuring and litigation charges discussed above. Excluding the adverse impact of restructuring and litigation charges in 1993, growth in pretax income from continuing operations in 1994 would have been 18%. The effective tax rate for continuing operations was 29% in 1995 compared to 27% in 1994. After adjusting for the tax benefits associated with the 1995 restructuring and litigation charges, the 1995 increase was primarily attributable to a larger proportion of earnings generated in higher tax jurisdictions. In 1993, the effective tax rate was affected by a number of unusual items, including tax benefits associated with restructuring and litigation charges, offset by a $151 million provision for U.S. taxes on previously unremitted foreign earnings. Excluding these items, the net effective tax rate in 1994 decreased slightly compared to 1993, due primarily to a larger portion of earnings generated in lower tax jurisdictions. Net earnings from continuing operations was $371 million in 1995 compared with $406 million in 1994, and a loss of $193 million in 1993. Earnings per common share from continuing operations was $1.34 in 1995 compared with $1.45 in 1994, and a loss of 70 cents in 1993. The decrease in 1995 primarily reflects provisions for restructuring and litigation charges, offset by the net gain related to the disposal of the company's remaining investment in MediSense, Inc. The company estimates that earnings per share from continuing operations in 1995, excluding these charges and the net gain related to MediSense, Inc., would have increased 21% to approximately $1.75. Excluding the impact of restructuring and litigation charges in 1993, earnings per share from continuing operations in 1994 would have increased 25% from an estimated 1993 per share amount of $1.16. Net income and earnings per share increased 9% and 10%, respectively, for the year ended December 31, 1995. Gains from the company's divestitures of the Industrial and Life Sciences division (included in discontinued operations) and its remaining investment in MediSense, Inc. substantially offset the special charges incurred for restructuring and litigation. Consequently, the increase in net income and earnings per share was primarily the result of increased sales volume, improved expense leveraging and the favorable effect of foreign currency rates. ADOPTION OF NEW ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which is effective for fiscal years beginning after December 31, 1995. Adoption of FASB No. 121 in fiscal year 1996 is not expected to have a material impact on the company. In October 1995, the FASB issued Statement No. 123, "Accounting for Stock- Based Compensation," which is effective for fiscal years beginning after December 15, 1995. The statement provides management with a choice of accounting methods for stock-based transactions with employees. Management is currently evaluating the fair value and disclosure alternatives in the statement and plans to adopt it in fiscal year 1996. 38 BAXTER INTERNATIONAL - -------------------------------------------------------------------------------- IMPACT OF INFLATION AND FOREIGN EXCHANGE In recent years, the company has experienced increases in its labor and material cost base influenced, in part, by general inflationary trends. While not directly related to inflationary trends, the company's revenue base, on average, over recent years has been adversely affected by lower average selling prices on certain products as a result of changes in Medicare reimbursement regulations, economic pressures in the U.S. hospital marketplace and increased competition in certain product lines. There is little correlation between general inflation rates directly affecting costs and expenses and the company's pricing levels for products sold to health-care customers. Management expects that these trends will continue. Approximately 50% of Baxter's sales are denominated in currencies other than the U.S. dollar, which exposes the company to risks associated with fluctuations in foreign currency rates. To help manage the risks associated with its foreign exchange exposures, the company routinely assesses the costs and benefits of various hedging strategies and implements those strategies that are considered appropriate and cost effective. Several of the markets in which the company operates are considered hyper-inflationary for accounting purposes. The company does not hedge its foreign currency exposures in these hyper-inflationary markets because of their relative immateriality and the costs associated with implementing such a strategy. The devaluations of the Mexican peso and Venezuelan bolivar are not expected to have a material impact on Baxter's results of operations in 1996. LIQUIDITY AND CAPITAL RESOURCES Management assesses the company's liquidity in terms of its overall ability to mobilize cash to support ongoing business levels and to fund its growth. In 1995, the company continued its emphasis on cash flow from operations. To facilitate this emphasis, management monitors an internal performance measure called "operational cash flow." This measure evaluates each operating business on all aspects of cash flow under its direct control. Management's objective was to generate "operational cash flow" of at least $500 million in 1995 and $450 million in 1994 (for combined continuing and discontinued operations). In addition, the incentive compensation programs for the company's senior management in each business include significant emphasis on the attainment of both "operational cash flow" as well as earnings objectives. Total "operational cash flow" for continuing and discontinued operations was $587, $954 and $292 million in 1995, 1994 and 1993, respectively. These levels of "operational cash flow" enabled the company to reduce net debt of continuing and discontinued operations by $286 million in 1995 and $742 million in 1994. The 1995 and 1994 increases in "operational cash flow" primarily reflect increases in income and improved balance sheet management. "Operational cash flow" includes approximately $50 million in proceeds for the sale of certain lease receivables in 1995 and approximately $110 million in such proceeds in 1994. The following table reconciles cash flow provided by continuing operations, as determined by generally accepted accounting principles, to the company's internal measure of "operational cash flow." 39 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- CASH FLOW PROVIDED BY CONTINUING OPERATIONS
BRACKETS DENOTE CASH OUTFLOWS YEARS ENDED DECEMBER 31 (IN MILLIONS) 1995 1994 1993 - -------------------------------------------------------------------------------- Cash flow provided by continuing operations per the company's consolidated statements of cash flows $573 $919 $437 Capital expenditures (399) (380) (332) Net interest after tax 56 58 53 Other 86 21 2 - -------------------------------------------------------------------------------- "Operational cash flow" - continuing operations 316 618 160 - -------------------------------------------------------------------------------- "Operational cash flow" - discontinued operations 271 336 132 - -------------------------------------------------------------------------------- TOTAL "OPERATIONAL CASH FLOW" $587 $954 $292 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
The company's current assets exceeded current liabilities by $757 million at December 31, 1995 versus an excess of $502 million at December 31, 1994. Current assets at December 31, 1995, included receivables of $1,209 million and inventories of $906 million. These sources of liquidity are convertible into cash over a relatively short period of time and thus, will help the company satisfy normal operating cash requirements. INVESTMENT TRANSACTIONS
Percent increase (decrease) YEARS ENDED DECEMBER 31 (IN MILLIONS) 1995 1994 1993 1995 1994 - -------------------------------------------------------------------------------- Capital expenditures $399 $380 $332 5% 14% Acquisitions 44 60 107 (27)% (44)% Proceeds from asset dispositions (91) (72) (5) 26% N/A - -------------------------------------------------------------------------------- Total investment transactions, net $352 $368 $434 - -------------------------------------------------------------- - --------------------------------------------------------------
Capital expenditures in 1995 included construction of a manufacturing facility for pericardial tissue valves in California, expansion of manufacturing capacity for renal products in Ireland, renal HomeChoice-Registered Trademark- leased equipment and manufacturing capacity expansion, and ground-breaking on a manufacturing facility for blood substitutes in Switzerland. Major capital projects in 1994 included expenditures in Singapore for a renal facility, renal HomeChoice-Registered Trademark- leased equipment, the completion of a plant in Puerto Rico to manufacture disposable products used in the automated collection of blood and a new manufacturing plant for renal products in China. The company expects to invest between $400 and $450 million in capital expenditures in 1996. The acquisitions summarized in the above table involved no significant change to the company's strategic direction, and were made for the purpose of acquiring technologies, broadening product lines and service offerings, or expanding market coverage. The proceeds received from asset dispositions are the result of the company's decision to divest or dispose of several minor non-strategic or unprofitable product lines or investments. The majority of these transactions resulted in the disposition of the company's entire interest in such product lines or investments. 40 BAXTER INTERNATIONAL - -------------------------------------------------------------------------------- Long-term insurance receivables and litigation liabilities increased due to the special charges for litigation discussed above. These increases were offset by reclassifications to notes and other current receivables and current liabilities for those insurance proceeds expected to be received and payments expected to be made within one year. Baxter made a payment of $125 million in connection with the mammary implant revised global settlement in January 1996. There are agreements or on-going negotiations with some insurance carriers for timely reimbursement of litigation settlements. Other reimbursements may lag the settlement payments. Such lags in insurance reimbursement are not expected to have a material impact on the company's cash flow. DEBT AND FINANCIAL INSTRUMENTS To meet its net financing requirements during the two years ended December 31, 1995, the company used short-term borrowings as required. For purposes of covenant compliance, the company's credit arrangements permit it to reduce its debt to capital ratio by a percentage of cash and equivalents. (See Note 6 to the Consolidated Financial Statements.) CAPITAL STRUCTURE
AS OF DECEMBER 31 (IN MILLIONS) 1995 1994 1993 - -------------------------------------------------------------------------------- Long-term obligations $2,372 $2,341 $2,800 Stockholders' equity 3,704 3,720 3,185 - -------------------------------------------------------------------------------- Long-term debt as a percent of total capital 39.0% 38.6% 46.8% - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Net debt (after consideration of cash equivalents) of continuing and discontinued operations declined to $2,115 million since the beginning of the year after paying $306 million in dividends. In line with its stated objective to maintain a net-debt-to-net-capital ratio between 35% and 40%, the company's ratio was 36.3% in 1995 and 39.2% in 1994. The company will continue to review its capital structure and may make changes to its targeted ratios should the need arise. The company's debt ratings of A3 on senior debt by Moody's, A- by Standard & Poor's and A by Duff & Phelps were reaffirmed by each rating agency this year. However, the rating agencies have placed Baxter on credit watch pending clarification of the company's capital structure in conjunction with the Distribution of the health-care cost management business. At December 31, 1995, the company could issue up to $300 million in aggregate principal amount of additional senior unsecured debt securities under an effective registration statement filed with the Securities and Exchange Commission. 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, restructuring and litigation 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. The company uses financial instruments (derivatives) as an essential tool to manage risk and reduce its cost of capital. It is the company's policy to manage debt securities and derivatives in an integrated manner to (i) lower funding risk by diversifying access to debt markets at an appropriate cost, (ii) reduce 41 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- the cost of funding without increasing the overall interest rate risk of the debt portfolio, and (iii) manage interest rate risk by lowering the company's exposure to adverse movements in interest rates at a cost deemed appropriate for the benefit [GRAPH] received. With respect to foreign exchange, the policy is to use derivatives to reduce the overall risk of the company to an acceptable level. The company does not hold or issue financial instruments for trading purposes. Beginning in October 1993 and continuing through 1995, the company has been implementing a long-term hedging strategy that uses swaps to fix the interest rate of the company's short-term borrowings for up to ten years. In addition, options were used to enable the company to benefit in future periods should short-term interest rates fall below certain levels. The interest rate exposure resulting from the ongoing agreement to sell up to $150 million of the company's lease receivables has been hedged. In the early part of each year the company assesses and implements appropriate hedges of its foreign exchange exposure with contracts that usually terminate on or before each year-end. The company monitors its credit exposure to its counterparties on a periodic basis using market measures that reflect the long- term nature of the hedges. In 1995, 1994 and 1993, gains and losses resulting from interest rate and foreign exchange hedging activities were not material. In February 1995, the company's board of directors authorized a two-year $500 million stock repurchase program. As of September 30, 1995, the company had completed this program by repurchasing $500 million (or approximately 14 million shares) of its common stock. In November 1995, the company's board of directors authorized the repurchase of an additional $500 million over a period of several years. As of December 31, 1995, the company had not repurchased any shares under the program authorized in November 1995. In connection with a Shared Investment Plan implemented in 1994, the company received $121 million in cash from 63 members of Baxter's senior management team who purchased an aggregate of 4.7 million shares of the company's common stock. This plan was designed to directly align management and shareholder interests. Under terms of the voluntary program, Baxter managers used personal full- recourse loans to exercise options to purchase stock at the June 15, 1994 closing price of $26. The loans, borrowed from several commercial banks, are the personal obligations of the participants. Baxter has agreed to guarantee repayment to the banks in the event of default by a participant. Baxter may take all actions necessary to obtain full reimbursement from the participant for amounts paid to the banks under its guarantee. To further align management and shareholder interests, Baxter changed its compensation program