10-K 1 FORM 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, 1994 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 I.R.S. Employer Incorporation Identification No. ONE BAXTER PARKWAY, DEERFIELD, ILLINOIS 60015 (708) 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 (currently traded with common stock) New York Stock Exchange Chicago Stock Exchange 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 $31.63 on March 10, 1995, and for the purpose of this computation only, the assumption that all registrant's directors and executive officers are affiliates) was approximately $8.7 billion. The number of shares of the registrant's common stock, $1 par value, outstanding as of March 10, 1995, was 282,851,308. DOCUMENTS INCORPORATED BY REFERENCE Those sections or portions of the registrant's 1994 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 8, 1995, 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.......................................... 8 Item 3. Legal Proceedings................................... 8(6) Item 4. Submission of Matters to a Vote of Security Holders. 13 Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................ 14(7) Item 6. Selected Financial Data............................. 14(8) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 14(9) Item 8. Financial Statements and Supplementary Data......... 14(10) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 14 Item 10. Directors and Executive Officers of the Registrant (a)Identification of Directors...................... 15(11) (b)Identification of Executive Officers............. 15 (c)Compliance with Section 16(a) of the Securities Exchange Act of 1934............................ 17(12) Item 11. Executive Compensation.............................. 17(13) Item 12. Security Ownership of Certain Beneficial Owners and Management......................................... 17(14) Item 13. Certain Relationships and Related Transactions...... 17(15) Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................ 18 (a)Financial Statements............................. 18 (b)Reports on Form 8-K.............................. 18 (c)Exhibits......................................... 18
------------------- (1) Information incorporated by reference to the Company's Annual Report to Stockholders for the year ended December 31, 1994 ("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 8, 1995 ("Proxy Statement"). (2) Annual Report, pages 49-66, section entitled "Notes to Consolidated Financial Statements" and pages 31-42, section entitled "Management's Discussion and Analysis." (3) Annual Report, pages 63-65, section entitled "Notes to Consolidated Financial Statements--Segment Information." (4) Annual Report, pages 31-42, section entitled "Management's Discussion and Analysis" and pages 63-65, section entitled "Notes to Consolidated Financial Statements--Segment Information." (5) Annual Report, pages 63-65, section entitled "Notes to Consolidated Financial Statements--Segment Information." (6) Annual Report, page 59-63, section entitled "Notes to Consolidated Financial Statements--Legal Proceedings." (7) Annual Report, page 66, 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 "Seven-Year Summary of Selected Financial Data." (9) Annual Report, pages 31-42, section entitled "Management's Discussion and Analysis." (10) Annual Report, pages 44-66, 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 2-4, sections entitled "Board of Directors" and "Election of Directors." (12) Proxy Statement, page 18, section entitled "Section 16 Reporting." (13) Proxy Statement, pages 6-16, sections entitled "Compensation of Directors" and "Compensation of Named Executive Officers," and page 17, section entitled "Pension Plan and Excess Plan." (14) Proxy Statement, pages 19-20, section entitled "Ownership of Company Securities." (15)Proxy Statement, page 18, section entitled "Significant Business Relationships." -------------------------------------------------------------------------------- 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 21 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 primarily by hospitals, clinical and medical research laboratories, blood and dialysis centers, rehabilitation centers, nursing homes, doctors' offices and at home under physician supervision. The Company also distributes and manufactures a wide range of products for research and development facilities and manufacturing facilities. For information regarding acquisitions, investments in affiliates and divestitures, see the Company's Annual Report to Stockholders for the year ended December 31, 1994 (the "Annual Report"), page 51, section entitled "Notes to Consolidated Financial Statements--Acquisitions, Investments in Affiliates, Divestitures and Discontinued Operations," which is incorporated by reference. (b) Financial Information about Industry Segments. Incorporated by reference from the Annual Report, pages 63-65, section entitled "Notes to Consolidated Financial Statements--Segment Information." (c) Narrative Description of Business. Recent Developments There are fundamental changes occurring in the United States health-care system and significant changes are occurring in the Company's marketplace. Competition among all health-care providers is becoming much more intense as they attempt to gain patients on the basis of price, quality and service. Each is under pressure to decrease the total cost of health-care delivery and, therefore, is looking for ways to reduce materials handling costs, decrease supply utilization, increase product standardization per procedure, and to control capital expenditures. There was increased 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 were below the increases in the Consumer Price Index, and these industry trends may inhibit the Company's ability to increase its supply prices in the future. Accordingly, in November 1993, the Company undertook a series of strategic actions to improve shareholder value, to extend positions of leadership in health-care markets and to reduce costs. These actions were designed to make the Company's domestic medical/laboratory products and distribution segment more efficient and more responsive in addressing the changes occurring in the United States health-care system and accelerate growth of its medical specialties businesses worldwide. The Company recorded a $700 million pre tax provision in 1993 to cover costs associated with these restructuring initiatives. The $700 million charge included approximately $300 million for non-cash valuation adjustments as a result of the Company's decision to close facilities or exit non-strategic businesses and investments. The Company expects to spend approximately $400 million in cash related to the 1993 restructuring program, with most of that expended from 1994 through 1996. 3 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 and is satisfied that such programs are progressing on schedule and that the overall restructuring program will meet established financial targets. The Company realized approximately $95 million in expense savings in 1994 under the 1993 restructuring program. Management believes that the overall expense savings to be realized in 1995 and beyond will be substantially consistent with its earlier estimates of $200 million in 1995, $275 million in 1996, $325 million in 1997 and exceeding $350 million in 1998. Management anticipates that these savings will be partially invested in increased research and development spending and the Company's 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. Since the inception of the 1993 restructuring program, the Company has eliminated approximately 2,300 of the 4,500 positions affected by the program. The majority of the remaining reductions will occur in 1995 and 1996 as facility closures and consolidations are completed as planned. As part of the 1993 restructuring program, the Company announced its intent to divest its diagnostics manufacturing businesses. In December 1994, the Company completed the divestiture of these businesses, but retained the rights to distribute all current diagnostics products in the United States. This transaction was completed substantially in accordance with the Company's valuation estimates. The divestiture of the diagnostics manufacturing businesses is not expected to have a material impact on the Company's results of operations, but will decrease the growth rate of sales in the medical/laboratory segment. See "Industry Segments--Medical/Laboratory Products and Distribution". Industry Segments The Company is a world leader in global manufacturing and distribution of health-care products and services for use in hospitals and other health-care and industrial settings. It offers a broad array of products and services. The Company's operations are reported in the following two industry segments: Medical Specialties The Company develops, manufactures and markets on a global basis highly specialized medical products for treating kidney and heart disease and blood disorders and for collecting and processing blood. These products include 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 distribution, marketing, and administrative infrastructure. The Company's International Hospital unit, which manufactures and distributes intravenous solutions and other medical products outside the United States is also included in this segment because it shares facilities, resources and customers with the other medical specialty businesses in several locations worldwide. Medical/Laboratory Products and Distribution The Company manufactures medical and laboratory supplies and equipment, including intravenous fluids and pumps, surgical instruments and procedure kits, and a range of disposable and reusable medical products. These self- manufactured products, as well as a significant volume of third party manufactured medical products, are primarily distributed through the Company's extensive distribution system to United States hospitals, alternate-site care facilities, medical laboratories, and industrial and educational facilities. Information about operating results by segments is incorporated by reference from the Annual Report, pages 31-42, section entitled "Management's Discussion and Analysis" and pages 63-65, section entitled "Notes to Consolidated Financial Statements--Segment Information." 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 two industry segments in which the Company operates. 4 United States Health Care Environment Accelerating cost pressures on hospitals are resulting in increased out- patient and alternate-site health-care service delivery and a focus on cost- effectiveness and quality. These forces increasingly shape the demand for, and supply of medical care. Many private health-care payors 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 suppliers, such as the Company, will depend on their ability to work with hospitals to help them enhance their competitiveness. The Company believes it can help hospitals achieve savings in the total supply system by automating supply-ordering procedures, optimizing distribution networks, improving materials management and achieving economies of scale associated with aggregating supply 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 restructuring of the United States health-care system which may ultimately occur. 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 hospital communications via various electronic purchasing systems, circulation of catalogs and merchandising bulletins, direct mail campaigns, trade publications and advertising. The Company's Corporate program provides large hospitals and multi-hospital systems with a single point of contact for all of the Company's products, services and special value-added programs. The Company is allied with other companies through its ACCESS(TM) program. Through this program, the Company provides its Corporate customers with products and services from leading companies in related industries which go beyond the Company's scope of proprietary product offerings. The Company maintains ACCESS alliances with a subsidiary of WMX Technologies, Inc. (formerly Waste Management of America, Inc.) for handling and disposal of medical waste; with Comdisco, Inc. for high technology asset management and contingency services; with Kraft Foodservice Inc., a subsidiary of Kraft General Foods, Inc., to distribute and market a broad array of hospital food service products; with the Graphics and Technology Group, a division of North American Paper Company; and with various divisions of Trammell Crow Company for facilities management and real estate planning services. The Company's ValueLink(R) hospital inventory management service is designed to deliver health-care products in ready-to-use packaging directly to individual hospital departments on a "just-in-time" basis. As of the end of 1994, 108 hospitals were participating in the Company's ValueLink program. With ValueLink services, hospitals reduce their inventories and the related warehousing costs for medical-surgical supplies and rely on the Company for frequent, standardized deliveries and improved service levels. The Company has distribution facilities across the United States to serve the nation's hospitals. The Company's Quality Enhanced Distribution Services(TM) program is designed to reduce the time it takes for a hospital to receive and store supplies and to process accounts payable. Through Quality Enhanced Distribution Services and based on each customer's unique requirements, the Company's products are delivered in a manner which facilitates efficient processing of products and related documents by the hospital's personnel. As a result, many hospital customers have been able to reduce the amount of labor associated with the receipt and storage of supplies. As of the end of 1994, more than 732 Quality Enhanced Distribution Services initiatives were serving United States hospital customers. 5 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 can be obtained 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 on such price increases. See "Contractual Arrangements." 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 The Company is a major factor in the distribution and manufacture of hospital and laboratory products and services and medical specialties. Although no single company competes with the Company in all of its industry segments, the Company is faced with substantial competition in all of its markets. 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. 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 "United States Health Care Environment." In part through its 1993 restructuring program, 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 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 1994. Standard & Poor's and Duff & Phelps have indicated that continuation of these ratings in the future is dependent on the Company's successful implementation of the 1993 restructuring program, reduction of its leverage and reduction in the uncertainty of the ultimate impact of products liability litigation. 6 Although the Company's credit practices and related working capital needs vary across industry segments, they 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 25 research and development centers located around the world and include facilities in Australia, Belgium, Germany, Italy, Japan, Malaysia, Malta, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States. Expenditures for Company-sponsored research and development activities were $343 million in 1994, $337 million in 1993 and $317 million in 1992. 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 1994 and similar expenditures are planned for 1995. See Item 3.--"Legal Proceedings." Employees As of December 31, 1994, the Company employed approximately 53,500 people, including approximately 30,600 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. 7 (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 63-65, section entitled "Notes to Consolidated Financial Statements-- Segment Information." -------------------------------------------------------------------------------- ITEM 2. PROPERTIES. The Company owns or has long-term leases on substantially all of its major manufacturing facilities. The Company maintains 34 manufacturing facilities in the United States, including nine in Puerto Rico, and also manufactures in Australia, Belgium, Brazil, Canada, the Chech Republic, Colombia, Costa Rica, the Dominican Republic, France, Germany, Ireland, Italy, Japan, Malaysia, Malta, Mexico, the Netherlands, Singapore, Spain, Russia and the United Kingdom. Many of the major manufacturing facilities are multi-product and manufacture items for both of the Company's industry segments. The Company owns or operates 90 distribution centers in the United States and Puerto Rico and 59 located in 23 foreign countries. Many of these facilities handle products for both of the Company's industry segments. 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 were $411 million in 1994, $516 million in 1993 and $537 million in 1992. In addition, the Company added to the pool of equipment leased or rented to customers, spending $91 million in 1994, $89 million in 1993 and $103 million in 1992. The Company's facilities are suitable for their respective uses and, in general, are adequate for the Company's current needs. -------------------------------------------------------------------------------- ITEM 3. LEGAL PROCEEDINGS. As of December 31, 1994, the Company was a defendant, together with other defendants, in 6,235 lawsuits and had 1,757 pending claims from individuals, all of which seek damages for injuries allegedly caused by silicone mammary prostheses ("mammary implants") manufactured by the American Heyer-Schulte division of American Hospital Supply Corporation ("American"). The comparable number of cases and claims was 4,870 as of December 31, 1993. In 1994, 311 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)). 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 three purported additional class actions, none of which is currently certified. (Barcellona, et al., v. Dow Corning, et al., U.S.D.C., Mich., 9300 8 72045 DT and Moss, et al., v. Dow Corning, et al., U.S.D.C., Minn., 92-P-10560- S, both of which have been transferred to and are part of In re: Silicone Gel Breast Implant Product Liability Litigation, U.S.D.C., N. Dist. Ala., MDL-926 for discovery purposes, and Doe, et al., v. INAMED Corporation, et al., Circuit Ct., Dade County, Fla., 92-07034.) 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. A second suit seeking class certification on behalf of all women in the Province of Ontario who received Heyer-Schulte mammary implants has been filed (Bennett v. American Heyer-Schulte, et al., Ontario Prov. Court, Gen. Div., 18169/94). 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. N.Y., 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 is 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. Two of the Company's claims-made insurers have tendered the full amounts of their policies to the Company and a third has tendered the full amounts of its policy on a prorata basis as claims are paid. Additionally, the Company received certain funds in settlement of claims pending against a carrier in liquidation. The total amount tendered is $85 million. Also, 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. Representatives of the plaintiffs and certain defendants in these cases have negotiated a global settlement of the issues under the jurisdiction of the Court in the Dante v. Dow Corning, et al. case (now known as Lindsay, et al. v. Dow Corning, et al.). The monetary provisions of the settlement providing compensation for all present and future plaintiffs and claimants based on a series of specific funds and scheduled medical conditions have been agreed upon by most of the significant defendants and representatives of the plaintiffs. The total of all of the specific funds, that would be paid-in and made available over approximately thirty years following final approval of the settlement by the courts, is capped at $4.75 billion. The settling defendants have agreed to fund $4.255 billion of this amount. The Company's share of this settlement has been established by the settlement negotiations at $556 million. Appeals have been filed challenging the global settlement. 9 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 January 1995, approximately 11,360 individuals have opted out of the global settlement, of which 3,757 allege claims against Baxter. Of the opt-outs who filed claims against Baxter, 2,101 represent U.S. claimants, 1,656 represent foreign claimants. The number of opt- outs against Baxter will change as some claimants elect to rescind their opt- out notice, others are found to not have valid claims against Baxter, and others are identified as having claims against Baxter. In December 1994, and January 1995, over 1,600 opt-out claimants asserting a claim against Baxter rescinded their opt-out notices and returned to the global settlement. 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. At present, the Company is not able to estimate the nature and extent of its potential future liability with respect to opt-outs. The Company believes that most of its potential future liability with respect to opt-outs is covered by insurance. The Company intends to continue to litigate pending mammary implant cases. 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. The reserves for the settlement do not include any provisions for opt-outs. Upon resolution of any of the uncertainties concerning these cases, the Company will 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 31, 1994, the Company was a defendant, together with other defendants, in 246 lawsuits, and had one pending claim, in the United States and Canada involving individuals who have hemophilia, or their representatives. Those cases and the claim 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. Furthermore, 57 lawsuits seeking damages based on similar allegations are pending in Ireland and Japan. 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). The court has certified the class only for the purpose of determining whether the defendants' actions were negligent. Baxter has also been named in three other purported class actions, none of which have been certified and all of which have been transferred to the MDL for discovery purposes. 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 product was used. The Company denies these allegations and has filed a challenge to the class proceedings. On March 16, 1995, the Seventh Circuit Court of Appeals granted the defendants' writ of mandamus and directed the District Court to decertify the class action. 10 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 (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. 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 tender, notice, and the like under the policies. 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 and Zurich and Columbia Casualty Company for failure to indemnify it. Subsequently, the Company's excess liability insurance carriers also brought suit for a declaratory judgment as to the parties' respective liabilities. The suit filed by Zurich has been stayed pending resolution of the Company's case against Zurich and its excess carriers. Zurich has appealed that stay. 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. 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. Upon resolution of any of the uncertainties concerning these cases, or if the Company, along with the other defendants, enters into a comprehensive settlement of the 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 this litigation will not have a material adverse effect on the Company's consolidated financial position. On February 21, 1994, the Company began the voluntary withdrawal world-wide of its Gammagard(R) IGIV (intravenous immune globulin) because of indications that it might be implicated in Hepatitis C infections occurring in users of the product. Gammagard is a concentration of antibodies derived from human plasma and is used to treat immune-suppressed patients. A new immune globulin product, Gammagard 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, 1994, the Company had received reports of Hepatitis C transmission from 219 patients. The exact cause for these reports has not been determined; however, all reports have been associated with Gammagard injection produced from plasma which was screened for antibodies to the Hepatitis C virus through second generation testing. The number of patients receiving Gammagard 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, 1994, 14 suits resulting from this incident have been served on the Company. Two suits have been filed as purported class actions, Lowe v. Baxter, U.S.D.C., W.D. KY, C94-0125, and Mock v. Baxter, U.S.D.C., ID, CIV-94-0524-S-LMV. The suits allege infection with the Hepatitis C virus from the use of Gammagard. The Company is defending these cases. 11 At this time the Company cannot estimate its level of exposure to claims or lawsuits stemming from the market withdrawal. The Company does not, however, at this time expect the exposure to have a material adverse effect on the Company's operations or its consolidated financial condition. At the start of 1993, the Company was a defendant in patent litigation brought by Scripps Clinic and Research Foundation ("Scripps") and Rhone-Poulenc Rorer, Inc. (formerly Rorer Group, Inc.) ("Rorer") in which the plaintiffs alleged that the Company's monoclonal anti-hemophilic Factor VIII and its Recombinate(R) Factor VIII infringed a patent. The Company entered into a worldwide settlement of the litigation with Scripps and Rorer. Under this settlement agreement, in 1993, the Company paid $105 million to Rorer to settle claims relating to certain anti-hemophilic Factor VIII products. Baxter Healthcare Corporation ("BHC") was one of ten 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 suffered allergic reactions to natural rubber latex gloves and other protective equipment or who 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) was filed against Baxter and three other defendants. The class action allegations have been withdrawn, but additional plaintiffs added individual claims. 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 will respond to the complaint and vigorously defend 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. Most of the individuals who served as directors of American in 1985, including Mr. Cathcart and Ms. Evans, who currently are directors of the Company, were defendants in a pending lawsuit filed as a derivative action. Lewis v. Bays, et al. was filed on March 23, 1990 in the Circuit Court of Cook County, Illinois. The plaintiffs allege breach of fiduciary duty claims relating to American's buyout of an agreement with Hospital Corporation of America ("HCA") in connection with the Company's merger with American in 1985. On April 12, 1994, the parties in this case filed a settlement agreement with the court for approval. The Court entered a preliminary order of fairness, and, on April 26, 1994, the Company began notifying its stockholders of the settlement. The settlement order was entered on June 15, 1994, and the time for appeal has expired. The terms of the settlement did not have a material adverse effect on the Company's results of operations or consolidated financial position. All of the individuals who served as directors of the Company as of September 1, 1993, as well as Lester B. Knight, executive vice president of the Company, were named as defendants in a lawsuit ostensibly filed as a "demand excused" derivative action. Siegel v. Loucks, et al., was filed September 15, 1993, in the Court of Chancery in New Castle County, Delaware Cir. Ct., New Castle Co., Del., C. A. No. 13130. On October 24, 1993, a substantially identical complaint was filed in the same court by Bartholomew J. Millano. The two complaints were consolidated. The plaintiffs allege that the directors failed to oversee management in connection with actions which were the basis for a dispute between the Company and the Department of Veterans Affairs concerning sales and pricing practices, failed to prevent such actions, and failed to create a 12 compliance program to prevent or detect such actions. The complaint seeks to recover alleged damages incurred by the Company as the result of lost sales due to the dispute, as well as the compensation paid to Messrs. Gantz, Knight, Loucks and Tobin since 1991. The Company and its directors filed motions to dismiss the suit, answered the complaint and filed a counterclaim seeking permanently to bar and enjoin the plaintiff from prosecuting this case because her claims have been disposed of and barred in a prior suit against the Company. On March 7, 1995 the court granted defendants' motions to dismiss the suit. The plaintiffs have thirty days to appeal the dismissal order. As of December 31, 1994, the Company has been named as a potentially responsible party for cleanup costs at 15 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 has been reserved 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 reserved 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. -------------------------------------------------------------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 13 PART II -------------------------------------------------------------------------------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Incorporated by reference from the Annual Report, page 66, 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 "Seven-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 31-42, section entitled "Management's Discussion and Analysis." Also incorporated by reference is the section of this Form 10-K, Part I captioned "Recent Developments," "United States Health Care Environment" and "Legal Proceedings" on pages 3 to 4, 5 and 8 to 13, respectively. -------------------------------------------------------------------------------- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Incorporated by reference from the Annual Report, pages 44-66, 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. 14 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 8, 1995 (the "Proxy Statement"), pages 2-4, sections entitled "Board of Directors" and "Election of Directors." (b) Identification of Executive Officers Following are the names and ages, as of March 10, 1995, 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 William B. Graham, age 83, has been senior chairman of the board of directors since 1985. Mr. Graham became president of the Company in 1953 and chief executive officer in 1960 and continued in these positions until 1971. From 1971 to 1980 he was chairman of the board and chief executive officer, and thereafter he served as chairman until he became senior chairman. Vernon R. Loucks Jr., age 60, 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. Lester B. Knight, age 36, has been an executive vice president of Baxter since 1992, and a vice president since 1990. Mr. Knight previously was president of a division of Healthcare. Tony L. White, age 48, has been an executive vice president of Baxter since 1992, and a vice president since 1986, when he was first elected an officer of Baxter. Harry M. Jansen Kraemer, Jr., age 40, has been 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 55, has been senior vice president, secretary and general counsel of Baxter since 1993. 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. Herbert E. Walker, age 60, has been senior vice president of Baxter since 1993. Mr. Walker previously was vice president of human resources of a division of Healthcare. Dale A. Smith, age 63, has been a group vice president of Baxter since 1979, when he was first elected an officer of Baxter. David J. Aho, age 45, has been a vice president of Baxter since 1989, when he was first elected an officer of Baxter. 15 John F. Gaither, Jr., age 45, has been a vice president of Baxter since 1994. Between 1991 and 1994, Mr. Gaither was vice president of business development and strategic planning and associate general counsel for a subsidiary of Baxter, and prior to that was secretary and deputy general counsel of Baxter. James H. Taylor, Jr., age 56, has been a vice president of Baxter since 1992. Mr. Taylor previously was the general manager of operations of a division of Healthcare, and prior to that was vice president of manufacturing of that division. Brian P. Anderson, age 44, 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 48, 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 38, has been secretary of Baxter since 1994. From 1992 to 1994, Mr. Sieck was assistant secretary of Baxter, and prior to that was corporate counsel in the law department of a subsidiary of Baxter. (2) Healthcare and World Trade Executive Officers Timothy B. Anderson, age 48, 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. Manuel A. Baez, age 53, has been 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. Joseph F. Damico, age 41, 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. Michael S. Estes, age 51, has been a group vice president of Healthcare and World Trade since 1994. Between 1990 and 1994, Mr. Estes was a group vice president of Baxter. Mr. Estes was first elected an officer of Baxter in 1987. Donald W. Joseph, age 57, 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. Mr. Joseph previously was president of a division of a subsidiary of Baxter. Darnell Martin, age 46, has been a group vice president of Healthcare since 1994. Between 1992 and 1994, Mr. Martin was a group vice president of Baxter, and a vice president since 1987, when he was first elected an officer of Baxter. Jack L. McGinley, age 48, 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 49, 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 42, has been a group vice president of Healthcare since 1994. Between 1993 and 1994, Mr. Mussallem was president of a division of Healthcare, and from 1990 to 1993, was president of another division of that subsidiary. Fabrizio Bonanni, age 48, has been a corporate vice president of World Trade since 1994. Mr. Bonanni previously was a vice president of a division of World Trade. 16 Carlos del Salto, age 52, 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 45, has been a corporate vice president of World Trade since 1993. Mr. Hurley previously was vice president of a division of World Trade. Robert Perez, age 45, 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. John L. Quick, age 50, has been a corporate vice president of Healthcare since 1994. Between 1992 and 1994, Mr. Quick was a vice president of a division of Healthcare, and prior to that, was a vice president of another division of that subsidiary. Michael J. Tucker, age 42, has been a corporate vice president of World Trade since 1994. Between 1992 and 1994, Mr. Tucker 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. (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 page 17, section entitled "Pension Plan and Excess Plan." -------------------------------------------------------------------------------- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Incorporated by reference from the Proxy Statement, pages 19-20, section entitled "Ownership of Company Securities." -------------------------------------------------------------------------------- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Incorporated by reference from the Proxy Statement, page 18, section entitled "Significant Business Relationships." 17 -------------------------------------------------------------------------------- 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 45 Consolidated Statements of Income Annual Report, page 46 Consolidated Statements of Cash Flows Annual Report, page 47 Consolidated Statements of Stockholders' Equity Annual Report, page 48 Notes to Consolidated Financial Statements Annual Report, pages 49-66 Report of Independent Accountants Annual Report, page 44 Schedules required by Article 12 of Regulation S-X Report of Independent Accountants on Financial Statement Schedule page 19 II Valuation and Qualifying Accounts page 20 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 December 23, 1994, was filed with the SEC under Item 5, Other Events, to file a press release which announced the completion of the sale of the Company's diagnostics businesses. A report on Form 8-K, dated February 14, 1995, was filed with the SEC under Item 5, Other Events, to file a press release which announced the Company's stock repurchase program. (c) Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated herein by reference.