for non-employee directors. Since May 8, 1995, Baxter's non-employee directors have been compensated principally with fixed grants of common stock of the company instead of cash. 42 BAXTER INTERNATIONAL - -------------------------------------------------------------------------------- In February 1996, the board of directors declared a quarterly dividend on the company's common stock of 28.25 cents per share (annualized rate of $1.13 per share). As a result of the proposed Distribution of the health-care cost management business discussed above, the company will review its dividend policy in 1996. However, it is management's present intent that the current annual dividend will be allocated between Baxter's continuing operations and the health-care cost management business subsequent to the Distribution. LITIGATION See Note 14 to the Consolidated Financial Statements for a detailed description of the company's litigation for the cases and claims from individuals seeking damages for injuries allegedly caused by silicone mammary implants manufactured by a division of American Hospital Supply Corporation. Note 14 also discusses the status of lawsuits and claims involving individuals with hemophilia, seeking damages for injuries allegedly caused by anti-hemophilic factor VIII and IX concentrates derived from human blood plasma processed and sold by the company and other commercial producers. It also discusses the status of lawsuits and claims stemming from the company's 1994 voluntary withdrawal of Gammagard- Registered Trademark- IGIV, a concentration of antibodies derived from human plasma, primarily used to treat immune-suppressed patients. As of December 31, 1995, the company has been named as a potentially responsible party for cleanup costs at 18 hazardous waste sites. The company was a significant contributor to waste disposed of at only one of these sites, the Thermo-Chem site in Muskegon, Michigan. The company expects that the total cleanup costs for this site will be between $44 million and $65 million, of which the company's share will be approximately $5 million. This amount, net of payments of approximately $1 million, has been accrued and is reflected in the company's financial statements. In all of the other sites, the company was a minor contributor and does not have information on the total cleanup costs. The company has, however, in most of these cases been advised by the potentially responsible party of its estimated exposure at these sites. Those estimated exposures total approximately $7 million. This amount has been accrued and reflected in the company's financial statements. The company is a defendant in a number of other claims, investigations and lawsuits. Upon resolution of any of the uncertainties described in Note 14 to the Consolidated Financial Statements, the company may incur charges in excess of presently established reserves. While such future charges could have a material adverse impact on the company's net income in the period in which it is recorded, 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 cash flow or consolidated financial position. 43 MANAGEMENT'S RESPONSIBILITIES FOR FINANCIAL REPORTING - -------------------------------------------------------------------------------- The consolidated balance sheets of Baxter International Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, cash flows and stockholders' equity for each of the years in the three- year period ended December 31, 1995, have been prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and include some amounts that are based upon management's best estimates and judgments. The financial information contained elsewhere in this annual report is consistent with that contained in the financial statements. Management is responsible for establishing and maintaining a system of internal control over financial reporting and safeguarding of assets against unauthorized acquisition, use or disposition which 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 therefrom. Management believes that the foundation of an appropriate system of internal control is a strong ethical company culture and climate. To this end the Corporate Responsibility Office was created in 1993 to recommend to the Public Policy Committee of the Board of Directors, revisions to the company's existing ethics and compliance policies, and to direct the implementation of and compliance with the company's ethics and compliance policies and procedures. To further emphasize the importance of business ethics, a revised business ethics manual was approved by the Public Policy Committee in 1994 and was distributed throughout the company. A related worldwide ethics-awareness training program commenced immediately thereafter. By the end of 1995, substantially all domestic and international employees completed the ethics training and awareness program. The Corporate Responsibility Office monitors compliance through audit programs and the requirement for annual representations by senior managers. Additionally, a professional staff of corporate auditors reviews the related internal control system design, the accounting policies and procedures supporting this system and compliance therewith. The results of these reviews are reported annually to the Public Policy and Audit Committees. Price Waterhouse 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 composed 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. The independent certified public accountants and corporate auditors meet regularly with, and have access to, this committee, with and without management present, to discuss the results of the audit work. Management assessed the company's system of internal control as of December 31, 1995, in relation to criteria for effective internal control over financial reporting described in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, it is management's opinion that, as of December 31, 1995, the company had an effective system of internal controls over the preparation of its published interim and annual financial statements and over safeguarding of assets against unauthorized acquisition, use or disposition. /s/ Vernon R. Loucks Jr. /s/ Harry M. Jansen Kraemer Jr. /s/ Brian P. Anderson VERNON R. LOUCKS JR. HARRY M. JANSEN KRAEMER JR. BRIAN P. ANDERSON Chairman and Senior Vice President Controller Chief Executive Officer and Chief Financial Officer 44 REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- BOARD OF DIRECTORS AND STOCKHOLDERS BAXTER INTERNATIONAL INC. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, cash flows and stockholders' equity present fairly, in all material respects, the financial position of Baxter International Inc. (the company) and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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. As discussed in Notes 11 and 13 to the consolidated financial statements, effective January 1, 1993, the company adopted Statement of Financial Accounting Standards No. 112, "Employers Accounting for Postemployment Benefits" and Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Chicago, Illinois February 14, 1996 45 CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
AS OF DECEMBER 31 (IN MILLIONS, EXCEPT SHARES) 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and equivalents $ 476 $ 468 Accounts receivable, net of allowance for doubtful accounts of $22 in 1995 and $21 in 1994 973 892 Notes and other current receivables 236 126 Inventories 906 816 Short-term deferred income taxes 189 126 Prepaid expenses 131 120 -------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 2,911 2,548 - ---------------------------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT At cost 3,427 3,101 AND EQUIPMENT Accumulated depreciation and amortization (1,678) (1,458) -------------------------------------------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 1,749 1,643 - ---------------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS Net assets of discontinued operations 2,619 3,085 Goodwill and other intangibles 1,098 1,084 Insurance receivables 805 446 Other 255 233 -------------------------------------------------------------------------------------------------------------- TOTAL OTHER ASSETS 4,777 4,848 -------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $9,437 $9,039 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Notes payable to banks $ 59 $ 131 Current maturities of long-term debt and lease obligations 160 400 Accounts payable and accrued liabilities 1,548 1,113 Income taxes payable 387 402 -------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 2,154 2,046 - ---------------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT AND LEASE OBLIGATIONS 2,372 2,341 - ---------------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEFERRED INCOME TAXES 173 112 - ---------------------------------------------------------------------------------------------------------------------------------- LONG-TERM LITIGATION LIABILITIES 678 458 - ---------------------------------------------------------------------------------------------------------------------------------- OTHER NON-CURRENT LIABILITIES 356 362 - ---------------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' Common stock, $1 par value, authorized 350,000,000 shares, EQUITY issued 287,701,247 shares in 1995 and 1994 288 288 Additional contributed capital 1,837 1,810 Retained earnings 2,105 1,762 Common stock in treasury, at cost, 15,801,580 shares in 1995 and 5,391,092 shares in 1994 (550) (135) Cumulative foreign currency adjustment 24 (5) -------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 3,704 3,720 -------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,437 $9,039 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 46 CONSOLIDATED STATEMENTS OF INCOME - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 (IN MILLIONS, EXCEPT PER SHARE DATA) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- OPERATIONS NET SALES $5,048 $4,479 $4,116 Costs and expenses Cost of goods sold 2,777 2,506 2,243 Marketing and administrative expenses 1,084 952 932 Research and development expenses 345 303 280 Restructuring charges 103 - 216 Special charge for litigation, net 96 - 330 Allocated interest, net 96 96 90 Goodwill amortization 28 27 26 Other (income) expense (5) 36 73 -------------------------------------------------------------------------------------------------------------- TOTAL COSTS AND EXPENSES 4,524 3,920 4,190 -------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes and cumulative effect of accounting changes 524 559 (74) Income tax expense 153 153 119 -------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 371 406 (193) Discontinued operations Income (loss) from discontinued operations, net of applicable income tax expense (benefit) of $88 in 1995, $52 in 1994 and $(181) in 1993 304 190 (75) Costs associated with effecting the business distribution, net of income tax benefit of $8 (26) - - -------------------------------------------------------------------------------------------------------------- TOTAL DISCONTINUED OPERATIONS 278 190 (75) -------------------------------------------------------------------------------------------------------------- Income (loss) before cumulative effect of accounting changes 649 596 (268) Cumulative effect of change in accounting for: Income taxes - - 81 Other postemployment benefits, net of income tax benefits of $7 - - (11) -------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 649 $ 596 $ (198) - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Earnings (loss) per common share CONTINUING OPERATIONS $ 1.34 $ 1.45 $(0.70) Discontinued operations Income (loss) from discontinued operations 1.10 0.68 (0.27) Costs associated with effecting the business distribution (0.09) - - -------------------------------------------------------------------------------------------------------------- TOTAL DISCONTINUED OPERATIONS $ 1.01 $ 0.68 $(0.27) -------------------------------------------------------------------------------------------------------------- Cumulative effect of change in accounting for: Income taxes - - .29 Other postemployment benefits - - (0.04) -------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 2.35 $ 2.13 $(0.72) -------------------------------------------------------------------------------------------------------------- Average number of common shares and equivalents outstanding 277 280 277 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 47 CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 (IN MILLIONS)(BRACKETS DENOTE CASH OUTFLOWS) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOW Income (loss) from continuing operations $ 371 $ 406 $ (193) PROVIDED BY Adjustments CONTINUING Depreciation and amortization 336 302 273 OPERATIONS Deferred income taxes (17) 27 28 Gain on asset dispositions, net (pretax) (65) (10) (7) Purchased research and development 18 - - Restructuring and special charge for litigation 199 - 441 Other 20 26 39 Changes in balance sheet items Accounts receivable (106) (13) (36) Inventories (90) 25 (43) Accounts payable and accrued liabilities 2 96 (17) Income taxes payable (19) 59 4 Restructuring program payments (40) (52) (12) Other (36) 53 (40) -------------------------------------------------------------------------------------------------------------- CASH FLOW PROVIDED BY CONTINUING OPERATIONS 573 919 437 - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOW PROVIDED BY DISCONTINUED OPERATIONS 763 354 112 - ---------------------------------------------------------------------------------------------------------------------------------- INVESTMENT Capital expenditures (309) (308) (276) TRANSACTIONS Additions to the pool of equipment leased or rented to customers (90) (72) (56) Acquisitions (net of cash received) and investments in affiliates (44) (60) (107) Proceeds from asset dispositions 91 72 5 -------------------------------------------------------------------------------------------------------------- INVESTMENT TRANSACTIONS, NET (352) (368) (434) - ---------------------------------------------------------------------------------------------------------------------------------- FINANCING Issuances of debt and lease obligations 1,296 970 2,437 TRANSACTIONS Redemption of debt and lease obligations (891) (1,593) (2,021) Increase (decrease) in debt with maturities of three months or less, net (698) (151) 274 Common stock cash dividends (306) (286) (278) Stock issued under Shared Investment Plan - 121 - Stock issued under employee benefit plans 103 56 52 Purchase of treasury stock (500) (47) (124) -------------------------------------------------------------------------------------------------------------- FINANCING TRANSACTIONS, NET (996) (930) 340 - ---------------------------------------------------------------------------------------------------------------------------------- EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS 20 11 (3) - ---------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS 8 (14) 452 - ---------------------------------------------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS AT BEGINNING OF YEAR 468 482 30 - ---------------------------------------------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS AT END OF YEAR $ 476 $ 468 $ 482 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 48 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 (IN MILLIONS) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK Balance, beginning and end of year $ 288 $ 288 $ 288 - ---------------------------------------------------------------------------------------------------------------------------------- ADDITIONAL Balance, beginning of year 1,810 1,883 1,889 CONTRIBUTED Stock issued under Shared Investment Plan - (44) - CAPITAL Stock issued under employee benefit plans 27 (29) (6) -------------------------------------------------------------------------------------------------------------- Balance, end of year 1,837 1,810 1,883 - ---------------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance, beginning of year 1,762 1,452 1,928 Net income (loss) 649 596 (198) Common stock cash dividends (306) (286) (278) -------------------------------------------------------------------------------------------------------------- Balance, end of year 2,105 1,762 1,452 - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK Balance, beginning of year (135) (350) (281) IN TREASURY Purchases (500) (47) (124) Stock issued under Shared Investment Plan - 165 - Stock issued under employee benefit plans 76 87 55 Stock issued for acquisitions 9 10 - -------------------------------------------------------------------------------------------------------------- Balance, end of year (550) (135) (350) - ---------------------------------------------------------------------------------------------------------------------------------- CUMULATIVE Balance, beginning of year (5) (88) (29) FOREIGN CURRENCY Currency fluctuations 29 83 (59) ADJUSTMENT -------------------------------------------------------------------------------------------------------------- Balance, end of year 24 (5) (88) - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $3,704 $3,720 $3,185 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies is presented to assist the reader in understanding and evaluating the consolidated financial statements. These policies are in conformity with generally accepted accounting principles and have been applied consistently in all material respects. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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 subsidiaries ("Baxter" or the "company"). Operations outside the United States and its territories are included in the consolidated financial statements on the basis of fiscal years ending November 30. The company's financial statements have been restated to reflect the results of operations and net assets of the health-care cost management business as a discontinued operation. Accordingly, all amounts included in the Notes to Consolidated Financial Statements pertain to continuing operations except where otherwise noted. See further discussion in Note 2. CASH AND EQUIVALENTS Cash and equivalents include cash, cash investments and marketable securities with a maturity of three months or less. For continuing and discontinued operations, cash payments for interest were $176 million in 1995, $226 million in 1994 and $217 million in 1993. Cash payments for income taxes related to continuing and discontinued operations in 1995, 1994 and 1993 were $182, $127 and $79 million, respectively. INVENTORIES
AS OF DECEMBER 31 (IN MILLIONS) 1995 1994 - -------------------------------------------------------------------------------- Raw materials $165 $154 Work in process 164 136 Finished products 577 526 - -------------------------------------------------------------------------------- TOTAL INVENTORIES $906 $816 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Inventories are stated at the lower of cost (first-in, first-out method) or market. Market for raw materials is based on replacement costs and for other inventory classifications on net realizable value. Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value. PROPERTY, PLANT AND EQUIPMENT
AS OF DECEMBER 31 (IN MILLIONS) 1995 1994 - -------------------------------------------------------------------------------- Land $ 88 $ 83 Buildings and leasehold improvements 701 663 Machinery and equipment 2,038 1,762 Equipment leased or rented to customers 341 348 Construction in progress 259 245 - -------------------------------------------------------------------------------- TOTAL PROPERTY, PLANT AND EQUIPMENT, AT COST 3,427 3,101 Accumulated depreciation and amortization (1,678) (1,458) - -------------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT $1,749 $1,643 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Depreciation and amortization are provided for financial reporting purposes principally on the straight-line method over the following estimated useful lives: buildings and leasehold improvements, 20 to 44 years; machinery and other equipment, 3 to 20 years; equipment leased or rented to customers, 1 to 5 years. Leasehold improvements are depreciated over the life of the related facility leases or the asset, whichever is shorter. Straight-line and accelerated methods of depreciation are used for income tax purposes. Depreciation expense was $254, $226 and $206 million in 1995, 1994 and 1993, respectively. Repairs and maintenance expense was $79 million in 1995, $74 million in 1994 and $78 million in 1993. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the excess of cost over the fair value of net assets acquired and is amortized on a straight-line basis over estimated useful lives not exceeding 40 years. Based 50 BAXTER INTERNATIONAL - -------------------------------------------------------------------------------- upon management's assessment of the future undiscounted operating cash flows of acquired businesses, the carrying value of goodwill at December 31, 1995, has not been impaired. As of December 31, 1995 and 1994, goodwill was $824 million and $820 million, respectively, net of accumulated amortization of $270 million and $242 million, respectively. Other intangible assets include purchased patents, trademarks, deferred charges and other identified rights which are amortized on a straight-line basis over their legal or estimated useful lives, whichever is shorter (generally not exceeding 17 years). As of December 31, 1995 and 1994, other intangibles were $274 million and $264 million, respectively, net of accumulated amortization of $281 million and $218 million, respectively. INCOME TAXES Effective January 1, 1993, the company adopted Financial Accounting Standards Board ("FASB") Statement No. 109, "Accounting for Income Taxes." Under this standard, deferred income taxes reflect the impact of temporary differences between the assets and liabilities recognized for financial reporting purposes and amounts recognized for tax purposes. Deferred income tax accounts are adjusted to reflect changes in tax rates made from time to time by taxing authorities in the jurisdiction in which the company operates. EARNINGS PER SHARE Earnings per share of common stock are computed by dividing the net income available for common stock by the weighted average number of common shares outstanding during the period. DERIVATIVES Gains and losses on hedges of existing assets or liabilities are included in the carrying amounts of those assets or liabilities and are ultimately recognized in income as part of those carrying amounts. Gains and losses relating to qualifying hedges of firm commitments or anticipated transactions also are deferred and are recognized in income or as adjustments of carrying amounts when the hedged transaction occurs. Gains and losses on interest rate-contracts that do not qualify as hedges are recognized as other income or expense. RECLASSIFICATIONS Certain immaterial reclassifications have been made to conform the 1994 and 1993 financial statements and related footnotes to the 1995 presentation. 2. DISCONTINUED OPERATIONS On November 28, 1995, the board of directors of Baxter International Inc. approved in principle a plan to distribute to Baxter stockholders all of the outstanding stock of its health-care cost management business (the "Distribution") in a spin-off transaction which is expected to be tax-free. The creation of two independent companies will enable Baxter and the new company to devote management time, attention and investments directly to the core strategies of each business. The new health-care cost management business will consist of Baxter's cost-management services, U.S. distribution, surgical products and respiratory-therapy operations. This new company will operate as a medical supplier, focused on helping customers manage the total cost of providing patient care. The Distribution is expected to occur in late 1996 and will result in the health-care cost management business operating as an independent entity with publicly traded common stock on the New York Stock Exchange. The following selected financial information for the new health-care cost management business (including previously divested businesses) is presented for informational purposes only and does not necessarily reflect what the results of operations and financial position would have been had it operated as a stand- alone entity. INCOME STATEMENT DATA FOR HEALTH-CARE COST MANAGEMENT BUSINESS
AS OF DECEMBER 31 (IN MILLIONS) 1995 1994 1993 - -------------------------------------------------------------------------------- Net sales $4,682 $4,845 $4,763 Income (loss) before income taxes $ 392 $ 242 $ (256) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
In 1995, income before income taxes includes a $268 million net pretax gain resulting from the company's divestiture of its Industrial and Life Sciences division to VWR Corporation. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NET ASSETS FOR HEALTH-CARE COST MANAGEMENT BUSINESS
AS OF DECEMBER 31 (IN MILLIONS) 1995 1994 - -------------------------------------------------------------------------------- Net current assets $ 722 $1,071 Net noncurrent assets 1,897 2,014 - -------------------------------------------------------------------------------- Total net assets $2,619 $3,085 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
It is estimated that through an issuance of new third-party debt, a substantial portion of Baxter's existing debt will be indirectly assumed by the health-care cost management business. The amount of the debt will be determined when the capital structure for the new company is finalized. As a result of the board's approval of the plan, the consolidated financial statements of Baxter and the related Notes to Consolidated Financial Statements and supplemental data have been adjusted and restated to reflect the results of operations and net assets of the health-care cost management business as a discontinued operation in accordance with generally accepted accounting principles. 3. RESTRUCTURING CHARGES In November 1993, the company announced that its board of directors approved a series of strategic actions to improve shareholder value, to extend positions of leadership in high-growth health-care markets and to reduce costs. These actions were designed to accelerate growth and reduce costs in the company's businesses worldwide, including reorganizations and consolidations in the United States, Europe, Japan and Canada. In November 1993, the company recorded a $230 million pretax provision to cover costs associated with these restructuring initiatives. Since the announcement of the 1993 restructuring program, the company has implemented, or is in the process of implementing, all of the major strategic actions associated with the restructuring program, which is expected to be completed in 1997. Employee-related costs include provisions for severance, outplacement assistance, relocation and retention payments for employees in the affected operations worldwide. Since the inception of the restructuring program, the company has eliminated approximately 1,250 of the 1,640 positions affected by the program. The majority of the remaining reductions will occur in 1996 and 1997, as facility closures and consolidations are completed as planned. 1993 RESTRUCTURING PROGRAM
Divestitures Employee- and asset Other (IN MILLIONS) related costs write-downs costs TOTAL - -------------------------------------------------------------------------------- Restructuring charges $94 $75 $61 $230 1994 utilization: Cash 27 - 21 48 Noncash - 29 - 29 - -------------------------------------------------------------------------------- 1995 utilization: Cash 19 - 17 36 Noncash - 24 - 24 - -------------------------------------------------------------------------------- December 31, 1995 $48 $22 $23 $ 93 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
In September 1995, the company completed a global study of its manufacturing capacity. As a result of the study, management approved a plan to consolidate the company's manufacturing operations in Puerto Rico in order to eliminate excess capacity and reduce manufacturing costs. To effect this plan, management recorded a restructuring charge of $93 million in the third quarter of 1995. The charge is predominantly composed of the estimated costs to close the company's intravenous solutions plant and warehouse in Carolina, Puerto Rico. Production and warehousing will be transferred and consolidated into other facilities in Puerto Rico and the United States. Implementation of the plan is underway and completion is anticipated by the end of 1998. Employee-related costs consist primarily of severance for the approximately 1,450 positions that will be eliminated in connection with the approved plan. In addition to the consolidation of the company's manufacturing operations in Puerto Rico, the company has initiated plans for other organizational structure changes which have resulted in a $10 million provision for employee severance. 52 BAXTER INTERNATIONAL - -------------------------------------------------------------------------------- 1995 RESTRUCTURING PROGRAM
Employee- Asset Other (IN MILLIONS) related costs write-downs costs TOTAL - -------------------------------------------------------------------------------- Restructuring charges: Puerto Rico facility consolidations $17 $67 $9 $93 Organizational changes 10 - - 10 Utilization: Cash 1 - - 1 Noncash - 48 - 48 - -------------------------------------------------------------------------------- December 31, 1995 $26 $19 $9 $54 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
4. ACQUISITIONS, INVESTMENTS IN AFFILIATES & DIVESTITURES The company invested $44 million in 1995, $16 million in 1994 and $91 million in 1993 for acquisitions accounted for as purchase transactions and investments in affiliated companies. Additionally, the company issued $9 million in 1995 and $10 million in 1994 of common stock for acquisitions accounted for as purchase transactions. Investments in 1995 also included $18 million for an acquisition accounted for as purchased research and development. Had the acquisitions taken place on January 1, consolidated results in the year of acquisition would not have been materially different from reported results. These acquisitions involved no significant change in the company's strategic direction and were made to acquire technologies, broaden product lines and expand market coverage. Additionally, the company paid previously recorded acquisition related liabilities associated with the 1985 acquisition of American Hospital Supply Corporation ("American") of $44 million in 1994 and $16 million in 1993. These payments were for costs associated with litigation surrounding mammary implants. See further discussion in Note 14. The company disposed of or discontinued several minor non-strategic or unprofitable product lines or investments which resulted in a net gain of $39 million (net of $26 million in related tax expense) in 1995, as compared to net gains of $6 million (net of $4 million in related tax expense) in 1994 and net gains of $5 million (net of $2 million in related tax expense) in 1993. Proceeds from divestitures were $91 million in 1995, $72 million in 1994 and $5 million in 1993. The majority of these transactions resulted in the disposition of the company's entire interest in such product lines and investments. 5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