18 REPORT OF INDEPENDENT ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULE Board of Directors Baxter International Inc. Our audits of the consolidated financial statements referred to in our report dated February 13, 1995 appearing on page 44 of the 1994 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 13, 1995 19 SCHEDULE II -------------------------------------------------------------------------------- VALUATION AND QUALIFYING ACCOUNTS (In millions of dollars) --------------------------------------------------------------------------------
Additions ---------------------- Balance at Charged to Charged to Deductions Balance beginning costs and other from at end of Description of period expenses accounts(A) reserves period ------------------------------------------------------------------------------- Year ended December 31, 1994: Accounts receivable $32 $14 $ 2 $(9) $39 === === ==== === === ------------------------------------------------------------------------------- Year ended December 31, 1993: Accounts receivable $29 $ 8 $-- $(5) $32 === === ==== === === ------------------------------------------------------------------------------- Year ended December 31, 1992: Accounts receivable $27 $ 6 $ 1 $(5) $29 === === ==== === ===
-------------------------------------------------------------------------------- (A) Valuation accounts of acquired or divested companies and foreign currency translation adjustments. Reserves are deducted from assets to which they apply. 20 SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Baxter International Inc. /s/ Vernon R. Loucks Jr. By: ____________________________________ Vernon R. Loucks Jr. Chairman of the Board and Chief Executive Officer Date: March 22, 1995 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 /s/ Vernon R. Loucks Jr. ___________________________________ Silas S. Cathcart Vernon R. Loucks Jr. John W. Colloton Director, Chairman of the Board Susan Crown and Chief Executive Officer Mary Johnston Evans Frank R. Frame (ii) Principal Financial Officer: William B. Graham David W. Grainger /s/ Harry M. Jansen Kraemer, Martha R. Ingram Jr. Arnold J. Levine ___________________________________ Georges C. St. Laurent, Jr. Harry M. Jansen Kraemer, Jr. Monroe E. Trout, M.D. Senior Vice President and Fred L. Turner Chief Financial Officer /s/ Vernon R. Loucks Jr. (iii) Controller: By: ____________________________________ Vernon R. Loucks Jr. /s/ Brian P. Anderson Director and Attorney-in-Fact ___________________________________ Brian P. Anderson Controller 21 -------------------------------------------------------------------------------- APPENDICES
DESCRIPTION PAGE ----------- ---- Computation of Primary Earnings per Common Share (Exhibit 11.1) 25 Computation of Fully Diluted Earnings per Common Share (Exhibit 11.2) 26 Computation of Ratio of Earnings to Fixed Charges (Exhibit 12) 27 Subsidiaries of the Company (Exhibit 21) 28
-------------------------------------------------------------------------------- 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% 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. 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.
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NUMBER AND DESCRIPTION OF EXHIBIT --------------------------------- 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. 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.
23
NUMBER AND DESCRIPTION OF EXHIBIT --------------------------------- 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. 10.32 Baxter International Inc. Restricted Stock Plan for Non-Employee Directors, as amended and restated effective May 8, 1995. 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. 1994 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 LLP. 24. Powers of Attorney. 27. Financial Statement Schedule.
------- * Incorporated herein by reference. (All other exhibits are inapplicable.) 24 EX-10.31 2 OFFICER INCENTIVE PLAN Exhibit 10.31 BAXTER INTERNATIONAL INC. 1995 OFFICER INCENTIVE COMPENSATION PLAN This 1995 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, as amended, and the related income tax regulations issued thereunder. 1. ELIGIBILITY ----------- Officers of the Company are eligible to participate in the Plan during 1995 ("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, 1995, and such terms shall not thereafter be changed, except as permitted by paragraph 2.2. 2.2 By March 31, 1996, 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 principle, and other extraordinary or non-recurring events occurring in 1995 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 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 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 162(m). 2.3 If an officer becomes a Participant in the Plan during 1995, but after January 1, 1995, the Committee shall establish a prorated Bonus Range for such Participant based on the number of full months remaining in 1995 after he or she becomes a Participant. To the extent applicable, the determination of a prorated Bonus Range shall be consistent with 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, 1996, 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-10.32 3 RESTRICTED STOCK PLAN Exhibit 10.32 BAXTER INTERNATIONAL INC. RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS As amended and restated effective May 8, 1995 --------------------------------------------- This Plan contains the terms and conditions on which grants of common stock of Baxter International Inc. ("Restricted Stock") are made to the directors of Baxter International Inc. ("Baxter"). 1. ELIGIBILITY AND GRANTS OF RESTRICTED STOCK 1.1 Each director of Baxter who is not an employee of Baxter or any of its subsidiaries is eligible to participate in this Plan. Each eligible director shall receive grants of Restricted Stock in accordance with this section 1 without further action by the board of directors or any of its committees. The provisions of this section 1 shall not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder. 1.2 Board Retainer. Each director elected for a three-year term shall receive 1,000 shares of Restricted Stock upon election or re-election to the Board of Directors. If a director is elected for a term of fewer than three years, the director shall receive 30 shares of Restricted Stock, upon election or re- election to the board, for each full calendar month in the director's term of office. If a director is elected for a term which does not include at least one full calendar month, the director shall receive 30 shares of Restricted Stock upon election or re-election to the board. 1.3 Board Membership Compensation. Each director elected for a three-year term shall receive 3,000 shares of Restricted Stock upon election or re-election to the Board of Directors. If a director is elected for a term of fewer than three years, the director shall receive 100 shares of Restricted Stock, upon election or re-election to the board, for each full calendar month in the director's term of office. If a director is elected for a term which does not include at least one full calendar month, the director shall receive 100 shares of Restricted Stock upon election or re-election to the board. Each director continuing in office after Baxter's annual meeting of stockholders in May 1995 ("1995 Annual Meeting"), but who is not standing for re-election at the 1995 Annual Meeting, shall receive a Restricted Stock grant effective on the date of the 1995 Annual Meeting. Each director continuing in office for a two-year term shall receive 2,000 shares of Restricted Stock. Each director continuing in office for a one-year term shall receive 1,000 shares of Restricted Stock. 1.4 Board Retirement Benefit. Each director who ceases membership on the Board of Directors (for a reason other than death or removal for cause) at or after age 65 with at least five years of service as a non-employee director will receive a retirement benefit equal to 1,000 shares of Restricted Stock for each twelve-month period of service as a non-employee director. The Restricted Stock grant shall be made effective on the director's last day of membership on the board. 1.5 Each grant of Restricted Stock shall be issued from shares held by Baxter in its treasury and when so issued, such shares shall be fully paid and non- assessable. 2. AGREEMENT AND CERTIFICATES Each director receiving Restricted Stock shall enter into an agreement with Baxter incorporating the terms and conditions of this Plan. A stock certificate for the shares of Restricted Stock awarded will be issued in the name of each director and deposited, together with a stock power endorsed in blank by the director, with Baxter. Each such certificate shall bear a legend in substantially the following form: The transferability of this certificate and the shares of Common Stock represented by it are subject to the terms and conditions (including conditions of forfeiture) contained in the Restricted Stock Plan for Non- Employee Directors of Baxter International Inc. ("Baxter"), as amended effective May 8, 1995, and an agreement entered into between the registered owner and Baxter. A copy of the Plan and agreement are on file in the office of the secretary of Baxter. 3. VESTING 3.1 Board Retainer. Each director who receives a Restricted Stock grant pursuant to section 1.2 of this Plan shall become vested in those shares of Restricted Stock at the expiration of the term of office to which the grant relates. 3.2 Board Membership Compensation. Each director elected for a three-year term shall become vested in the 3,000 shares of Restricted Stock he or she receives pursuant to section 1.3 in 1,000 share installments on the dates of Baxter's three annual meetings of stockholders following the election to which the grant relates. Each director elected for a term of fewer than three years shall become vested in the shares of Restricted Stock he or she receives pursuant to section 1.3 at the expiration of the term of office to which the grant relates. Each director continuing in office for a two-year term after the 1995 Annual Meeting shall become vested in the 2,000 shares of Restricted Stock he or she receives pursuant to section 1.3 in 1,000 share installments on the dates of Baxter's 1996 and 1997 annual meetings of stockholders. Each director continuing in office for a one-year term after the 1995 Annual Meeting shall become vested in the 1,000 shares of Restricted Stock he or she receives pursuant to section 1.3 on the date of Baxter's 1996 annual meeting of stockholders. 3.3 Board Retirement Benefit. Each director who receives a Restricted Stock grant pursuant to section 1.4 of this Plan shall become vested in those shares of Restricted Stock on the six-month anniversary of the grant date. If the director dies after the Restricted Stock grant is made pursuant to section 1.4, but before it vests in accordance with this section 3.3, then the director's estate shall become vested in such Restricted Stock on the date specified in the preceding sentence. 3.4 If a director dies while in office or becomes disabled such that he or she is unable to perform the duties of a director, then the director or the director's estate shall become vested in all of the Restricted Stock granted pursuant to sections 1.2 and 1.3 of this Plan. If a director resigns or is otherwise removed as a director prior to vesting of the Restricted Stock granted pursuant to sections 1.2 and 1.3 of this Plan, then the director shall become vested in that number of shares of Restricted Stock held by the director determined by multiplying the number of shares held by a fraction, the numerator of which is the number of months served in the director's term and the denominator of which is the number of months of the term at the time of the director's election, rounded to the nearest whole share. The director shall forfeit all rights to Restricted Stock which does not become vested. 3.5 When a director's rights to Restricted Stock become vested, the director shall be entitled to receive certificates representing shares of Baxter's common stock, $1.00 par value, ("Common Stock") free and clear of all restrictions, except as otherwise provided in section 7.2 of this Plan. The certificates representing these shares shall be delivered to the director within 30 days after the date such rights become vested. 4. RIGHTS OF PARTICIPANTS 4.1 Subject to the conditions of the Plan, each director receiving Restricted Stock shall have all of the rights of a stockholder with respect to the shares of Restricted Stock during the period in which such shares are subject to forfeiture and restrictions on transfer, including without limitation, the right to vote the shares. Dividends paid in cash or property other than Common Stock with respect to shares of Restricted Stock shall be paid to the director currently or, at the election of the director, shall be reinvested under Baxter's Stockholder Investment Service. Shares purchased with reinvested dividends shall not be restricted. 4.2 Dividends with respect to shares of Restricted Stock which are paid in Common Stock shall be restricted on the same basis as the underlying Restricted Stock. 4.3 Restricted Stock is not transferable and may not be sold, assigned, pledged or otherwise encumbered by any director at any time. No recognition shall be required to be given by Baxter to any attempted assignment of any rights to Restricted Stock or other rights under this Plan. 5. ADJUSTMENT In the event of any merger, consolidation or reorganization of Baxter with any other corporation or corporations, there shall be substituted for each of the shares of Restricted Stock then subject to the Plan the number and kind of shares of stock or other securities to which the holders of the shares of Common Stock will be entitled pursuant to the transaction. In the event of any recapitalization, stock dividend, stock split, combination of shares or other change in the Common Stock, the number of shares of Restricted Stock then subject to the Plan shall be adjusted in proportion to the change in outstanding shares of Common Stock. 6. ACCELERATION Notwithstanding any provision in this Plan to the contrary, the restrictions on all shares of Restricted Stock awarded shall lapse immediately if a Change in Control occurs. For purposes of this Plan, a Change in Control shall have occurred if: (i) any "person", as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than Baxter, any corporation owned, directly or indirectly, by the stockholders of Baxter in substantially the same proportions as their ownership of stock of Baxter, and any trustee or other fiduciary holding securities under an employee benefit plan of Baxter or such proportionately owned corporation), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of Baxter representing 30% or more of the combined voting power of Baxter's then outstanding securities; (ii) during any 24 month period (not including any period prior to the execution of this amendment to the Plan), individuals who at the beginning of such period constitute the board of directors of Baxter, and any new director (other than a director designated by a Person who has entered into an agreement with Baxter to effect a transaction described in clause (i), (iii) or (iv) of this Section) whose election by the board or nomination for election by Baxter's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of Baxter approve a merger or consolidation of Baxter with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of Baxter outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 60% of the combined voting power of the voting securities of Baxter or such surviving entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of Baxter (or similar transaction) in which no Person acquires more than 30% of the combined voting power of Baxter's then outstanding securities; or (iv) the stockholders of Baxter approve a plan of complete liquidation of Baxter or an agreement for the sale or disposition by Baxter of all or substantially all of Baxter's assets (or any transaction having a similar effect). 7. GENERAL 7.1 Subject to the limitation in section 1.1, the Board may amend or discontinue the Plan at any time. However, no such amendment or discontinuance shall, subject to adjustment under section 5, change or impair, without the consent of the recipient, the terms of Restricted Stock previously granted. 7.2 Notwithstanding any provision in this Plan to the contrary: (a) Baxter may, if it shall determine it necessary or desirable for any reason, at the time of award of any Restricted Stock or at the time of the removal of the restrictions imposed on such shares and the issuance of shares of otherwise unrestricted Common Stock, require the recipient of the shares, as a condition to the receipt thereof, to deliver to Baxter a written representation of present intention to acquire the Restricted Stock or the shares of Common Stock for his or her own account for investment and not for distribution and (b) if at any time Baxter further determines, in its sole discretion, that the listing, registration or qualification of any Restricted Stock or shares of Common Stock is necessary on any securities exchange or under any federal or state securities or blue sky law, or that the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with the award of any Restricted Stock or the removal of any restrictions imposed on such shares, such Restricted Stock shall not be awarded or such restrictions shall not be removed, as the case may be, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to Baxter. 7.3 Baxter may require a participant to pay to Baxter any amounts required to be withheld under applicable income tax laws as a condition for the issuance of any Common Stock. 7.4 No director in this Plan shall have any right because he or she is a participant in the Plan to continue as a director of Baxter for any period of time or to continue his or her present or any other rate of compensation. 7.5 This Plan shall continue in effect until all restriction imposed on shares of Common Stock by it have lapsed and all unrestricted shares of Common Stock required to be issued pursuant to the Plan have been issued. EX-11.1 4 COMPUTATION OF PRIMARY EARNINGS EXHIBIT 11.1 -------------------------------------------------------------------------------- COMPUTATION OF PRIMARY EARNINGS PER COMMON SHARE (In millions, except per share data)
Year ended December 31, ----------------------------------------------------------------------------- 1994 1993 1992 ----------------------------------------------------------------------------- EARNINGS Income (loss) from continuing operations before cumulative effect of accounting changes $ 596 $ (268) $ 561 Preferred stock dividends -- -- (5) ----------------------------------------------------------------------------- Income (loss) from continuing operations before cumulative effect of accounting changes applicable to common stock 596 (268) 556 Total discontinued operations -- -- 45 Cumulative effect of accounting changes -- 70 (165) ----------------------------------------------------------------------------- Net income (loss) available for common stock $ 596 $( 198) $ 436 ----------------------------------------------------------------------------- SHARES Average common shares outstanding 280 277 279 ----------------------------------------------------------------------------- PRIMARY EARNINGS (LOSS) PER COMMON SHARE INCOME FROM CONTINUING OPERATIONS $2.13 $(0.97) $ 1.99 DISCONTINUED OPERATIONS -- -- 0.16 CUMULATIVE EFFECT OF ACCOUNTING CHANGES -- 0.25 (0.59) ----------------------------------------------------------------------------- NET INCOME (LOSS) $2.13 $(0.72) $ 1.56 -----------------------------------------------------------------------------
EX-11.2 5 COMPUTATION OF DILUTED EARNINGS EXHIBIT 11.2 -------------------------------------------------------------------------------- COMPUTATION OF FULLY DILUTED EARNINGS PER COMMON SHARE (In millions, except per share data)
Year ended December 31, ------------------------------------------------------------------------------ 1994 1993(a) 1993(a) 1992 ------------------------------------------------------------------------------ EARNINGS Income (loss) from continuing operations before cumulative effect of accounting changes $596 $(268) $(268) $ 561 Preferred stock dividends -- -- -- (5) ------------------------------------------------------------------------------ Pro Forma income (loss) from continuing operations before cumulative effect of accounting changes applicable to common stock 596 (268) (268) 556 Total discontinued operations -- -- -- 45 Cumulative effect of accounting changes -- 70 70 (165) ------------------------------------------------------------------------------ Pro forma net income (loss) available for $596 $(198) $(198) $ 436 ------------------------------------------------------------------------------ SHARES Weighted average number of common shares outstanding 280 277 277 279 Additional shares assuming conversion of exercise of stock options, performance share awards and stock purchase plan subscriptions 2 -- 1 3 ------------------------------------------------------------------------------ Average common shares outstanding 282 277 278 282 ------------------------------------------------------------------------------ PRIMARY EARNINGS (LOSS) PER COMMON SHARE INCOME FROM CONTINUING OPERATIONS $2.11 $(0.97) $(0.96) $ 1.97 DISCONTINUED OPERATIONS -- -- -- 0.16 CUMULATIVE EFFECT OF ACCOUNTING CHANGES -- 0.25 0.25 (0.59) ------------------------------------------------------------------------------ NET INCOME (LOSS) $2.11 $(0.72) $(0.71) $ 1.54 ------------------------------------------------------------------------------
(a) For the year ended December 31, 1993, fully diluted earnings (loss) per common share has been computed with and without anti-dilutive common stock equivalents. EX-12 6 RATIO OF EARNINGS TO CHARGES EXHIBIT 12 -------------------------------------------------------------------------------- COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (In millions, except ratios)
Year ended December 31, ----------------------------------------------------------------------------- 1994 1993(2) 1992 1991 1990 ----------------------------------------------------------------------------- Income (loss) from continuing operations before income tax expense (benefit) $ 801 $(330) $ 753 $688 $ 16 Add: Interest costs 242 232 221 231 264 Estimated interest in rentals (1) 43 44 43 36 35 ----------------------------------------------------------------------------- Fixed charges as defined 285 276 264 267 299 Interest costs capitalized (5) (10) (10) (9) (5) Losses of less than majority owned affiliates, net of dividends 18 27 34 32 22 ----------------------------------------------------------------------------- Income (loss) as adjusted $1,099 $ (37) $1,041 $978 $332 ----------------------------------------------------------------------------- Ratio of earnings to fixed charges 3.86 (0.13) 3.94 3.66 1.11 -----------------------------------------------------------------------------
(1) Represents the estimated interest portion of rents. (2) Earnings were inadequate to cover fixed charges for the year-ended December 31, 1993, due to the provision for the restructuring program costs. The amount of the coverage deficiency is $313 million. EX-13 7 ANNUAL REPORT 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, 1994, and the company's financial position at that date. Trends of a material nature are discussed to the extent known and considered relevant. 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 China, 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, and the company's strategies for its medical specialties segment emphasize international expansion to capitalize on the company's strong global positions in renal therapy, biotechnology and cardiovascular therapies. U.S. Market Though the U.S. government failed to enact health-care reform legislation in 1994, there continued to be fundamental change in the U.S. health-care system. Competition for patients among health-care providers is becoming more intense and, increasingly, they are looking for ways to better manage costs in materials handling, supply utilization, product standardization for specific procedures, and capital expenditures. There was increased 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 were below the Consumer Price Index, and industry trends may inhibit the company's ability to increase prices in the future. In the U.S. health-care market, management believes Baxter's strong positions in manufacturing and broad-based distribution create a unique competitive advantage, since the company is well positioned to help customers reduce costs by being more efficient, while maintaining or improving the quality of patient care. In 1994 for example, Baxter and Duke University Medical Center signed a risk-sharing supply agreement that aligns the financial incentives of both organizations around reducing total system costs. Given the increased pressure on hospital revenues, this agreement is designed to reduce costs by determining and using the appropriate amount of resources for specific clinical outcomes. 31 MANAGEMENT'S DISCUSSION AND ANALYSIS COMPANY OBJECTIVES AND RESULTS Management outlined key financial objectives to stockholders for 1994. These objectives and the results achieved are summarized below: OBJECTIVES RESULTS . Improve "operational cash . The company achieved flow" to $450 million in 1994, "operational cash flow" of allowing the company to $954 million in 1994, and remain debt-neutral, after the reduced net debt by payment of dividends and all $742 million. financing costs. . Reduce the company's net- . The company's net-debt-to- debt-to-net-capital ratio from net-capital ratio was 39% at approximately 50% at the December 31, 1994, after the end of 1993 to the mid-40s receipt of $44 million in by the end of 1994, before partial net proceeds related considering the use of any to the sale of the diagnostics proceeds from the divestiture manufacturing businesses. of the diagnostics manufacturing businesses. . Grow sales in the high . In the third quarter, the com- single-digit percentage range. pany indicated that its future sales growth would be below its earlier expectations of growth in the high single dig- its as sales growth slowed in the U.S. market. Worldwide sales growth for the full year was 5%, including interna- tional sales growth of 8%. . Grow net earnings in the high . The company's net earnings single-digit percentage range. grew 10% and EPS grew 9% in 1994, excluding the 1993 after-tax restructuring and litigation charges. . Hold operating expenses flat . The company's marketing for 1994 and 1995 and and administrative expenses position Baxter to further declined by $20 million in reduce its expense ratio in 1994 and resulted in a ratio the years beyond 1995. of 19.9% of sales as compared to 21.2% of sales in 1993. . Complete the divestiture of . The divestiture of Baxter's diagnostics manufacturing diagnostics manufacturing businesses. businesses was completed in December 1994. "OPERATIONAL CASH FLOW" (in millions of dollars) [BAR GRAPH APPEARS HERE] 1992 1993 1994 ---- ---- ---- 207 292 954 NET DEBT (in millions of dollars) [BAR GRAPH APPEARS HERE] 1992 1993 1994 ----- ----- ----- 2,901 3,143 2,401 These objectives were associated with the November 1993 announcement that the company's board of directors approved a series of strategic actions to improve shareholder value, to extend positions of leadership in health-care markets and to reduce costs. These actions were designed to make the company's domestic medical/laboratory products and distribution segment more efficient and more responsive in addressing the sweeping changes occurring in the U.S. health-care system and to accelerate growth of Baxter's medical specialties businesses worldwide. The company recorded a $700 million pretax provision in 1993 to cover costs associated with these restructuring initiatives. The restructuring activities included: . Realigning the company's U.S. sales organization; . Restructuring the distribution organization and investing in new systems to improve manufacturing and distribution efficiencies worldwide; . Seeking to divest its diagnostics manufacturing businesses and exiting selected non-strategic product lines in other businesses; and . Reducing corporate staff and layers of management to give business units more autonomy. Additional details of the restructuring program are discussed later. The following discussion and analysis illustrates how management met all its key financial objectives, except for the attainment of anticipated domestic sales growth as discussed above. 32 BAXTER INTERNATIONAL RESULTS OF OPERATIONS The company operates in two industry segments, medical specialties and medical/laboratory products and distribution. The medical specialties segment includes specialized products that Baxter develops, manufactures and markets on a global basis for treating kidney and heart disease and blood disorders and for collecting and processing blood. The company's International Hospital unit, which manufactures and distributes intravenous solutions and other medical products outside the United States, is also included in this segment because it shares facilities, resources and customers with the other medical specialty businesses in several locations worldwide. The medical/laboratory products and distribution segment ("med/lab") includes products that Baxter manufactures for use in U.S. hospitals, alternate-site facilities, medical laboratories, and other industrial and educational facilities. A significant volume of third-party manufactured medical products (included in this segment) also are distributed through the company's extensive distribution system. The following table shows net sales trends for each industry segment (in millions):