AS OF DECEMBER 31 (IN MILLIONS) 1995 1994 - -------------------------------------------------------------------------------- Accounts payable, principally trade $ 355 $ 311 Employee compensation and withholdings 188 163 Restructuring 64 20 Litigation 466 240 Pension and other deferred benefits 11 81 Property, payroll and other taxes 51 47 Other 413 251 - -------------------------------------------------------------------------------- Accounts payable and accrued liabilities $1,548 $1,113 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
6. CREDIT FACILITIES At December 31, 1995, Baxter's revolving credit facility enabled the company to borrow funds on an unsecured basis at variable interest rates. The banks participating in this facility are committed to maintain the $1.5 billion facility through July 2000. The agreement contains covenants which include a maximum debt-to-capital ratio (as defined) and a minimum interest coverage ratio. At December 31, 1995, there were no borrowings outstanding under this facility. Baxter also maintains other short-term credit arrangements totaling approximately $890 million in support of international and domestic operations. At December 31, 1995, $99 million of borrowings were outstanding under these facilities, of which $40 million is classified as long-term debt. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 7. LONG-TERM DEBT AND LEASE OBLIGATIONS
Effective AS OF DECEMBER 31 (IN MILLIONS) interest rate 1995 1994 - -------------------------------------------------------------------------------- Commercial paper 5.9% $ 615 $ 314 - -------------------------------------------------------------------------------- Short-term notes 5.9% 559 728 - -------------------------------------------------------------------------------- Notes due within one year 9.5% 160 299 - -------------------------------------------------------------------------------- 7 1/2% notes due 1997 7.3% 201 201 - -------------------------------------------------------------------------------- Notes redeemable by holders/callable by company in 1998 9.7% 186 185 - -------------------------------------------------------------------------------- 9 1/4% notes due 1999 10.1% 97 97 - -------------------------------------------------------------------------------- Zero coupon notes due 2000 10.3% 88 79 - -------------------------------------------------------------------------------- 7 1/4% notes due 2008 6.6% 198 200 - -------------------------------------------------------------------------------- Swapped notes due 1997, 2001 and 2002 7.3% 325 336 - -------------------------------------------------------------------------------- Industrial development obligations, due 1996 through 2013 8.4% 71 71 - -------------------------------------------------------------------------------- Notes and capitalized lease obligations due 1996 through 2020 32 231 - -------------------------------------------------------------------------------- Total long-term debt and lease obligations 2,532 2,741 Current portion (160) (400) Long-term portion $2,372 $2,341 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
At December 31, 1995 and 1994, commercial paper and certain short-term notes together totaling $1,174 million and $953 million, respectively, have been classified with long-term debt as they are supported by long-term credit facilities and will continue to be refinanced. Commercial paper and short-term notes of $89 million as of December 31, 1994 were included in current maturities as they were supported by short-term credit facilities. The company had unamortized original issue discounts of $56 and $66 million for the Zero coupon notes due 2000 at December 31, 1995 and 1994, respectively. The company leases certain facilities and equipment under capital and operating leases expiring at various dates. Most of the operating leases contain renewal options. Total expense for all operating leases was $88 million in 1995, $92 million in 1994 and $94 million in 1993. FUTURE MINIMUM LEASE PAYMENTS
Aggregate debt maturities (INCLUDING INTEREST) Operating and capital AS OF DECEMBER 31 (IN MILLIONS) leases leases - -------------------------------------------------------------------------------- 1996 $82 $162 1997 52 227 1998 36 102 1999 25 100 2000 21 1,331 Thereafter 67 668 - -------------------------------------------------------------------------------- Total obligations and commitments $283 2,590 - ----------------------------------------------------------------- - ----------------------------------------------------------------- Amounts representing interest, discounts, premiums and deferred financing costs 58 - -------------------------------------------------------------------------------- Present value of long-term debt and lease obligations $2,532 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT CONCENTRATIONS OF CREDIT RISK The company provides credit, in the normal course of business, to hospitals, private and government institutions, health-care agencies, insurance agencies and doctors' offices. The company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses which, when realized, have been within the range of management's allowance for doubtful accounts. The company invests the majority of its excess cash, primarily generated through operations in Puerto Rico, in certificates of deposit with major banks there. These certificates typically have a maturity of 30 to 45 days. The company has not experienced any losses on its certificate of deposit investments. FINANCIAL INSTRUMENT USE Baxter uses financial instruments to manage its exposure to adverse movements in interest rates and foreign exchange rates. Baxter does not use financial instruments for trading purposes, nor is Baxter a party to leveraged derivatives. If Baxter did not use financial instruments, its exposure to these risks would increase. 54 BAXTER INTERNATIONAL - -------------------------------------------------------------------------------- The notional amounts of derivatives summarized below are used to calculate amounts exchanged in future periods relating to interest rates or foreign exchange rates. While the company is exposed to credit-related losses equal to the market value of the financial instrument shown below (which reflects the gain or loss at December 31, that would result from replacing the instrument in the case of non-performance by the counterparty), the company does not anticipate that any of its counterparties will fail to meet their obligations because of their high credit ratings. Where appropriate, the company has diversified its selection of counterparties, and has arranged collaterization and master-netting agreements to minimize the risk of loss. INTEREST RATE AND DEBT RISK MANAGEMENT Baxter uses forward contracts, options and interest-rate swaps from one to 10 years in duration to reduce the company's exposure to adverse movements in interest rates and lower the costs related to various debt instruments. The book values of debt at December 31, 1995 and 1994 reflect deferred hedge gains of $3 million and $7 million, offset by $6 million and $7 million of deferred hedge losses, respectively. In 1995 and 1994, options consisted principally of caps and floors that will lower the cost of associated fixed rate debt if floating rates fall below 7.5%, and minimize the impact of increases in floating rates between 1996 and 2005. The forward starting swap consisted of a fixed to floating rate swap that became effective January 4, 1996. Hedges of anticipated transactions in 1994 consisted of forward starting swaps that hedged floating rate debt issued upon maturity of the company's notes in 1995 at a fixed rate of approximately 7%. INTEREST-RATE CONTRACTS, MARKET VALUE GAIN (LOSS) AND WEIGHTED-AVERAGE INTEREST RATES
AS OF DECEMBER 31 (IN MILLIONS) 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- MARKET WEIGHTED- Market Weighted- VALUE AVERAGE value average NOTIONAL GAIN INTEREST Notional gain interest AMOUNTS (LOSS) RATE amounts (loss) rate - ---------------------------------------------------------------------------------------------------------------------------------- Floating to fixed rate hedges $1,050 $(21) $950 $57 Average pay rate 5.8% 5.8% Average receive rate 5.9% 6.2% Fixed to floating rate (swapped notes) 35 1 395 (31) Average pay rate 5.9% 6.2% Average receive rate 6.3% 7.3% Options 475 32 425 13 Forward starting swap 300 1 - - Hedges of anticipated transactions - - 300 30 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- FOREIGN EXCHANGE RISK MANAGEMENT The company enters into various types of foreign exchange contracts in managing its foreign exchange risk. The amounts hedged, including the market gain (loss) on termination, are indicated in the following table: FOREIGN EXCHANGE RISK MANAGEMENT
AS OF DECEMBER 31 (IN MILLIONS) 1995 1994 - -------------------------------------------------------------------------------- MARKET Market VALUE value NOTIONAL GAIN Notional gain AMOUNTS (LOSS) amounts (loss) - -------------------------------------------------------------------------------- Forwards and options used to hedge anticipated sales - - $ 60 - - -------------------------------------------------------------------------------- Forwards and swaps used to hedge certain receivables and payables $189 $ (1) $176 $ (2) - -------------------------------------------------------------------------------- Forwards and swaps used to hedge net investments in foreign affiliates $154 $(19) $226 $(38) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
The corporation enters into forward exchange contracts, options and swaps to hedge anticipated but not yet committed sales expected to be denominated in foreign currencies and certain receivables and payables. The terms of these currency financial instruments are less than two years. The purpose of the company's foreign currency hedging activities is to protect the company from the risk that the eventual dollar net cash inflows resulting from the sale of products to foreign customers and purchases from foreign suppliers and the repayment on non-U.S. dollar borrowings may be adversely affected by changes in exchange rates. The company also enters into foreign exchange contracts, for up to 10 years, to hedge its net investments in foreign affiliates. Subsequent to year-end 1995, the company entered into options to hedge anticipated but not yet committed sales expected to be denominated in foreign currencies with notional amounts totaling $166 million. The company principally hedges the following currencies: Japanese Yen, Belgian Franc, Canadian Dollar, French Franc, Swiss Franc, Spanish Peseta, Italian Lira, U.K. Pound Sterling, German Deutsch Mark, Malaysian Ringgit, Singapore Dollar and Australian Dollar. FAIR VALUES OF FINANCIAL INSTRUMENTS
Approximate Carrying amounts fair values AS OF DECEMBER 31 (IN MILLIONS) 1995 1994 1995 1994 - -------------------------------------------------------------------------------- Assets Long-term insurance receivables $805 $446 $633 $248 Investment in affiliates 134 163 134 235 Liabilities Notes payable to banks 59 131 59 131 Short-term borrowings classified as long-term 1,174 1,042 1,174 1,042 Other long-term debt and lease obligations 1,358 1,699 1,489 1,694 Interest rate and foreign exchange hedges 1 9 18 7 (29) Long-term litigation liabilities 678 458 532 254 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
1. INTEREST RATE HEDGE CARRYING AMOUNTS ARE INCLUDED IN CORRESPONDING DEBT BALANCES. The carrying values of cash and cash equivalents, accounts receivable and payable, and accrued liabilities, approximate fair value due to the short-term maturities of these assets and liabilities. Investments in affiliates are accounted for by both the cost and equity methods and pertain to several minor equity investments in companies for which fair values are determined by quoted market prices and others for which fair values are not readily available, but are believed to exceed carrying amounts. The aggregate fair value of notes payable to banks and short-term borrowings approximates its carrying amount because of the recent and frequent repricing based on market conditions. The fair value of other long-term debt and lease obligations was based on quoted market prices for the same or similar issues, giving consideration to quality, interest rates, maturity and other significant characteristics. The aggregate fair value of hedges was based on market valuations and is equivalent to the credit exposures at each December 31 for these instruments. Although the company's litigation has not yet been settled, 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. 56 BAXTER INTERNATIONAL - -------------------------------------------------------------------------------- 9. PREFERRED STOCK The stockholders have authorized the issuance of 100 million shares of no par value preferred stock. This stock can be issued in series with varying terms as determined by the board of directors. PREFERRED STOCK PURCHASE RIGHTS During 1989, common stockholders received a dividend of one preferred stock purchase right (collectively, the "Rights") for each share of common stock held of record. Each Right entitles the registered holder to purchase from the company one one-hundredth of a share of Series A Junior Participating Preferred Stock for $70. The Rights will become exercisable (and transferable apart from the common stock) on the earlier of (1) 10 days following a public announcement that a person or group has acquired 20% or more of the common stock, or (2) 10 business days following the commencement or announcement of an offer to acquire 20% or more of the common stock. If, after the Rights become exercisable, any person or group (the "Acquirer") acquires 20% or more of the common stock (except pursuant to an offer for all outstanding shares of common stock which the independent directors determine to be fair to and otherwise in the best interests of the company and its stockholders) each Right may be exercised for common stock (or, in certain circumstances, cash, other property or securities) having a value of $140. In specified circumstances, each Right may be exercised for common stock of an acquiring entity having a value of $140. All Rights held by the Acquirer will be null and void. The company may generally redeem the Rights at a price of $.01 per Right at any time until 10 days following a public announcement that a person or group has acquired 20% or more of the common stock. The Rights will expire on March 20, 1999, unless redeemed earlier. 10. COMMON STOCK In connection with a Shared Investment Plan implemented during 1994, the company received $121 million in cash from 63 members of Baxter's senior management team who collectively purchased 4,685,000 shares of the company's common stock. This plan more directly aligns management and shareholder interests. Under the terms of the voluntary program, Baxter managers used personal full-recourse loans to exercise options to purchase stock at the June 15, 1994, closing price of $26. The loans, borrowed from several commercial banks, are the personal obligations of the participants. Baxter has agreed to guarantee repayment to the banks in the event of default by a participant. The company has employee stock purchase plans under which the sale of its common stock has been authorized. 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 on the date sufficient funds have been withheld to purchase 10 shares. At December 31, 1995, approximately 5,400 of approximately 33,000 eligible employees in the U.S. and Canada and approximately 900 of approximately 13,000 other eligible employees were participating in the plans. Expiration dates for these subscriptions run from 1996 to 1998. The weighted average subscription price approximated $27.74 for U.S. and Canadian employees and $27.98 for other employees at December 31, 1995. EMPLOYEE STOCK PURCHASE PLAN