Percent increase 1994 1993 1992 1994 1993 --------------------------------------------------------------------------------------------------- Medical specialties Renal $1,160 $1,061 $ 978 9% 8% Biotech 949 849 805 12% 5% Cardiovascular 632 562 540 12% 4% International Hospital 816 778 773 5% 1% --------------------------------------------------------------------------------------------------- Total medical specialties 3,557 3,250 3,096 9% 5% % to total company 38.1% 36.6% 36.5% Medical/laboratory products and distribution 5,767 5,629 5,375 2% 5% % to total company 61.9% 63.4% 63.5% --------------------------------------------------------------------------------------------------- Total net sales $9,324 $8,879 $8,471 5% 5% ===================================================================================================
Worldwide sales of renal products and services were strong over the past three years, reflecting a growing patient base and increased acceptance of peritoneal dialysis ("PD") therapy. Sales penetration of PD products was especially strong in international markets, where many national governments recognize the low start-up and operating costs of PD when compared to traditional hemodialysis. Sales of the HomeChoice(TM) automated PD system in North America, Japan and Europe in 1994 helped sales growth. Additionally, sales of the UltraBag(TM) system, designed to reduce the incidence of infection and improve convenience for the patient, also contributed to increased sales during 1993 and 1994. The company experienced strong demand for its therapeutic blood products including Recombinate(TM) Anti-hemophilic factor (Recombinant) which was launched in December 1992. Sales in the Biotech unit were adversely affected in 1994 by the voluntary market withdrawal of Gammagard(R) IGIV, an immune globulin intravenous product. A new product, Gammagard(R)S/D was introduced in the second quarter of 1994. It is treated with a solvent and two detergents known to inactivate viruses such as hepatitis B, hepatitis C and HIV. The demand for automated blood-collection products was strong in all years. Sales of manual collection products were flat for 1994 and 1993. The market for the company's blood- collection products slowed in 1993, as the number of whole-blood-collections declined in the U.S. and Europe. Sales growth of the company's cardiovascular ("CV") products was strong in 1994. Key contributors were 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). Sales growth of CV products moderated in 1993, primarily due to reduced levels of hospital activity in the U.S. Sales of the company's hospital products in international markets increased moderately in 1994 and 1993. The company's sales in Canada slowed in 1994 and 1993 as hospital cost containment in that country put downward pressure on the consumption of health-care products and services. Sales of specialty IV products were strong as the company broadened its base-product offering to international markets. Sales in the International Hospital unit in 1993 were 33 MANAGEMENT'S DISCUSSION AND ANALYSIS adversely affected by weakening of foreign currencies. Sales in the med/lab segment were up slightly during 1994. The trend reflects continued pricing pressures on certain product lines, the loss of some Columbia/HCA contracts and the decline in sales of diagnostics products as a result of reduced capital purchases by hospitals and uncertainties regarding Baxter's plans to divest its diagnostics manufacturing businesses. Although some contracts were lost, in September 1994, the company signed an eight-year contract with Columbia/HCA Healthcare Corporation valued at $800 million (including current and incremental volume) for products and services related to intravenous systems and laboratory products. The sales growth rate in 1993 primarily reflects market growth and increased market penetration. It is anticipated that the med/lab segment will be adversely affected in 1995 because it will lose approximately $300 million in sales (primarily international) related to the divestiture of the diagnostics manufacturing businesses and certain distribution businesses in Canada. Baxter will continue to distribute all current diagnostics products in the U.S. but will not distribute these products internationally as a result of the divestiture. The divestiture of the diagnostics manufacturing businesses will not have a material impact on the company's results of operations although it will decrease the growth rate of sales in the med/lab segment. Net sales by geographical region were (in millions):
Percent increase (decrease) 1994 1993 1992 1994 1993 ---------------------------------------------------------------------------------------------------------------- Medical specialties International $2,354 $2,142 $2,076 10% 3% United States 1,203 1,108 1,020 9% 9% ---------------------------------------------------------------------------------------------------------------- Total medical specialties 3,557 3,250 3,096 9% 5% ---------------------------------------------------------------------------------------------------------------- Medical/laboratory products and distribution United States 5,490 5,343 5,060 3% 6% International 277 286 315 (3%) (9%) ---------------------------------------------------------------------------------------------------------------- Total medical/laboratory products and distribution 5,767 5,629 5,375 2% 5% ---------------------------------------------------------------------------------------------------------------- Total United States sales $6,693 $6,451 $6,080 4% 6% Total international sales 2,631 2,428 2,391 8% 2% ---------------------------------------------------------------------------------------------------------------- Total net sales $9,324 $8,879 $8,471 5% 5% ================================================================================================================
The slowdown in the growth rate of U.S. sales in 1994 as compared to 1993 is due to the factors affecting the U.S. health-care market discussed earlier. These factors are expected to continue in 1995 and beyond. Sales in international markets increased in 1994 due to increased unit volume, market penetration and improved foreign currency rates. International sales growth in local currency was approximately 8%, 7% and 9% in 1994, 1993 and 1992, respectively. It is anticipated that the ratio of self-manufactured sales as a percentage of total sales versus distributed sales in the med/lab segment will decline in 1995 as a result of the sale of the company's diagnostics manufacturing businesses in December 1994. MED/LAB NET SALES (in billions of dollars) . Distributed products . Self-Manufactured products [BAR GRAPH APPEARS HERE] 1992 1993 1994 ---- ---- ---- Distributed products............................... 2.2 2.4 2.7 Self-Manufactured products......................... 3.2 3.2 3.1 MEDICAL SPECIALTIES NET SALES (in billions of dollars) . Distributed products . Self-Manufactured products [BAR GRAPH APPEARS HERE] 1992 1993 1994 ---- ---- ---- Distributed products............................... 0.4 0.4 0.4 Self-Manufactured products......................... 2.7 2.9 3.2 34 BAXTER INTERNATIONAL The following table gives key ratios of certain income statement items (as a percent of sales):
1994 1993 1992 ----------------------------------------------- Gross margin 35.3% 36.3% 38.1% Marketing and administrative expenses 19.9% 21.2% 21.2% ===============================================
The decline in the gross margin rate in 1994 versus 1993 reflects pricing pressures on certain product lines, a heavier mix of lower-margin distributed products, and the voluntary market withdrawal of Gammagard(R) IGIV discussed previously. The gross margin rate improved sequentially in every quarter beginning with the second quarter of 1994. The decline in this rate in 1993 reflects lower prices on certain product lines, a heavier mix of lower-margin distributed and manufactured products and unfavorable manufacturing variances related to the rebalancing of inventories, which caused some manufacturing plants to operate at reduced-capacity levels. The mix shift towards distributed products is consistent with the company's strategy of being a broad-based distributor of health-care supplies and services in the U.S. The impact of foreign currency exchange rates reduced the company's overall gross margin rate by approximately .3% in 1994 and by approximately .7% in 1993. The decrease in the marketing and administrative expense ratio offset the gross margin erosion in 1994. The decrease in these expenses in 1994 reflects improved expense leveraging as a result of initiatives taken in connection with the 1993 downsizing and restructuring programs. The company expects to further reduce the marketing and administrative expense ratio in 1995 and to continue the trend of reductions through 1998. The 1993 total included $53 million in charges to provide for staff reductions in the company's hospital and diagnostics businesses. The $53 million in charges were primarily incurred to combine sales staffs and streamline administrative functions. MARKETING AND ADMINISTRATIVE EXPENSES (as a percent of sales) [BAR GRAPH APPEARS HERE] 1990 1991 1992 1993 1994 ----- ----- ----- ----- ----- 21.3% 21.1% 21.2% 21.2% 19.9% The following table shows research and development expenses for each industry segment (in millions):
Percent increase (decrease) 1994 1993 1992 1994 1993 ----------------------------------------------------------------------------------------------------------- Medical specialties $259 $237 $213 9% 11% Medical/laboratory products and distribution 84 100 104 (16%) (4%) ----------------------------------------------------------------------------------------------------------- Total research and development $343 $337 $317 2% 6% as a % of self-manufactured sales 5.4% 5.5% 5.3% ===========================================================================================================
The company's research and development ("R&D") expenses increased at a lower rate in 1994 as compared to the 1993 growth rate primarily as a result of the company's strategic review of research and development initiatives. R&D expenses have increased in the medical specialties segment as the company continues to increase its investment in key strategic initiatives such as renal therapy and transplantation, the Novacor(R) left-ventricular assist system and blood substitutes. Significant R&D investments were made in 1993 in these same areas. The decrease in R&D spending in 1994 in the med/lab segment is primarily related to the rationalization of projects being developed in the diagnostics manufacturing businesses. It is anticipated that R&D spending in the med/lab segment will be lower in 1995 due to the divestiture of the diagnostics manufacturing businesses and the company's strategy to focus its R&D expenditures in the medical specialties segment. New self-manufactured products introduced to worldwide markets in the last five years comprised approximately 37% of the company's total worldwide self-manufactured sales in 1994, 35% in 1993 and 34% in 1992. 35 MANAGEMENT'S DISCUSSION AND ANALYSIS During 1993, the company recorded a special charge for major litigation settlements and minimum liability exposures, and recorded significant estimated insurance recoveries with respect to these liabilities. The net results of the charges and recoveries are as follows (in millions):
Gross Estimated Net litigation insurance litigation charge recoveries charge ------------------------------------------------------------- Mammary implant product liabilities $556 $426 $130 HIV/hemophilia product liabilities 131 83 48 Patent infringement settlement 105 -- 105 Legal fees and other 47 -- 47 ------------------------------------------------------------- Total $839 $509 $330 =============================================================
The provision for mammary implant product liabilities pertains to the company's share of the global settlement of class action litigation. The provision for HIV/hemophilia product liabilities pertains to worldwide litigation and expected settlement expenses involving anti-hemophilic Factor Concentrate cases for HIV-positive hemophiliacs. The patent infringement settlement pertains to patent litigation with Scripps Research Institute and Rhone-Poulenc Rorer, Inc., relating to certain anti-hemophilic Factor VIII products manufactured. The provision for legal fees pertains primarily to product liability litigation. See accompanying Notes to Consolidated Financial Statements titled "Legal Proceedings" for a more detailed description of these issues. Other costs and expenses include approximately $21 million in net gains associated with the disposal or discontinuance of minor, non-strategic businesses and investments in 1994, versus $44 million in net gains in 1993 and $21 million in net losses in 1992. The company also realized $10 million in gains related to the termination of an interest-rate hedging contract due to the significant reduction in net debt during 1994. Foreign exchange losses were $17 million in 1994, $28 million in 1993 and $26 million in 1992. Also included in other non-operating expenses in 1993 was a provision for $8 million in costs related to Baxter's settlement of anti-boycott investigations under the U.S. Export Administration Act. The impact of the recent devaluation of the peso in Mexico is not expected to have a material effect on Baxter's results of operations during 1995. Income before income taxes was $801 million in 1994 compared to a loss of $330 million in 1993 and income of $753 million in 1992. The following table shows income (loss) before income taxes for each industry segment (in millions):
1994 1993 1992 -------------------------------------------------------------- Medical specialties Pretax income before restructuring and litigation charges $ 621 $ 605 $ 556 Restructuring and litigation charges - (253) - -------------------------------------------------------------- Total medical specialties 621 352 556 -------------------------------------------------------------- Med/lab Pretax income before restructuring charge 474 422 512 Restructuring charge - (550) - -------------------------------------------------------------- Total med/lab 474 (128) 512 -------------------------------------------------------------- General corporate and other Expenses excluding restructuring and litigation charges (101) (135) (128) Restructuring and litigation charges - (227) - -------------------------------------------------------------- Total general corporate and other (101) (362) (128) -------------------------------------------------------------- Interest - net (193) (192) (187) -------------------------------------------------------------- Total pretax income (loss) $ 801 $(330) $ 753 ==============================================================
The increase in pretax income of 3% (excluding the restructuring and litigation charges in 1993) in the medical specialties segment for 1994 is primarily related to an increase in sales that was offset by lost margin and related rework costs related to the voluntary market withdrawal of Gammagard(R)IGIV discussed above. Pretax income in 1993 for the medical specialties segment was adversely affected by the impact of the restructuring and litigation charges discussed above. The restructuring charge was $100 million of this total (approximately $42 million non- 36 BAXTER INTERNATIONAL cash) and was provided to rationalize manufacturing capacity in the U.S. and Canada, consolidate distribution facilities in Europe and streamline administrative efficiency in several countries. Excluding the restructuring and litigation charges, 1993 pretax income for the segment increased as a result of lower manufacturing costs, improved expense control and improved pricing in select product lines, offset by the adverse impact of foreign currency rates. The med/lab segment's pretax income (excluding the 1993 restructuring and litigation charges) increased 12% in 1994 as a result of the benefits of cost- containment measures implemented throughout 1993 and 1994, and a decrease in the level of net gains from divestitures in 1994 offset by the $53 million of downsizing costs incurred in the second and third quarters of 1993. The pretax loss in 1993 in the med/lab segment was due to the provision of $550 million ($231 million non-cash) for the 1993 restructuring program. These charges were incurred to make the company's domestic hospital-supply operations more efficient and more responsive in addressing the changes occurring in the U.S. health-care system. Pretax income in 1993 decreased, excluding restructuring program costs, as a result of lower sales growth of the company's manufactured products and higher sales of the company's distributed products, the impact of an inventory-reduction program that caused some manufacturing plants to operate at reduced capacity utilization levels, the company's inability to recover raw material and other cost increases through product pricing, and downsizing costs discussed previously. The net decrease in costs in general corporate and other (excluding the 1993 restructuring and litigation charges) in 1994 primarily reflects the impact of cost savings achieved in connection with the restructuring program and the effect of net gains associated with the disposal or discontinuance of minor, non-strategic business investments. The increase in interest expense for 1994 was due primarily to higher interest rates offset by lower average debt levels. The increase in interest expense for 1993 as compared to 1992 was due primarily to higher debt levels offset by lower interest rates. Interest income improved in both 1994 and 1993 due to higher average investment levels and improved returns on the company's portfolio of investments. The increase in pretax income in 1994 versus 1993, excluding the $700 million restructuring charge and the $330 million special charge for litigation, was primarily a result of improved sales and improved expense leveraging. The decline in pretax income from 1992 to 1993 is largely the result of restructuring and litigation charges discussed previously, which were recorded in 1993. Pretax income in 1993, excluding the charges, was $700 million. The effective tax rate was 26% in 1994 compared to 19% in 1993 and 25% in 1992. The 1993 effective tax rate was unusually low due primarily to the tax benefits associated with the restructuring and litigation charges discussed previously, offset by a $151 million provision for U.S. taxes on previously unremitted foreign earnings that the company intends to use for the cash requirements of its restructuring program. The increase in the 1994 effective tax rate as compared to 1992 was due primarily to a larger proportion of earnings generated in higher-tax jurisdictions. Net earnings from continuing operations was $596 million in 1994 compared with a net loss of $268 million in 1993 and net earnings of $561 million in 1992. Earnings per common share from continuing operations was $2.13 in 1994 versus a loss of 97 cents in 1993 and earnings of $1.99 in 1992. The loss in 1993 primarily reflects the provisions for restructuring and litigation charges. The company estimates that earnings per share from operations in 1993, excluding these charges, would have been approximately $1.95. RESTRUCTURING PROGRAM As discussed previously, the company announced a major restructuring program that resulted in a $700 million pretax charge in the fourth quarter of 1993. This charge included approximately $300 million for non-cash valuation adjustments as a result of the company's decision to close facilities or exit non-strategic businesses and investments. The company expects to spend approximately $400 million in cash related to the restructuring program, with most of that expended between 1994 and 1996. 37 MANAGEMENT'S DISCUSSION AND ANALYSIS The following table summarizes major components of the company's restructuring charge, use of restructuring reserves through December 31, 1994 and the remaining restructuring reserves at December 31, 1994 (in millions):
Major cost categories ------------------------------------- Employee- Write-down related of assets to Other costs be sold costs Total ------------------------------------------------------------ Total restructuring charge $295 $289 $116 $700 Less reserves utilized through Dec. 31, 1994: Cash 58 -- 66 124 Noncash -- 206 -- 206 ------------------------------------------------------------ Reserves as of Dec. 31, 1994 $237 $ 83 $ 50 $370 ============================================================
Employee-related costs include provisions for severance, outplacement assistance, relocation and retention payments. Since the inception of the restructuring program, the company has eliminated approximately 2,300 of the approximately 4,500 positions affected by the program. The majority of the remaining reductions will occur in 1995 and 1996 as facility closures and consolidations are completed as planned. Since the announcement of the restructuring program, the company has implemented, or is in the process of implementing, all of the major strategic actions associated with the restructuring program and is satisfied that such programs are progressing on schedule and that the overall restructuring program will meet previously established financial targets. As part of the restructuring, the company announced its intent to divest its diagnostics manufacturing businesses and established a valuation allowance as a component of the 1993 restructuring charge. In December 1994, the company completed the divestiture of these businesses and received net proceeds of approximately $44 million in cash, $200 million in installment notes (which were collected in cash during January 1995) and $40 million in face value of preferred stock. In addition, Baxter retained accounts receivable of approximately $85 million, which will be collected from customers by Baxter in the normal course of business. Baxter has retained the rights to distribute all current diagnostics products in the U.S. The transaction was completed substantially in accordance with the company's valuation estimates and, therefore, no gain or loss was recognized on the sale. The divestiture of the diagnostics manufacturing businesses will not have a material impact on the company's results of operations, but will decrease the growth rate of sales in the med/lab segment. The company realized approximately $95 million in expense savings for the total year 1994, which was consistent with forecasted savings. Management believes that its overall savings to be realized in 1995 and beyond will be substantially consistent with earlier estimates disclosed which are $200 million in 1995, $275 million in 1996, $325 million in 1997 and exceeding $350 million in 1998. Management anticipates that these savings will be partially invested in increased research and development spending and the company's expansion into growing international markets. Management further believes that its remaining restructuring reserves are adequate to complete the actions contemplated by the restructuring program. DISCONTINUED OPERATIONS Net earnings from discontinued operations were $45 million in 1992 or 16 cents per share. This included costs the company incurred of $18 million (net of $6 million in related income tax benefits) to effect the distribution of Caremark International Inc. to Baxter stockholders as of November 30, 1992. ADOPTION OF NEW ACCOUNTING STANDARDS The 1993 benefit for the cumulative effect of adopting FASB Statement No. 109, "Accounting for Income Taxes" was $81 million, or 29 cents per common share. This Statement 38 BAXTER INTERNATIONAL was adopted on January 1, 1993. The 1993 charge for the cumulative effect of adopting FASB Statement No. 112, "Accounting for Postemployment Benefits" was $11 million (net of $7 million in income tax benefits) or 4 cents per common share. Statement No. 112 was adopted during the fourth quarter of 1993, retroactive to January 1, 1993. The 1992 charge for the cumulative effect of adopting FASB Statement No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions" covering the accounting for retiree benefits other than pensions was $165 million (net of $50 million in income tax benefits), or 59 cents per common share. Statement No. 106 was adopted during the fourth quarter of 1992, retroactive to January 1, 1992. IMPACT OF INFLATION 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 Medicare reimbursement regulations and economic pressures in the U.S. hospital marketplace. 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. 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. The company increased its emphasis on cash flow during 1994. To facilitate this emphasis, management introduced a new internal performance measure called "operational cash flow." This measure evaluates each operating business on all aspects of cash flow under their direct control. Management's objective in 1994 was to generate "operational cash flow" of at least $450 million (after the payment of restructuring costs planned in 1994). In addition, the incentive compensation programs for the company's senior management in each business have been modified to include significant emphasis on the attainment of both "operational cash flow" as well as earnings objectives. The company expects to sustain at least $500 million in annual "operational cash flow" in the years ahead. The table that follows shows that "operational cash flow" increased to $954 million in 1994 from a level of $292 million in 1993. This increase enabled the company to reduce net debt by $742 million. The increase primarily reflects the increase in income and improved balance sheet management, including approximately $110 million in proceeds for the sale of certain lease receivables. The increase in the level in 1993 of $292 million from $207 million in 1992 is due to a variety of items including improvement in the collection of accounts receivable. 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" (in millions):
Brackets denote cash outflows 1994 1993 1992 ------------------------------------------------------- Cash flow provided by operations $1,316 $ 765 $ 742 Capital expenditures (502) (605) (640) Net interest after tax 116 115 113 Other 24 17 (8) ------------------------------------------------------- Total "operational cash flow" $ 954 $ 292 $ 207 =======================================================
The company's current assets exceeded current liabilities by $1.6 billion at December 31, 1994 versus an excess of $1.5 billion at December 31, 1993. Current assets at December 31, 1994, included receivables of $1.9 billion and inventories of $1.5 billion. 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. Inventory level changes from 1993 contributed to the improved balance sheet management and cash flow. 39 MANAGEMENT'S DISCUSSION AND ANALYSIS Capital expenditures for the three years ended December 31, 1994, are shown below (in millions):
Percent increase (decrease) 1994 1993 1992 1994 1993 ------------------------------------------------------------------------------------------------------ Medical specialties $289 $266 $259 9% 3% Medical/laboratory products and distribution 199 300 365 (34%) (18%) General corporate 14 39 16 (64%) 144% ------------------------------------------------------------------------------------------------------ Total capital expenditures $502 $605 $640 (17%) (5%) ======================================================================================================