YEARS ENDED DECEMBER 31 Shares subscribed 1995 1994 1993 - -------------------------------------------------------------------------------- Beginning of year 2,050,970 2,496,703 1,704,735 Subscriptions 1,458,638 1,968,058 3,303,465 Purchases (1,579,425) (1,881,757) (1,592,102) Cancellations (351,583) (532,034) (919,395) - -------------------------------------------------------------------------------- End of year 1,578,600 2,050,970 2,496,703 - -------------------------------------------------------------------------------- Subscription price per share outstanding, end of year $18.70-$36.13 $17.21-$31.19 $17.21-$32.78 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
The company has various employee stock option plans. All outstanding options under these plans have been granted at 100% of market value on the dates of grant. As of December 31, 1995, options were held by approximately 7,800 employees, of which 6,258,117 shares were exercisable. Expiration dates for these options range from 1996 to 2005. The weighted average option price approximated $31.35 at December 31, 1995. 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- OPTION SHARES OUTSTANDING FOR EMPLOYEES AND DIRECTORS
YEARS ENDED DECEMBER 31 1995 1994 1993 - -------------------------------------------------------------------------------- Beginning of year 12,368,320 11,225,565 8,887,657 Granted 5,193,650 2,777,182 3,496,709 Exercised (2,107,441) (471,837) (466,105) Cancelled/Expired (802,694) (1,162,590) (692,696) - -------------------------------------------------------------------------------- End of year 14,651,835 12,368,320 11,225,565 - -------------------------------------------------------------------------------- Option price per share Exercised $13.07-$36.66 $8.35-$26.00 $10.32-$24.36 Outstanding, end of year $13.07-$37.25 $13.07-$36.66 $8.35-$36.66 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
In addition, stock options were granted to The Baxter Foundation (a philanthropic organization), as follows: an option to purchase 1,047,000 shares of common stock, at $33.78 per share (both equitably adjusted) was granted on April 22, 1991, and expires in 2001; and an option to purchase one million shares of common stock at $33.75 per share was granted on December 2, 1992, and expires in 2002. 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. At December 31, 1995, 174,280 shares were subject to restrictions which lapse between 1996 and 1998, and 797,479 shares were subject to restrictions which lapse upon achievement of future performance objectives. RESTRICTED STOCK OUTSTANDING
YEARS ENDED DECEMBER 31 1995 1994 1993 - -------------------------------------------------------------------------------- Beginning of year 1,571,841 1,466,200 2,052,777 Granted 107,104 508,320 5,400 Vested (free of restrictions) (562,291) (169,709) (313,353) Cancelled (144,895) (232,970) (278,624) - -------------------------------------------------------------------------------- End of year 971,759 1,571,841 1,466,200 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PERFORMANCE SHARES OUTSTANDING
YEARS ENDED DECEMBER 31 1995 1994 1993 - -------------------------------------------------------------------------------- Beginning of year 40,671 49,547 57,736 Granted/awarded 51,000 12,000 12,000 Issued (21,515) (20,001) (20,189) Cancelled (2,485) (875) - - -------------------------------------------------------------------------------- End of year 67,671 40,671 49,547 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
In February 1995, the company's board of directors authorized a two-year, $500 million stock repurchase program. As of September 30, 1995, the company completed this program by repurchasing $500 million (or approximately 14 million shares) of its common stock. In November 1995, the company's board of directors authorized the repurchase of an additional $500 million of the company's common stock over the next several years. As of December 31, 1995, no additional shares had been repurchased by the company under this authorization. COMMON STOCK RESERVED FOR ISSUANCE
AS OF DECEMBER 31, 1995 - -------------------------------------------------------------------------------- Acquisitions 986,525 Stock purchase plans 13,005,587 Management incentive compensation programs 19,502,478 Other 2,047,000 - -------------------------------------------------------------------------------- Total shares reserved 35,541,590 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock- Based Compensation," which is effective for fiscal years beginning after December 15, 1995. The statement provides management with a choice of accounting methods for stock-based transactions with employees. Management is currently evaluating the fair value and disclosure alternatives in the statement and plans to adopt it in fiscal year 1996. 58 BAXTER INTERNATIONAL - -------------------------------------------------------------------------------- 11. RETIREMENT AND OTHER BENEFIT PROGRAMS The company and its subsidiaries sponsor qualified and non-qualified non- contributory, defined benefit pension plans covering substantially all employees in the U.S. and Puerto Rico. The benefits are based on years of service and the employee's compensation during 5 of the last 10 years of employment as defined by the plans. The company's funding policy is to make contributions to the trust of the Qualified Plan which meet or exceed the minimum requirements of the Employee Retirement Income Security Act of 1974. Assets held by the trusts of the plans consist primarily of equity and fixed income securities. The company also has various retirement plans in locations outside the U.S. and Puerto Rico. The assumed discount rate applied to benefit obligations to determine 1995 pension expense was 9% and the assumed long-term rate of return on assets was 9.5% for the U.S. and Puerto Rico plans. These rates averaged 7% and 8% respectively, for the international plans. PENSION EXPENSE
(IN MILLIONS) YEARS ENDED DECEMBER 31 1995 1994 1993 - -------------------------------------------------------------------------------- Service cost-benefits earned during the period $27 $33 $30 Interest cost on projected benefit obligation 62 61 57 Actual return on assets (62) (58) (57) Net amortization and deferral 8 7 17 - -------------------------------------------------------------------------------- Total pension expense for continuing operations $35 $43 $47 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total pension expense for discontinued operations $17 $22 $28 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
ASSUMPTIONS USED IN DETERMINING FUNDED STATUS
AS OF DECEMBER 31 1995 1994 - -------------------------------------------------------------------------------- Annual rate of increase in compensation levels: U.S. plans 4.5% 4.5% Puerto Rico plan 4.0% 4.0% International plans (average) 4.9% 4.8% Discount rate applied to benefit obligations: U.S. plans 7.25% 9.0% Puerto Rico plan 7.25% 9.0% International plans (average) 7.0% 7.4% Return on assets: U.S. plans 9.5% 9.5% Puerto Rico plan 9.5% 9.5% International plans (average) 8.0% 8.0% - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
FUNDED STATUS AND AMOUNT INCLUDED IN CONSOLIDATED BALANCE SHEETS
Plans where Plans where accumulated assets exceed benefits exceed accumulated (IN MILLIONS) assets benefits AS OF DECEMBER 31 1995 1994 1995 1994 - -------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefits $ 72 $ 56 $ 938 $683 - -------------------------------------------------------------------------------- Accumulated benefits $ 77 $ 59 $ 970 $702 - -------------------------------------------------------------------------------- Projected benefits $100 $ 80 $1,093 $782 Less plan assets at fair value 13 13 1,042 761 - -------------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets 87 67 51 21 Unrecognized net gains and unrecognized prior service cost (4) 8 (107) 17 Unrecognized obligation at January 1, net of amortization (10) (7) (31) (37) Additional minimum liability 1 - - - - -------------------------------------------------------------------------------- Net pension liability (asset) $ 74 $ 68 $ (87) $ 1 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
The company is currently exploring its options relative to pension benefits for the new health-care cost management business (See Note 2). Until final decisions are made regarding the pension plan, the net pension liability above reflects the total net liability for eligible employees of both Baxter and the health-care cost management business. If allocated, the net pension liability for the health-care cost management business would have been $9 million in 1995 and $21 million in 1994. 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The company also offers non-qualified supplemental retirement benefits to certain individuals. The liability for these benefits was $10 million and $11 million at December 31, 1995 and 1994, respectively. Most U.S. employees are eligible to participate in a qualified 401(k) plan. Participants may contribute up to 12% of their annual compensation (limited in 1995 to $9,240 per individual) to the plan and the company matches participants' contributions, up to 3% of compensation. Matching contributions made by the company were $24 million in 1995, $27 million in 1994 and $28 million 1993 for both continuing and discontinued operations. In addition to pension benefits, the company sponsors certain contributory health-care and life insurance benefits for substantially all domestic retired employees. These postretirement benefit plans are not funded. Effective January 1, 1993, the company adopted FASB Statement No. 112, "Employers' Accounting for Postemployment Benefits" which requires accrual accounting for postemployment benefits such as disability-related and workers- compensation payments. The company recorded the obligation as a cumulative effect of an accounting change for $11 million (net of $7 million in related income tax benefits). The effect of this change on 1993 operating income versus the prior method of accounting for these benefits was not material. The company's liability for these benefits was approximately $19 million at December 31, 1995 and 1994. NET POSTRETIREMENT HEALTH-CARE AND LIFE INSURANCE EXPENSE
AS OF DECEMBER 31 (IN MILLIONS) 1995 1994 - -------------------------------------------------------------------------------- Service cost-benefits earned during the period $ 3 $ 3 Interest cost on projected benefit obligation 15 14 Net amortization and deferral (2) (1) - -------------------------------------------------------------------------------- Net postretirement benefits cost $16 $16 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
ASSUMPTIONS USED IN DETERMINING THE NET POSTRETIREMENT BENEFITS COST
1995 1994 - -------------------------------------------------------------------------------- Discount rate 9% 7.5% Annual rate of increase in the per capita cost 11% 13% Rate to decrease to 5% 5% by the year ended 2002 2002 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRESENT VALUE OF THE COMPANY'S OBLIGATION INCLUDED IN THE CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31 (IN MILLIONS) 1995 1994 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation ("APBO"): Retirees $157 $118 Fully eligible active participants 6 4 Other active participants 61 35 Unrecognized net gains (6) 50 - -------------------------------------------------------------------------------- Accrued postretirement benefit liability $218 $207 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
ASSUMPTIONS USED IN DETERMINING THE APBO
AS OF DECEMBER 31 1995 1994 - -------------------------------------------------------------------------------- Discount rate applied to APBO 7.25% 9% Annual rate of increase in the per capita cost 10% 11% Rate to decrease to 5% 5% By the year ended 2002 2002 Increase if health-care trend rates increase by 1% in each year (in millions) APBO $25 $24 Expense $ 2 $ 3 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
60 BAXTER INTERNATIONAL - -------------------------------------------------------------------------------- 12. INTEREST AND OTHER (INCOME) EXPENSE
YEARS ENDED DECEMBER 31 (IN MILLIONS) 1995 1994 1993 - -------------------------------------------------------------------------------- Interest, net Interest cost $219 $242 $232 Interest cost capitalized (5) (5) (10) - -------------------------------------------------------------------------------- Interest expense 214 237 222 Interest income (34) (44) (30) - -------------------------------------------------------------------------------- Total interest, net $180 $193 $192 - -------------------------------------------------------------------------------- Allocated to discontinued operations $ 84 $ 97 $102 Allocated to continuing operations $ 96 $ 96 $ 90 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
As shown above, the allocation of interest to continuing and discontinued operations was based on relative net assets of these operations. OTHER (INCOME) EXPENSE
YEARS ENDED DECEMBER 31 (IN MILLIONS) 1995 1994 1993 - -------------------------------------------------------------------------------- Equity in losses of affiliates $ 17 $ 26 $ 36 Asset dispositions, net (65) (10) (7) Foreign exchange 22 12 28 Termination of interest-rate hedging contracts - (10) - Other 21 18 16 - -------------------------------------------------------------------------------- Total (income) expenses $ (5) $ 36 $ 73 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
13. INCOME TAXES U.S. federal income tax returns filed by Baxter International Inc. through December 31, 1986, have been examined and closed by the Internal Revenue Service. In the opinion of management, the company has made adequate provisions for tax expenses for all open years. Income (loss) before tax expense by category is as follows: INCOME (LOSS) BEFORE TAX EXPENSE BY CATEGORY
YEARS ENDED DECEMBER 31 (IN MILLIONS) 1995 1994 1993 - -------------------------------------------------------------------------------- U.S. $ 4 $132 $(292) International 520 427 218 - -------------------------------------------------------------------------------- Income (loss) from continuing operations before income tax expense $524 $559 $(74) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Income tax expense related to continuing operations and before cumulative effect of accounting changes by category and by income statement classification is as follows: INCOME TAX EXPENSE
YEARS ENDED DECEMBER 31 (IN MILLIONS) 1995 1994 1993 - -------------------------------------------------------------------------------- Current U.S. Federal $ 21 $ 3 $ 16 State and local 26 31 20 International 123 92 55 - -------------------------------------------------------------------------------- Current income tax expense 170 126 91 - -------------------------------------------------------------------------------- Deferred U.S. Federal 13 23 27 State and local (27) 4 10 International (3) - (9) - -------------------------------------------------------------------------------- Deferred income tax expense (benefit) (17) 27 28 - -------------------------------------------------------------------------------- Income tax expense $153 $153 $119 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
The income tax for continuing operations was calculated as if Baxter were a stand-alone entity (without income from discontinued operations). Effective January 1, 1993, the company adopted FASB Statement No. 109, "Accounting for Income Taxes." Baxter recorded a tax benefit of $81 million, or 29 cents per common share reflecting the cumulative effect of the accounting change. DEFERRED TAX ASSETS AND LIABILITIES
YEARS ENDED DECEMBER 31 (IN MILLIONS) 1995 1994 1993 - -------------------------------------------------------------------------------- Deferred tax assets Accrued expenses $192 $191 $242 Accrued postretirement benefits 80 87 90 Merger and restructuring costs 97 71 151 Alternative minimum tax credit 62 77 75 Tax credits and net operating losses 20 26 23 Valuation allowances (30) (43) (36) - -------------------------------------------------------------------------------- Total deferred tax assets 421 409 545 - -------------------------------------------------------------------------------- Deferred tax liabilities Asset basis differences 241 248 267 Subsidiaries' unremitted earnings 121 132 195 Other 26 13 39 - -------------------------------------------------------------------------------- Total deferred tax liabilities 388 393 501 - -------------------------------------------------------------------------------- Net deferred tax assets $ 33 $ 16 $ 44 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Income tax expense before cumulative effect of accounting changes applicable to consolidated income from continuing operations differs from income tax expense calculated by using the U.S. federal income tax rate for the following reasons: INCOME TAX EXPENSE
YEARS ENDED DECEMBER 31 (IN MILLIONS) 1995 1994 1993 - -------------------------------------------------------------------------------- Income tax expense (benefit) at statutory rate $183 $196 $(26) Tax-exempt operations (125) (107) (91) Nondeductible goodwill 8 7 16 Unremitted foreign earnings - - 151 State and local taxes 7 11 4 Repatriation of foreign earnings 57 47 45 Foreign tax expense 14 6 22 Other factors 9 (7) (2) - -------------------------------------------------------------------------------- Income tax expense $153 $153 $119 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
The company has received a tax exemption grant from Puerto Rico which provides that 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 U.S. that benefit from reductions in local tax rates under tax incentives that will continue at least through 1997. U.S. federal income taxes, net of available foreign tax credits, on unremitted earnings deemed permanently reinvested would be approximately $191 million as of December 31, 1995. A tax provision of $151 million was made in 1993 for unremitted foreign earnings to allow the transfer of $430 million cash to the U.S. to fund restructuring costs. 14. LEGAL PROCEEDINGS In both 1995 and 1993, the company recorded special charges for major litigation settlements and minimum liability exposures, and recorded significant estimated insurance recoveries with respect to these liabilities. LITIGATION CHARGES
Plasma Patent Mammary based settlement (in millions) implants therapies and other - -------------------------------------------------------------------------------- 1995: Gross litigation charge $298 $247 - Estimated insurance recoveries 258 191 - - -------------------------------------------------------------------------------- Net 1995 litigation charge $ 40 $ 56 - - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1993: Gross litigation charge $580 $131 $128 Estimated insurance recoveries 426 83 - - -------------------------------------------------------------------------------- Net 1993 litigation charge $154 $ 48 $128 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
As of December 31, 1995, the company was a defendant, together with other defendants, in 6,961 lawsuits and had 1,764 pending claims from individuals, all of which seek damages for injuries allegedly caused by silicone mammary implants manufactured by the American Heyer-Schulte division of American Hospital Supply Corporation ("American"). The comparable number of cases and claims was 7,992 as of December 31, 1994. In the fourth quarter of 1995, 22 cases and claims were disposed of. The typical case or claim alleges that the individual's mammary implants caused one or more of a wide range of ailments, including non-specific autoimmune disease, scleroderma, lupus, rheumatoid arthritis, fibromyalgia, mixed connective tissue disease, Sjogren's syndrome, dermatomyositis, polymyositis, and chronic fatigue. In addition to the individual suits against the company, a class action on behalf of all women with mammary implants filed against all manufacturers of such implants has been conditionally certified and is pending in the United States District Court for the Northern District of Alabama (Dante, et al., v. Dow Corning, et al., U.S.D.C., N. Dist., Ala., 92-2589; part of In re: Silicone Gel Breast Implant Product Liability Litigation, U.S.D.C., N. Dist. Ala., MDL 926, (U.S.D.C., N. Dist. Ala., CV 92-P-10000-S) (now held in abeyance pending settlement proceedings in Lindsey, et al., v. Dow Corning, et al., U.S.D.C., N. Dist. Ala., CV 94-P-11558-S)). Another class action has been certified and is pending in state court in Louisiana (Spitzfadden, et al., v. Dow Corning Corp., et al., Dist. Ct., Parish of Orleans, 92-2589). Baxter also has been named in 10 other purported additional class actions, none of which is currently 62 BAXTER INTERNATIONAL - -------------------------------------------------------------------------------- certified. A suit seeking class certification on behalf of all residents of the Province of Ontario, Canada, who received Heyer-Schulte implants was dismissed as to Baxter (Burke v. American Heyer-Schulte, et al., Ontario Prov. Court, Gen. Div., 15981/93). That case currently is on appeal. Three other suits seeking class certification on behalf of all women in the Provinces of Ontario, Quebec and British Columbia, respectively, who received Heyer-Schulte mammary implants have been filed (Bennett v. American Heyer-Schulte, et al., Ontario Prov. Court, Gen. Div., 18169/94; Pelletier v. Baxter Healthcare Corporation, et al., Quebec Prov. Court, Dist. of Montreal, 500-06-000005-955; Harrington v. Dow Corning Corporation, et al., Supreme Court, British Columbia, C954330). Additionally, the company has been served with a purported class action brought on behalf of children allegedly exposed to silicone in utero and through breast milk. (Feuer, et al., v. McGhan, et al., U.S.D.C., E. Dist. NY, 93-0146.) The suit names all mammary implant manufacturers as defendants and seeks to establish a medical monitoring fund. These implant cases and claims generally raise difficult and complex factual and legal issues and are subject to many uncertainties and complexities, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is brought, and differences in applicable law. Many of the cases and claims are at very preliminary stages, and the company has not been able to obtain information sufficient to evaluate each case and claim. There also are issues concerning which of the company's insurers are responsible for covering each matter and the extent of the company's claims for contribution against third parties. The company believes that a substantial portion of the liability and defense costs related to mammary implant cases and claims will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. Most of the company's insurers 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. The company is engaged in active negotiations with its insurers concerning coverages and the settlement described below. The company has recently consummated a "Coverage-in-Place" Agreement with certain London Market Insurers which it believes collectively subscribed the majority of the company's solvent London occurrence coverage for the period 1979 to 1985. The Agreement resolves the signatory insurers' coverage defenses and specifies rules and procedures for their allocation and payment of defense and indemnity costs. The amounts the signatory insurers will pay the company depends upon how much loss the company incurs in connection with breast implant claims, subject to policy limits. Three of the company's claims-made insurers have tendered the full amounts of their policies to the company and a fourth has tendered the full amounts of its policy ratably as claims are paid. Additionally, the company received certain funds in settlement of claims pending against a carrier in liquidation. The total amount tendered from the claims-made insurers and others exceeds $100 million. Some of the mammary implant cases pending against the company seek punitive damages and compensatory damages arising out of alleged intentional torts. Depending on policy language, applicable law, and agreements with insurers, the damages awarded pursuant to such claims may or may not be covered, in whole or in part, by insurance. On February 7, 1994, the company filed suit against all of the insurance companies that issued product liability policies to American, American Heyer-Schulte and Baxter for a declaratory judgment that: the policies cover each year of injury or claim; the company may choose among multiple coverages; coverage begins with the date of implant; and legal fees and punitive damages are covered. Subsequently, certain of the company's product liability insurance carriers filed suit against the company and all of its other carriers for a declaratory judgment to define various terms in the company's insurance policies, the extent of the company's coverage, the date of the occurrences giving rise to coverage, and the relative liabilities of the various insurance carriers involved. In both cases, the parties have entered into a "stand-still" agreement while negotiations continue. In 1994, representatives of the plaintiffs and certain defendants in these cases negotiated a global settlement of the issues under the jurisdiction of the Court in the Lindsey v. Dow Corning, et al. case. The monetary provisions of the settlement, providing compensation for all present and future plaintiffs and claimants through a series of specific 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- funds and a disease compensation program involving scheduled medical conditions, were agreed upon by most of the significant defendants and representatives of the plaintiffs. The total of all of the specific funds and the disease compensation program, which would be paid-in and made available over approximately 30 years following final approval of the settlement by the courts, was $4.255 billion. The company's share of this settlement was established by the settlement negotiations at $556 million. Appeals have been filed challenging the global settlement. The time to file current claims against the fund ended on September 16, 1994. Since that date, the Court's claims administration office has been evaluating the current claims filed against the scheduled medical conditions. If those claims exceed the funds available, the settlement agreement provides for reductions of the amounts payable for scheduled medical conditions (a "ratchet"), and for negotiations among the representatives of the plaintiffs and the settling defendants with respect to the shortfall in funding for current claims. The Court has indicated that it expects that there will be a substantial ratchet downward in the amounts payable, and this expectation has resulted in further negotiations among the parties. On October 20, 1995, Baxter, Bristol- Myers Squibb Company and Minnesota Mining and Manufacturing Company presented a draft proposal to the Court modifying, among other things, the compensation program under the current settlement. The settlement continues to provide compensation for all present and future plaintiffs and claimants who have, or had at any time, one or more mammary implants manufactured by any of the settling defendants; however, current claims would be paid substantially through a claims-made program and all compensation amounts have been substantially reduced. On November 13, 1995, the company's Board of Directors authorized the company to participate in the revised settlement. Subsequently, Union Carbide Corporation and McGhan Medical Corporation joined the revised settlement. On December 22, 1995, the Court approved the revised settlement program. On January 16, 1996, the company, Bristol-Myers Squibb Company and Minnesota Mining and Manufacturing Company each paid $125 million into the Court-established fund as an initial reserve to pay claims under the revised settlement. The global settlement gave individual plaintiffs and claimants the opportunity to remove themselves from the settlement ("opt-out"). The initial opt-out period ended July 1, 1994. As of December 1, 1995, approximately 11,041 individuals have opted out of the global settlement, of which approximately 2,959 allege claims against Baxter. Of the opt-outs who filed claims against Baxter, 1,888 represent U.S. claimants and 1,071 represent foreign claimants. The number of opt-outs against Baxter will change as some claimants are found to not have valid claims against Baxter, and others are identified as having claims against Baxter. The company believes that a substantial number of the suits filed in the second, third and fourth quarters of 1994 against Baxter will ultimately be dismissed because it will be determined that no Heyer-Schulte mammary implant is involved. As a result of the anticipated substantial ratchet in the global settlement, on October 9, 1995, the Court in the Lindsey case reopened the right to opt-out, commencing on December 1, 1995. On May 15, 1995, Dow Corning Corporation, one of the defendants in the breast implant cases declared bankruptcy and filed for protection under Chapter 11 In re: Dow Corning Corporation, U.S.D.C., E.D. Mich. 95-20512, 95CV72397-DT. ("Dow Corning Bankruptcy"). The full impact of these proceedings on the global settlement is unclear. As a result of the Dow Corning bankruptcy, Baxter was able to remove a substantial number of opt-out claims from state to federal courts. As of June 30, 1995, Baxter had removed the claims of 2,361 individuals and moved to transfer all of those cases to the federal district court in Michigan in which the Dow Corning bankruptcy is pending. The court denied transfer of these cases. Baxter has filed a notice of appeal. In the fourth quarter of 1993, the company accrued $556 million for its estimated liability resulting from the global settlement of the mammary implant class action and recorded a receivable for estimated insurance recovery of $426 million, resulting in a net charge of $130 million. Based on its continuing evaluation of the remaining opt-outs, the company accrued an additional $298 million for its estimated liability to litigate and/or settle cases and claims involving opt-outs and recorded an additional receivable for estimated insurance recovery of $258 million, resulting in an additional net charge of $40 million in the first quarter of 1995. At present, the company is not able to estimate the nature and extent of its further potential future liability with respect 64 BAXTER INTERNATIONAL - -------------------------------------------------------------------------------- to mammary implants. The company believes that most of its potential future liability with respect to mammary implant cases is covered by insurance. The company intends to continue to litigate pending mammary implant cases. Upon resolution of any of the uncertainties concerning these cases, the company may ultimately 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 in the period in which it is recorded, management believes that any outcome of this litigation will not have a material adverse effect on the company's consolidated financial position. As of December 1, 1995, the company was a defendant, together with other defendants, in 366 lawsuits, and had 860 pending claims