Major capital projects in 1994 include expenditures in Singapore for a dialysis facility, renal HomeChoice(TM) 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 dialysis products in China. Capital expenditures in 1993 included the expansion of manufacturing capacity for renal products in Puerto Rico and Singapore, a recombinant manufacturing facility in Thousand Oaks, California, and expenditures for a distribution center in Waukegan, Illinois. As the table above illustrates, the shift of capital expenditures is consistent with the company's strategy to increase its investment in its higher- return medical specialties businesses. The company has made significant investments in recent years in its U.S. distribution and manufacturing capabilities and corporate infrastructure. As a consequence, the level of capital expenditures in the med/lab segment and general corporate capital expenditures has declined in 1994 versus 1993 and 1992 levels. The company expects to invest approximately $500 to $540 million in capital expenditures in 1995, primarily in the medical specialties segment. The acquisitions made by the company involved no significant change to the company's strategic direction, and were made for the purpose of acquiring technologies, broadening product lines or expanding market coverage. The proceeds received from the disposition of the diagnostics-products manufacturing and other non-strategic businesses have been used to reduce net debt. Additionally, $200 million related to the divestiture of the diagnostics manufacturing businesses was received in January 1995. Notes and other current receivables increased due to the $200 million in notes related to the proceeds which were received in January 1995 from the sale of the diagnostics manufacturing businesses as discussed earlier, the reclassification of insurance receivables to reflect payments expected to be received within one year offset by the sale of certain lease receivables. The decrease in long-term litigation liabilities is due primarily to the reclassifications to current liabilities of payments expected to be made within one year. There are agreements or ongoing negotiations with some insurance carriers for timely reimbursement of litigation settlements. Other reimbursements may lag the settlement payments. DEBT AND FINANCIAL INSTRUMENTS To meet its net financing requirements during the two years ended December 31, 1994, the company used short-term borrowings as required. For purposes of covenant compliance and rating agency reviews, the company's credit arrangements permit it to reduce its debt-to-capital ratio by a percentage of cash and equivalents. (Also see the accompanying Notes to Consolidated Financial Statements titled "Credit Facilities.") Net debt (after consideration of cash equivalents) declined to $2,401 million since the beginning of the year after paying $286 million in dividends. At December 31, 1994, the company's net-debt-to-net capital ratio was 39.2% versus 49.7% at year-end 1993, a decrease of 10.5 percentage points. This decrease resulted from the strong cash flow generated by the company during 1994. Net debt will be reduced further with the proceeds of $200 million received in January 1995 for the divestiture of the diagnostics manufacturing businesses. 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. Standard & Poor's and Duff & Phelps have indicated that continuation of these ratings in the future is dependent on Baxter's successful implementation of the 1993 restructuring program, reduction of its leverage and reduction in the uncertainty of the ultimate impact of product liability litigation. 40 BAXTER INTERNATIONAL At December 31, 1994, 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 interest-rate risk and reduce costs 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 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 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. For all years the company lowered its cost of floating rate debt by issuing long-term notes in 1992 and 1993 (that remain outstanding at December 31, 1994) and swapping (for the term of the notes through 2008) the fixed rate coupon to a floating rate that resulted in a lower cost than the company's then existing short-term borrowing rate. In 1993, the company entered into a currency swap to hedge its net investment in a foreign affiliate. Starting in October 1993 and continuing through 1994, 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, including hedging the rate of debt expected to be issued to refinance the notes that mature during 1995. Options are used to enable the company to benefit in future periods should short-term interest rates fall below certain levels. 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 both 1994 and 1993, except for the previously discussed $10 million gain related to the termination of an interest-rate hedging contract, the gains and losses resulting from interest-rate and foreign exchange hedging activities were not material. The company's board of directors had previously authorized the purchase of common stock to fund various employee-benefit plans and for other corporate purposes. Under this authorization, the company purchased approximately 1.8 million shares of common stock for $47 million in 1994. In February 1995, the board of directors authorized the purchase of up to $500 million of common stock, which replaced the prior authorization. Management expects to repurchase these shares over the next two years, while maintaining a net-debt-to-net- capital ratio in the 35% to 40% range. In connection with a newly implemented Shared Investment Plan, the company received $121 million in cash from 63 members of Baxter's senior management team who collectively purchased 4.7 million shares of the company's common stock. This plan more directly aligns 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. In February 1995, the board of directors declared the quarterly dividend on the company's common stock of 26.25 cents per share (annualized rate of $1.05 per share). The company intends to grow its dividends at a rate lower than its anticipated growth in earnings per share with a goal of a long-term dividend payout ratio of approximately 40% compared to the 1994 payout ratio of 48%. DIVIDENDS PER COMMON SHARE (in dollars) [BAR GRAPH APPEARS HERE] 1990 1991 1992 1993 1994 ---- ---- ---- ---- ----- 0.64 0.74 0.86 1.00 1.025 41 MANAGEMENT'S DISCUSSION AND ANALYSIS LITIGATION See the accompanying Notes to Consolidated Financial Statements titled "Legal Proceedings" for a detailed description of the company's litigation for the cases and claims from individuals seeking damages for injuries allegedly caused by silicone gel-filled mammary prostheses manufactured by a division of American Hospital Supply Corporation. That section 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. As of December 31, 1994, the company has been named as a potentially responsible party for cleanup costs at 15 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 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 "Legal Proceedings," 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 consolidated financial position. 42 MANAGEMENT'S RESPONSIBILITIES FOR FINANCIAL REPORTING The consolidated balance sheets of Baxter International Inc. and subsidiaries as of December 31, 1994 and 1993, 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, 1994, 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 over 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. The Corporate Responsibility Office also monitors compliance with the company's ethics through audit programs and review of 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. Independent certified public accountants perform 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, 1994, 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, 1994, the company maintained 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. Vernon R. Loucks Jr. Chairman and Chief Executive Officer /s/ Harry M. Jansen Kraemer, Jr. Harry M. Jansen Kraemer, Jr. Senior Vice President and Chief Financial Officer /s/ Brian P. Anderson Brian P. Anderson Controller 43 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, 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. Effective January 1, 1993, as discussed in the Income Taxes Note, the company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" and as discussed in the Retirement and Other Benefit Programs Note, the company also adopted Statement No. 112, "Employers Accounting for Postemployment Benefits." Additionally, as discussed in the Retirement and Other Benefit Programs Note, effective January 1, 1992, the company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Chicago, Illinois February 13, 1995 44 CONSOLIDATED BALANCE SHEETS
December 31 (in millions, except shares) 1994 1993 ---------------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and equivalents $ 471 $ 479 Accounts receivable, net of allowance for doubtful accounts of $39 in 1994 and $32 in 1993 1,543 1,594 Notes and other current receivables 373 82 Inventories 1,537 1,772 Short-term deferred income taxes 271 341 Prepaid expenses 145 154 ----------------------------------------------------------------------------- Total current assets 4,340 4,422 ---------------------------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND At cost 4,431 4,491 EQUIPMENT Accumulated depreciation and amortization (1,869) (1,836) ----------------------------------------------------------------------------- Net property, plant and equipment 2,562 2,655 ---------------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS Goodwill and other intangibles 2,290 2,490 Insurance receivables 446 509 Other 364 469 ----------------------------------------------------------------------------- Total other assets 3,100 3,468 ----------------------------------------------------------------------------- Total assets $10,002 $10,545 ================================================================================================================================== CURRENT LIABILITIES Notes payable to banks $ 131 $ 271 Current maturities of long-term debt and lease obligations 400 551 Accounts payable and accrued liabilities 1,834 1,783 Income taxes payable 401 328 ----------------------------------------------------------------------------- Total current liabilities 2,766 2,933 ---------------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT AND LEASE OBLIGATIONS 2,341 2,800 ---------------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEFERRED INCOME TAXES 167 201 ---------------------------------------------------------------------------------------------------------------------------------- LONG-TERM LITIGATION LIABILITIES 458 674 ---------------------------------------------------------------------------------------------------------------------------------- OTHER NON-CURRENT LIABILITIES 550 752 ---------------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $1 par value, authorized 350,000,000 shares, issued 287,701,247 shares in 1994 and 1993 288 288 Additional contributed capital 1,810 1,883 Retained earnings 1,762 1,452 Common stock in treasury, at cost, 5,391,092 shares in 1994 and 11,187,278 shares in 1993 (135) (350) Cumulative foreign currency adjustment (5) (88) ----------------------------------------------------------------------------- Total stockholders' equity 3,720 3,185 ----------------------------------------------------------------------------- Total liabilities and stockholders' equity $10,002 $10,545 ================================================================================================================================== See accompanying notes to consolidated financial statements.
45 CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31 (in millions, except per share data) 1994 1993 1992 -------------------------------------------------------------------------------------------------------- OPERATIONS Net sales $9,324 $8,879 $8,471 Costs and expenses Cost of goods sold 6,032 5,657 5,244 Marketing and administrative expenses 1,859 1,879 1,798 Research and development expenses 343 337 317 Restructuring charge -- 700 -- Special charge for litigation -- 330 -- Interest - net 193 192 187 Goodwill amortization 67 67 67 Other 29 47 105 ---------------------------------------------------------------------- Total costs and expenses 8,523 9,209 7,718 ---------------------------------------------------------------------- Income (loss) from continuing operations before income taxes and cumulative effect of accounting changes 801 (330) 753 Income tax expense (benefit) 205 (62) 192 ---------------------------------------------------------------------- Income (loss) from continuing operations before cumulative effect of accounting changes 596 (268) 561 Total discontinued operations -- -- 45 ---------------------------------------------------------------------- Income (loss) before cumulative effect of accounting changes 596 (268) 606 Cumulative effect of change in accounting for: Income taxes -- 81 -- Other postemployment/postretirement benefits, net of income tax benefits of $7 and $50 for 1993 and 1992, respectively -- (11) (165) ---------------------------------------------------------------------- Net income (loss) $ 596 $ (198) $ 441 ======================================================================================================== PER SHARE DATA Earnings (loss) per common share Continuing operations $ 2.13 $(0.97) $ 1.99 Total discontinued operations -- -- 0.16 Cumulative effect of change in accounting for: Income taxes -- 0.29 -- Other postemployment/postretirement benefits -- (0.04) (0.59) ---------------------------------------------------------------------- Net income (loss) $ 2.13 $(0.72) $ 1.56 ====================================================================== Average number of common shares and equivalents outstanding 280 277 279 ======================================================================================================== See accompanying notes to consolidated financial statements.