in the United States, Canada, Ireland, Italy, Spain, Japan and the Netherlands, involving individuals who have hemophilia, or their representatives. Those cases and claims seek damages for injuries allegedly caused by anti-hemophilic factor concentrates VIII and IX derived from human blood plasma processed and sold by the company. The typical case or claim alleges that the individual with hemophilia was infected with HIV by infusing Factor VIII or Factor IX concentrates ("Factor Concentrates") containing HIV. All Federal Court Factor Concentrate cases have been transferred to the U.S.D.C. for the Northern District of Illinois for case management under Multi District Litigation (MDL) rules. In addition to the individual suits against the company, a purported class action was filed on September 30, 1993, on behalf of all U.S. residents with hemophilia (and their families) who were treated with Factor Concentrates and who allegedly are infected with HIV as a result of the use of such Factor Concentrates. This lawsuit was filed in the United States District Court for the Northern District of Illinois (Wadleigh, et al., v. Rhone-Poulenc Rorer, et al., U.S.D.C., N. Dist., Ill. 93C 5969). On November 3, 1994, the court certified the class only for the purpose of determining whether the defendants' actions were negligent. The defendants in this case filed a petition for a Writ of Mandamus with the 7th Circuit Court of Appeals seeking an order directing the district court judge to vacate that certification. On March 16, 1995, the Court of Appeals granted the petition and stated that it would issue a Writ of Mandamus directing the District Court to vacate its certification. On April 28, 1995, the Court of Appeals denied the plaintiffs request for a rehearing en banc, but stayed enforcement of the writ pending a petition for certiorari by the plaintiffs to the U.S. Supreme Court. On October 2, 1995, the U.S. Supreme Court denied the plaintiffs petition for certiorari. On January 16, 1996, the District Court decertified the class. Baxter has also been named in five other purported class actions, none of which have been certified and three of which have been transferred to the MDL for discovery purposes. The company denies these allegations. Many of the cases and claims are at very preliminary stages, and the company has not been able to obtain information sufficient to evaluate each case and claim. In most states, the company's potential liability is limited by laws that provide that the sale of blood or blood derivatives, including Factor Concentrates, is not the sale of a "good," and thus is not covered by the doctrine of strict liability. As a result, each claimant will have to prove that his or her injuries were caused by the company's negligence. The Wadleigh case alleges that the company was negligent in failing: to use available purification technology; to promote research and development for product safety; to withdraw Factor Concentrates once it knew or should have known of viral-contamination of such concentrates; to screen plasma donors properly; to recall contaminated Factor Concentrates; and to warn of risks known at the time the Factor Concentrates were used. The company believes that a substantial portion of the liability and defense costs related to anti-hemophilic Factor Concentrate cases and claims will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. Most of the company's insurers have reserved their rights (i.e., neither admitted nor denied coverage), and may attempt to reserve in the future, the right to deny coverage, in whole or in part, due to differing theories regarding, among other things, the applicability of coverage and when coverage may attach. The company has filed suit in California, against all of the insurance companies that issued comprehensive general liability and excess liability policies to the company for a declaratory judgment that the policies of all of the carriers provide coverage. In that suit, the company also sued Zurich for failure to defend it. The company subsequently dismissed without prejudice its claims against all of the 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- excess insurance carriers except Columbia Casualty Company (one of the company's excess insurers during part of the relevant time period). The company has filed an Amended Complaint in the California action seeking a declaration that Zurich has a duty to defend the company in connection with the Factor Concentrate cases and claims. Zurich Insurance Co., one of the company's comprehensive general liability insurance carriers has filed a suit in Illinois against the company, seeking a declaratory judgment that the policies it had issued do not cover the losses that the company has notified it of for a number of reasons, including that Factor Concentrates are products, not services, and are, therefore, excluded from the policy coverage, and that the company has failed to comply with various obligations of notice, and the like under the policies. The company's excess liability insurance carriers also brought suit in Illinois for a declaratory judgment as to the parties' respective liabilities. That suit has been dismissed without prejudice. The suit filed by Zurich in Illinois had been stayed pending resolution of the company's California case. Zurich appealed that stay and the Illinois Appellate Court reversed and issued a certificate of importance ensuring the Illinois Supreme Court will hear the company's appeal. In January 1996, the Illinois Supreme Court issued an interim order precluding the company from prosecuting the California action during the pendency of the appeal before the Illinois Supreme Court. Thus, the California action is currently stayed. The company has notified its insurers concerning coverages and the status of the cases. Also, some of the anti-hemophilic Factor Concentrates cases pending against the company seek punitive damages and compensatory damages arising out of alleged intentional torts. Depending on policy language, applicable law and agreements with insurers, the damages awarded pursuant to such claims may or may not be covered, in whole or in part, by insurance. Accordingly, the company is not currently in a position to estimate the amount of its potential future recoveries from its insurers, but has estimated its recovery with respect to the reserves it has established. The company is vigorously defending each of the cases and claims against it. The company will continue to seek ways to resolve pending and threatened litigation concerning these issues through a negotiated resolution. On June 29, 1995, the German parliament approved the creation of an assistance fund for approximately 1,900 individuals, and their families, who contracted HIV from blood and blood products in the early 1980s. The fund of approximately $180 million will be established by contributions from the German federal and state governments, the German Red Cross and fractionators who sold Factor Concentrate during the relevant period of time. The company has agreed to contribute approximately $12 million over a four-year period of time. Claims against the German federal and state governments, the German Red Cross and fractionators contributing to the fund are, by law, extinguished. In Japan, the company is a defendant, along with the Japanese government and four other co-defendants, in multiple-plaintiff Factor Concentrate cases in Osaka and Tokyo. Both cases currently involve 374 plaintiffs, at least 166 of whom allegedly used Baxter Factor Concentrates. The Japanese Ministry of Health and Welfare ("MHW") estimates that there are approximately 1,400 hemophiliacs who are HIV-positive or AIDS-manifested, and approximately 400 who have died. In October, 1995, the Osaka and Tokyo courts issued interim opinions setting forth a first proposal for settlement. In general, the settlement recommendations provided for payment of an up-front, lump sum amount of approximately $450,000 per plaintiff, 40% funded by the Japanese government and 60% funded by the corporate defendants. The proposal foresees limited credits to be applied to the corporate defendants' share of the settlement for prior payments made under the "Yuai Zaidan" (a government-administered program, funded almost entirely by the corporate defendants, which pays monthly allowances to HIV-infected and AIDS-manifested hemophiliacs and their survivors). The courts also raised the possibility of additional payments of unspecified amounts supplemental to the lump-sum, which will be paid during the life of an infected hemophiliac. The courts directed the parties to commence settlement negotiations under the framework outlined above. Settlement discussions have proceeded, but have not yet reached a resolution. On February 9, 1996, the MHW announced that it had recently discovered several files of documents which confirmed that the Ministry was aware, at the time the heat-treated Factor Concentrates were available, that non heat-treated Factor Concentrates could transmit the AIDS virus. 66 BAXTER INTERNATIONAL - -------------------------------------------------------------------------------- On February 16, 1996, the MHW admitted the responsibility on the part of the government as indicated in the courts' interim opinions and presented a public apology. The second proposal of settlement is expected from the courts in early March. The company has been notified that approximately 1,354 HIV-positive hemophiliacs in Spain are investigating the possibility of filing suit both in the United States and in Spain against the company and other fractionators which sold factor concentrate in Spain in the early 1980s. As of this time, no formal suits have been filed against the company either in Spain or the United States. Approximately 800 of these individuals have taken Baxter factor concentrates. On February 21, 1994, the company began the voluntary withdrawal worldwide of its Gammagard-Registered Trademark- IGIV (intravenous immune globulin) because of indications that it might be implicated in Hepatitis C infections occurring in users of Gammagard. Gammagard is a concentration of antibodies derived from human plasma and is used to treat immune-suppressed patients. A new immune globulin, Gammagard-Registered Trademark- S/D, produced with an additional viral inactivation process was introduced by the company after licensure in the United States and certain other countries. As of December 31, 1995, the company had received reports of alleged Hepatitis C transmission from 342 patients. The exact cause for these reports has not been determined; however, many of the reports have been associated with Gammagard injections produced from plasma which was screened for antibodies to the Hepatitis C virus through second-generation testing. The number of patients receiving Gammagard-Registered Trademark- IGIV produced from the second- generation screened plasma is not yet known, nor is the number of patients claiming exposure to Hepatitis C known. As of December 31, 1995, the company was a defendant in 88 lawsuits and had 91 pending claims in United States, Denmark, France, Germany, Italy, Spain, Sweden and the United Kingdom resulting from this incident. Seven suits in the United States have been filed as purported class actions: (Lowe v. Baxter, U.S.D.C., W.D. KY, C94-0125; Mock v. Baxter, et al., U.S.D.C., ID, CIV-94-0524-S-LMV; Fayne v. Baxter, U.S.D.C., S.D., NY, 95CIV1129; Gutterman v. Baxter, U.S.D.C., S.D., IL, 95-198-WDS; Geary v. Baxter, U.S.D.C., W.D., PA, 95 0457; Kelley v. Baxter, U.S.D.C., M.D., NC, 6:95CV00178; and Logan, et al., v. Baxter, U.S.D.C., Central Dist., CA, 95-3584). On December 18, 1995, the Lowe class action allegations were voluntarily dismissed with prejudice by the plaintiffs. The suits allege infection with the Hepatitis C virus from the use of Gammagard. On June 9, 1995, the judicial panel on multi-district litigation ordered all federal cases involving Gammagard to be transferred to the Central District of California for coordinated pretrial proceedings before Judge Manuel L. Real, MDL docket no. 1060. Of the 82 pending suits in the United States, 67 are filed in federal court (including the 6 class actions), and all are expected to be transferred to Judge Real. Judge Real has indicated that he intends to certify a class action of all persons who took Gammagard but he has not yet entered such an order. Judge Real has scheduled a trial for September 1996. The company is vigorously defending these cases. In the fourth quarter of 1993, the company accrued $131 million for its estimated worldwide liability for litigation and settlement expenses involving anti-hemophilic Factor Concentrate cases, and recorded a receivable for insurance coverage of $83 million, resulting in a net charge of $48 million. The expense associated with the German settlement is covered by this accrual. In the third quarter of 1995, significant developments occurred, primarily in the United States, Europe and Japan relative to claims and litigation pertaining to the company's plasma based therapies, including Factor Concentrates. After analyzing circumstances in light of recent developments and considering various factors and issues unique to each geography, the company revised its estimated exposure from the $131 million previously recorded for Factor Concentrates to $378 million for all plasma based therapies. Related estimated insurance recoveries were revised from $83 million for Factor Concentrates to $274 million for all plasma based therapies. This resulted in a net charge of $56 million in the third quarter of 1995. Upon resolution of any of the uncertainties concerning these cases, or if the company, along with the other defendants, enters into comprehensive settlements of the putative class actions described above, the company may incur charges in excess of presently established reserves. While such a future charge could have a material adverse impact on the company's net income in the period in which it is recorded, management believes that any outcome of 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- this litigation will not have a material adverse effect on the company's consolidated financial position. Baxter Healthcare Corporation ("BHC") was one of 10 defendants named in a purported class action filed in August 1993, on behalf of all medical and dental personnel in the state of California who allegedly suffered allergic reactions to natural rubber latex gloves and other protective equipment or who allegedly have been exposed to natural rubber latex products (Kennedy, et al., v. Baxter Healthcare Corporation, et al., Sup. Ct., Sacramento Co., Cal., #535632). The case alleges that users of various natural rubber latex products, including medical gloves made and sold by BHC and other manufacturers, suffered allergic reactions to the products ranging from skin irritation to systemic anaphylaxis. The Court granted defendants' demurrer to the class action allegations. This is currently on appeal. In April 1994, a similar purported class action, Green, et al. v. Baxter Healthcare Corporation, et al., (Cir. Ct., Milwaukee Co., WI, 94CV004977) was filed against Baxter and three other defendants. The class action allegations have been withdrawn, but additional plaintiffs added individual claims. As of December 31, 1995, 15 additional lawsuits have been served on the company containing similar allegations of sensitization to natural rubber latex products. The company will vigorously defend against these actions. Management believes that the outcome of these matters will not have a material adverse effect on the company's results of operations or consolidated financial position. A purported class action has been filed against the company, Caremark International Inc. ("Caremark"), C.A. (Lance) Piccolo, James G. Connelly and Thomas W. Hodson (all current officers of Caremark) alleging securities law disclosure violations in connection with the November 30, 1992, spin-off of Caremark in the Registration and Information Statement ("Registration Statement") and subsequent SEC filings submitted by Caremark (Isquith v. Caremark International, Inc., et al., U.S.D.C., N. Dist. Ill., 94C 5534). The plaintiffs allege, among other things, that the Registration Statement and subsequent SEC filings contained false and misleading statements regarding the scope of the Office of Inspector General for the Department of Health and Human Services' investigation of Caremark's business and Medicare/Medicaid patient- referral practices. The company has responded to the complaint and is vigorously defending this action. Management believes that the outcome of this matter will not have a material adverse effect on the company's results of operations or consolidated financial position. As of December 31, 1995, the company has been named as a potentially responsible party for cleanup costs at 18 hazardous waste sites. The company was a significant contributor to waste disposed of at only one of these sites, the Thermo-Chem site in Muskegon, Michigan. The company expects that the total cleanup costs for this site will be between $44 million and $65 million, of which the company's share will be approximately $5 million. This amount, net of payments of approximately $1 million, has been accrued and is reflected in the company's financial statements. In all of the other sites, the company was a minor contributor and does not have information on the total cleanup costs. The company has, however, in most of these cases been advised by the potentially responsible party of its roughly estimated exposure at these sites. Those estimated exposures total approximately $7 million. This amount has been accrued and reflected in the company's financial statements. The company is a defendant in a number of other claims, investigations and lawsuits. Based on the advice of counsel, management does not believe that the other claims, investigations and lawsuits individually or in the aggregate, will have a material adverse effect on the company's operations or its consolidated financial condition. 15. INDUSTRY AND GEOGRAPHIC INFORMATION The company operates in a single industry segment as a world leader in providing health-care products for use in hospitals and other health-care settings. On a global basis, Baxter develops, manufactures and markets intravenous solutions and related administration equipment, highly specialized medical products for treating kidney and heart disease and blood disorders, and for collecting and processing blood. These products include intravenous solutions and pumps; dialysis equipment and supplies; prosthetic heart valves and cardiac catheters; blood-clotting therapies; and machines and supplies for collecting, separating and storing blood. These products require extensive research and development and investment in worldwide manufacturing, marketing, and administrative infrastructure. 68 BAXTER INTERNATIONAL - -------------------------------------------------------------------------------- FINANCIAL INFORMATION BY GEOGRAPHIC AREA
YEARS ENDED DECEMBER 31 (IN MILLIONS) Canada Pacific Latin and other Inter-area United States Europe Rim(1) America international Other eliminations Total - ----------------------------------------------------------------------------------------------------------------------------------- 1995 Trade sales $2,634 1,215 860 204 135 - - $5,048 Inter-area sales $ 675 158 191 113 2 - (1,139) - - ----------------------------------------------------------------------------------------------------------------------------------- Total sales $3,309 1,373 1,051 317 137 - (1,139) $5,048 Pretax income (loss) $ 85 244 320 30 37 (192) - $ 524 Identifiable assets $4,975 1,156 533 209 82 - (137) $6,818 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- 1994 Trade sales $2,429 1,057 695 166 132 - - $4,479 Inter-area sales $ 605 129 144 56 1 - (935) - - ----------------------------------------------------------------------------------------------------------------------------------- Total sales $3,034 1,186 839 222 133 - (935) $4,479 Pretax income (loss) $ 119 200 257 33 39 (96) 7 $ 559 Identifiable assets $4,371 959 486 182 88 - (132) $5,954 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- 1993 Trade sales $2,242 996 573 155 150 - - $4,116 Inter-area sales $ 524 107 157 41 1 - (830) - - ----------------------------------------------------------------------------------------------------------------------------------- Total sales $2,766 1,103 730 196 151 - (830) $4,116 Pretax income (loss) $ 14 142 150 36 12 (420) (8) $ (74) Identifiable assets $4,545 866 424 135 102 - (117) $5,955 - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
1. INCLUDES JAPAN, AUSTRALIA, NEW ZEALAND AND ASIA. Inter-area transactions are accounted for using arm's-length principles. Identifiable assets are those assets associated with a specific geographic area. Goodwill and amortization have been allocated to geographic areas as applicable. Other consists of litigation charges and interest, net. Foreign net sales (including U.S. export sales) and net assets (including advances from the company and its subsidiaries) of all consolidated foreign subsidiaries and branches located outside the U.S., its territories and possessions for the three years ended December 31 are as follows: NET SALES AND NET ASSETS FOR ALL CONSOLIDATED FOREIGN SUBSIDIARIES AND BRANCHES
YEARS ENDED DECEMBER 31 (IN MILLIONS) 1995 1994 1993 - -------------------------------------------------------------------------------- Foreign net sales $2,556 $2,187 $2,004 Foreign assets net of liabilities at end of year $1,382 $1,154 902 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 16. QUARTERLY FINANCIAL RESULTS AND MARKET FOR THE COMPANY'S STOCK
First Second Third Fourth Total (UNAUDITED, IN MILLIONS, EXCEPT PER SHARE DATA) quarter quarter quarter quarter year - ---------------------------------------------------------------------------------------------------------------------------------- 1995 Net sales $1,158 $1,275 $1,261 $1,354 $5,048 Gross profit 506 573 566 626 2,271 Income from continuing operations before cumulative effect of accounting change 98 114 11 148 371 Net income 145 165 163 176 649 Per common share: Income from continuing operations .35 .41 .04 .54 1.34 Net income(1) .52 .59 .59 .65 2.35 Dividends .2625 .2825 .2825 .2825 1.11 Market price High 34.875 37.00 41.375 44.75 Low 26.75 32.50 33.75 36.75 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- 1994 Net sales $1,013 $1,111 $1,117 $1,238 $4,479 Gross profit 438 476 499 560 1,973 Income from continuing operations before cumulative effect of accounting changes 84 84 105 133 406 Net income 131 144 149 172 596 Per common share: Income from continuing operations .30 .30 .38 .47 1.45 Net income .47 .52 .53 .61 2.13 Dividends .25 .25 .2625 .2625 1.025 Market price High 24.75 26.75 28.75 28.88 Low 21.75 21.63 25.25 23.75 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
1. THE FOURTH QUARTER INCLUDES A PRETAX CHARGE OF $34 MILLION FOR COSTS ASSOCIATED WITH EFFECTING THE DISTRIBUTION OF THE HEALTH-CARE COST MANAGEMENT BUSINESS. 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, 1996, there were approximately 74,000 holders of record of the company's common stock. 70 FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1995(1) 1994 1993(2) 1992 1991 - ---------------------------------------------------------------------------------------------------------------------------------- OPERATIONS Net sales $5,048 4,479 4,116 3,857 3,365 (IN MILLIONS) Income (loss) from continuing operations $ 371 406 (193) 373 302 Net income (loss) $ 649 596 (198) 441 591 Depreciation and amortization $ 336 302 273 251 231 Research and development expenses $ 345 303 280 257 226 - ---------------------------------------------------------------------------------------------------------------------------------- CAPITAL EMPLOYED Working capital $ 757 502 546 347 539 (IN MILLIONS) Capital expenditures (3) $ 399 380 332 362 306 Net property, plant and equipment $1,749 1,642 1,434 1,469 1,337 Total assets $9,437 9,039 9,211 8,310 8,428 Net debt (4) $2,115 2,404 3,139 2,902 2,338 Long-term obligations $2,372 2,341 2,800 2,433 2,246 Stockholders' equity $3,704 3,720 3,185 3,795 4,373 Total capitalization $6,076 6,061 5,985 6,228 6,619 - ---------------------------------------------------------------------------------------------------------------------------------- PER COMMON Average number of common shares SHARE outstanding (in millions) (5) $ 277 280 277 279 280 Earnings (loss) Continuing operations $ 1.34 1.45 (0.70) 1.34 1.08 Net income $ 2.35 2.13 (0.72) 1.56 2.03 Cash dividends declared $ 1.11 1.025 1.00 0.86 0.74 Market price-high $44.75 28.88 32.75 40.50 40.88 Market price-low $26.75 21.63 20.00 30.50 25.63 Net book value $13.39 13.28 11.52 13.59 14.45 - ---------------------------------------------------------------------------------------------------------------------------------- PRODUCTIVITY Employees at year-end 35,500 32,400 32,600 32,000 32,300 MEASURES Sales per year-end employee $142,037 138,138 126,099 120,400 112,462 Operating assets per employee (6) $108,708 107,211 96,927 99,167 89,660 - ---------------------------------------------------------------------------------------------------------------------------------- GROWTH STATISTICS Net sales 12.7% 8.8 6.7 6.1 N/A (PERCENT CHANGE Income (loss) from continuing operations (8.6)% N/A N/A 23.5 N/A FROM PRIOR YEAR) Cash dividends per common share 8.3% 2.5 16.3 16.2 15.6 Net book value per year-end common share .8% 15.3 (15.2) (5.9) 7.4 - ---------------------------------------------------------------------------------------------------------------------------------- FINANCIAL RETURNS Income from continuing operations as a AND STATISTICS percent of sales 7.3% 9.0 (4.7) 9.7 8.3 Return on average common stockholders' equity--total company 17.5% 17.3 (5.7) 11.3 15.2 Long-term debt as a percent of total year-end capital 39.0% 38.6 46.8 39.1 33.9 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
1. INCOME (LOSS) FROM CONTINUING OPERATIONS INCLUDES A PROVISION FOR RESTRUCTURING CHARGES OF A PRETAX AMOUNT OF $103 MILLION AND A SPECIAL CHARGE FOR LITIGATION OF A PRETAX AMOUNT OF $96 MILLION. 2. INCOME (LOSS) FROM CONTINUING OPERATIONS INCLUDES A PROVISION FOR RESTRUCTURING CHARGES OF A PRETAX AMOUNT OF $216 MILLION AND A SPECIAL CHARGE FOR LITIGATION OF A PRETAX AMOUNT OF $330 MILLION. 3. INCLUDES ADDITIONS TO THE POOL OF EQUIPMENT LEASED OR RENTED TO CUSTOMERS. 4. TOTAL DEBT AND LEASE OBLIGATIONS NET OF CASH AND EQUIVALENTS. 5. EXCLUDES COMMON STOCK EQUIVALENTS. 6. ACCOUNTS RECEIVABLE, NOTES AND OTHER CURRENT RECEIVABLES, INVENTORIES AND NET PROPERTY, PLANT AND EQUIPMENT. EX-21 10 SIGNIFICANT SUBSIDIARIES EXHIBIT 21 - -------------------------------------------------------------------------------- SIGNIFICANT SUBSIDIARIES OF THE COMPANY, AS OF MARCH 15, 1996
% OWNED BY ORGANIZED UNDER IMMEDIATE SUBSIDIARY LAWS OF PARENT(1)(2) - ------------------------------------------------------------------------------------------------------------------ Baxter International Inc. (parent company)................................. Delaware Baxter Healthcare Corporation............................................ Delaware 100 Baxter World Trade Corporation........................................... Delaware 100 Baxter S.A............................................................. Belgium 93(4) Baxter S.A........................................................... France 65(4) Baxter Deutschland GmbH................................................ Germany 100 Baxter Pharmacy Services Corporation................................... Delaware 100(3) Baxter Sales and Distribution Corporation............................ Delaware 100 Baxter Healthcare Corporation of Puerto Rico......................... Alaska 100(3) Baxter Healthcare (Holdings) Ltd....................................... United Kingdom 99(4) Baxter Healthcare Limited............................................ United Kingdom 99(4) Baxter Healthcare, S.A................................................. Panama 100 Baxter Healthcare Pte. Ltd............................................. Singapore 100 Baxter World Trade S.A............................................... Belgium 52(4) Baxter Limited......................................................... Japan 100 Baxter Healthcare Pty. Ltd............................................. Australia 99(4) Baxter A.G............................................................. Switzerland 99(4) Baxter S.A. de C.V..................................................... Mexico 99(4) - ------------------------------------------------------------------------------------------------------------------
Subsidiaries omitted from this list, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. * * * * * (1) Including director's qualifying and other nominee shares. (2) All subsidiaries set forth herein are reported in the Company's financial statements through consolidations or under the equity method of accounting. (3) Of common stock. (4) Remaining shares owned by the Company, its subsidiaries or employees. 25 EX-23 11 EXHIBIT 23 EXHIBIT 23 - ------------------------------------------------------------------------------- CONSENT OF PRICE WATERHOUSE LLP - ------------------------------------------------------------------------------- We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-8 (Nos. 2-82667, 2-86993, 2-97607, 33-8812, 33-15523, 33-15787, 33-28428, 33-33750 and 33-54069), on Form S-3 (Nos. 33-5044, 33-23450, 33-27505, 33-31388 and 33-49820) and on Form S-4 (Nos. 33-808, 33-15357 and 33-53937) of Baxter International Inc. of our report dated February 14, 1996 appearing on page 45 of the Annual Report to Stockholders incorporated by reference herein. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 15 of this Form 10-K. PRICE WATERHOUSE LLP Chicago, Illinois March 21, 1996 EX-24 12 EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY ANNUAL REPORT ON FORM 10-K The undersigned director of Baxter International Inc., a Delaware corporation ("the Company"), which proposes to file with the Securities and Exchange Commission its annual report on Form 10-K for year ended December 31, 1995, pursuant to the Securities Exchange Act of 1934, as approved by the Company's principal executive and financial officers and controller, hereby appoints Vernon R. Loucks Jr. for him/her and in his/her name as a director to be his/her lawful attorney-in-fact, with full power (i) to sign and file with the Securities and Exchange Commission the proposed report and (ii) to perform every other act which said attorney-in-fact may deem necessary or proper in connection with such report. /S/ Silas S. Cathcart /S/ Pei-yuan Chia /S/ John W. Colloton /S/ Susan Crown /S/ Mary Johnston Evans /S/ Frank R. Frame /S/ David W. Grainger /S/ Martha R. Ingram /S/ Lester B. Knight /S/ Harry M. Jansen Kraemer, Jr. /S/ Arnold J. Levine, Ph.D. /S/ Georges C. St. Laurent, Jr. /S/ Monroe E. Trout, M.D. /S/ Fred L. Turner Dated: As of March 18, 1996 21 EX-27 13 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 AND CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 476 0 995 22 906 2,911 3,427 1,678 9,437 2,154 2,372 0 0 288 3,416 9,437 5,048 5,048 2,777 2,777 373 9 117 524 153 371 278 0 0 649 2.35 2.31 FOR "OTHER COSTS AND EXPENSES" - REF #5-03(b)3 - INCLUDES R&D AND GOODWILL AMORTIZATION.
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