46 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31 (in millions) (Brackets denote cash outflows) 1994 1993 1992 --------------------------------------------------------------------------------------------------------------------- CASH FLOW PROVIDED BY Income (loss) from continuing operations $596 ($268) $561 CONTINUING OPERATIONS Adjustments Depreciation and amortization 524 494 447 Deferred income taxes 30 (172) 32 Asset dispositions, net (pretax) (21) (44) 21 Restructuring and special charge for litigation -- 925 -- Minority and equity interests, net of distributions 16 27 35 Other 12 24 13 Changes in balance sheet items Accounts receivable (5) (42) (171) Inventories 112 (167) (139) Accounts payable and accrued liabilities 54 61 63 Income taxes payable 58 4 (14) Restructuring program payments (106) (29) (63) Other 46 (48) (43) ---------------------------------------------------------------------------------------- Cash flow provided by continuing operations 1,316 765 742 --------------------------------------------------------------------------------------------------------------------- CASH FLOW PROVIDED BY DISCONTINUED OPERATIONS -- -- 21 --------------------------------------------------------------------------------------------------------------------- INVESTMENT TRANSACTIONS Capital expenditures (411) (516) (537) Additions to the pool of equipment leased or rented to customers (91) (89) (103) Acquisitions (net of cash received) and investments in affiliates (62) (120) (125) Proceeds from asset dispositions 159 70 39 ---------------------------------------------------------------------------------------- Investment transactions, net (405) (655) (726) --------------------------------------------------------------------------------------------------------------------- FINANCING TRANSACTIONS Issuances of debt and lease obligations 970 2,437 3,203 Redemption of debt and lease obligations (1,593) (2,021) (2,684) Increase (decrease) in debt with maturities of three months or less (151) 274 (215) Redemption of preferred stock -- -- (337) Common stock cash dividends (286) (278) (240) Preferred stock cash dividends -- -- (5) Stock issued under Shared Investment Plan 121 -- -- Stock issued under employee benefit plans 56 52 85 Purchase of treasury stock (47) (124) (123) ---------------------------------------------------------------------------------------- Financing transactions, net (930) 340 (316) --------------------------------------------------------------------------------------------------------------------- EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS 11 (3) 12 --------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS (8) 447 (267) CASH AND EQUIVALENTS AT BEGINNING OF YEAR 479 32 299 --------------------------------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS AT END OF YEAR $471 $479 $ 32 =====================================================================================================================
See accompanying notes to consolidated financial statements. 47 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31 (in millions) 1994 1993 1992 --------------------------------------------------------------------------------------------------------------------- ADJUSTABLE RATE Balance, beginning of year $ -- $ -- $ 339 PREFERRED STOCK Redemption of preferred stock -- -- (339) ---------------------------------------------------------------------------------------- Balance, end of year -- -- -- --------------------------------------------------------------------------------------------------------------------- COMMON STOCK Balance, beginning and end of year 288 288 288 --------------------------------------------------------------------------------------------------------------------- ADDITIONAL CONTRIBUTED Balance, beginning of year 1,883 1,889 1,859 CAPITAL Stock issued under Shared Investment Plan (44) -- -- Stock issued under employee benefit plans (29) (6) 30 ---------------------------------------------------------------------------------------- Balance, end of year 1,810 1,883 1,889 --------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance, beginning of year 1,452 1,928 2,083 Net income (loss) 596 (198) 441 Common stock cash dividends (286) (278) (240) Preferred stock cash dividends -- -- (5) Stock dividend of Caremark International Inc. -- -- (351) ---------------------------------------------------------------------------------------- Balance, end of year 1,762 1,452 1,928 --------------------------------------------------------------------------------------------------------------------- COMMON STOCK Balance, beginning of year (350) (281) (234) IN TREASURY Purchases (47) (124) (123) Stock issued under Shared Investment Plan 165 -- -- Stock issued under employee benefit plans 87 55 76 Stock issued for acquisition 10 -- -- ---------------------------------------------------------------------------------------- Balance, end of year (135) (350) (281) --------------------------------------------------------------------------------------------------------------------- CUMULATIVE FOREIGN Balance, beginning of year (88) (29) 38 CURRENCY ADJUSTMENT Currency fluctuations 83 (59) (67) ---------------------------------------------------------------------------------------- Balance, end of year (5) (88) (29) --------------------------------------------------------------------------------------------------------------------- Total stockholders' equity $3,720 $3,185 $3,795 =====================================================================================================================
See accompanying notes to consolidated financial statements. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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. Cash and equivalents Cash and equivalents include cash, cash investments and marketable securities with a maturity of three months or less. Cash payments for interest were $226 million in 1994, $217 million in 1993 and $193 million in 1992. Cash payments for income taxes related to continuing operations in 1994, 1993 and 1992 were $127, $79 and $157 million, respectively. Inventories 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. Inventories consisted of the following at December 31 (in millions):
1994 1993 ----------------------------------- Raw materials $ 219 $ 238 Work in process 191 221 Finished products 1,127 1,313 ----------------------------------- Total inventories $1,537 $1,772 ===================================
Property, plant and equipment Property, plant and equipment are stated at cost. Depreciation and amortization are provided for financial reporting purposes principally on the straight-line method over the estimated useful lives of the assets or, for leasehold improvements, over the terms of the related facility leases, if shorter. Straight-line and accelerated methods of depreciation are used for income tax purposes. Property, plant and equipment consisted of the following at December 31 (in millions):
1994 1993 ----------------------------------------------------------------- Land $ 187 $ 203 Buildings and leasehold improvements 1,049 1,051 Machinery and equipment 2,539 2,508 Equipment leased or rented to customers 365 390 Construction in progress 291 339 ----------------------------------------------------------------- Total property, plant and equipment, at cost 4,431 4,491 Accumulated depreciation and amortization (1,869) (1,836) ----------------------------------------------------------------- Net property, plant and equipment $ 2,562 $ 2,655 =================================================================
Depreciation expense was $381, $362 and $323 million in 1994, 1993 and 1992, respectively. Repairs and maintenance expense was $104 million in 1994, $111 million in 1993 and $115 million in 1992. 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 upon management's assessment of the future undiscounted operating cash flows of acquired businesses, the carrying value of goodwill at December 31, 1994, has not been impaired. As of December 31, 1994 and 1993, goodwill was $1,990 million and $2,098 million, respectively, net of accumulated amortization of $587 million and $538 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, 1994 and 1993, other intangibles were $300 million and $392 million, respectively, net of accumulated amortization of $256 million and $226 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 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 and foreign exchange contracts that do not qualify for hedge accounting treatment are recognized as other income or expense. Reclassifications Certain immaterial reclassifications have been made to conform the 1993 and 1992 financial statements to the 1994 presentation. RESTRUCTURING CHARGE 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 make the company's domestic medical/laboratory products and distribution segment more efficient and more responsive in addressing the changes occurring in the U.S. health-care system and accelerate growth of its medical specialties businesses worldwide. The company recorded a $700 million pretax provision to cover costs associated with these restructuring initiatives. The following table summarizes major components of the company's restructuring charge, use of restructuring reserves through December 31, 1994, and the remaining restructuring reserves at December 31, 1994, (in millions):
Major cost categories ----------------------------------------- Write-down Employee- of assets to Other related costs be sold costs Total -------------------------------------------------------------------- Total restructuring charge $295 $289 $116 $700 Less reserves utilized through Dec. 31, 1994: Cash 58 -- 66 124 Noncash -- 206 -- 206 -------------------------------------------------------------------- Reserves as of Dec. 31, 1994 $237 $ 83 $ 50 $370 ====================================================================
Employee-related costs include provisions for severance, outplacement assistance, relocation and retention payments. Since the inception of the restructuring program, the company has eliminated approximately 2,300 of the approximately 4,500 positions affected by the program. The majority of the remaining reductions will occur in 1995 and 1996 as facility closures and consolidations are completed as planned. Since the announcement of the restructuring program, the company has implemented, or is in the process of implementing, all of the major strategic actions associated with the restructuring program and is satisfied that such programs are progressing on schedule and that the overall restructuring program will meet established financial targets. As part of the restructuring, the company announced its intent to divest its diagnostics manufacturing businesses and established a valuation allowance as a component of the 1993 restructuring charge. In December 1994, the company completed the divestiture of these businesses and received net proceeds of approximately $44 million in cash, $200 million in installment notes (which were collected in cash during January 1995) and $40 million in face value of preferred stock. In addition, Baxter retained accounts receivable of approximately $85 million, which will be collected from customers by Baxter in the normal course of business. Baxter has retained the rights to distribute all current diagnostics products in the U.S. The transaction was completed substantially in accordance with the company's valuation estimates, and therefore, no gain or loss was recognized on the sale. 50 BAXTER INTERNATIONAL ACQUISITIONS, INVESTMENTS IN AFFILIATES, DIVESTITURES AND DISCONTINUED OPERATIONS The company invested $18 million in 1994, $104 million in 1993 and $113 million in 1992 for acquisitions accounted for as purchase transactions and investments in affiliated companies. The company also issued $10 million in common stock in 1994 for one acquisition. Had these transactions taken place on January 1, consolidated results in the year of acquisition would not have been materially different from reported results. The acquisitions involved no significant change to the company's strategic direction. They 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, $16 million in 1993 and $12 million in 1992. The company disposed of or discontinued several minor non-strategic or unprofitable business units and investments which resulted in a net gain of $14 million (net of $7 million related tax expense) in 1994, as compared to net gains of $27 million (net of $17 million related tax expense) in 1993 and net losses of $16 million (net of related tax benefits of $5 million) in 1992. The majority of these transactions resulted in the disposition of the company's entire interest in such businesses. The aggregate net sales proceeds for such dispositions were $115 million in 1994, $70 million in 1993 and $30 million in 1992. Additionally, the company received net proceeds of $44 million in 1994 related to the divestiture of the diagnostics manufacturing businesses discussed previously. On October 28, 1992, the board of directors of Baxter declared a dividend to the company's common stockholders of all the common stock of Caremark International Inc. ("Caremark," formerly a wholly-owned subsidiary of Baxter). This dividend was distributed to holders of record on November 30, 1992. The primary purpose for the stock dividend was to eliminate a developing strategic competitive conflict between the customers of Baxter's hospital business and Caremark's alternate site health-care businesses. The company reported income from discontinued operations of $63 million (net of taxes of $31 million) or 22 cents per share offset by costs associated with effecting the business discontinuance of $18 million (net of a tax benefit of $6 million) or costs of 6 cents per share in 1992. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consisted of the following at December 31 (in millions):
1994 1993 -------------------------------------------------------------- Accounts payable, principally trade $ 701 $ 738 Employee compensation and withholdings 272 339 Restructuring and merger consolidation costs 100 237 Litigation 240 62 Pension and other deferred benefits 81 64 Property, payroll and other taxes 84 93 Other 356 250 -------------------------------------------------------------- Accounts payable and accrued liabilities $1,834 $1,783 ==============================================================
CREDIT FACILITIES At December 31, 1994, Baxter's revolving credit facilities enabled the company to borrow funds on an unsecured basis at variable interest rates. The banks participating in these facilities are committed to maintain a $953 million five- year facility which expires in August 1999 and a $477 million facility which expires in July 1995. The agreements contain convenants which include a maximum debt-to-capital ratio (as defined) and a minimum interest coverage ratio. At December 31, 1994, there were no borrowings outstanding under these facilities. Baxter also maintains other short-term credit arrangements totaling approximately $900 million in support of international and domestic operations. At December 31, 1994, approximately $176 million of borrowings were outstanding under these facilities, of which $45 million is classified as long-term debt. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS LONG-TERM DEBT AND LEASE OBLIGATIONS Long-term debt and lease obligations consisted of the following at December 31 (in millions):
Effective interest rate 1994 1993 ----------------------------------------------------------------- Commercial paper 6.0% $ 314 $ 833 ----------------------------------------------------------------- Short-term notes 6.0% 728 467 ----------------------------------------------------------------- Notes due 1995 6.5% 299 297 ----------------------------------------------------------------- 9-1/4% notes due 1996 9.7% 149 148 ----------------------------------------------------------------- 7-1/2% notes due 1997 7.2% 201 202 ----------------------------------------------------------------- Notes redeemable by holders/callable by company in 1998 9.7% 185 199 ----------------------------------------------------------------- 9-1/4% notes due 1999 10.2% 97 96 ----------------------------------------------------------------- Zero coupon notes due 2000 10.7% 79 74 ----------------------------------------------------------------- Swapped notes due 1997, 2002 and 2008 6.2% 387 418 ----------------------------------------------------------------- Industrial development obligations, due 1995 through 2013 8.5% 71 74 ----------------------------------------------------------------- Notes and capitalized lease obligations due 1995 through 2020 7.7% 231 543 ----------------------------------------------------------------- Total long-term debt and lease obligations 2,741 3,351 Current portion (400) (551) ----------------------------------------------------------------- Long-term portion $2,341 $2,800 =================================================================
At December 31, 1994 and 1993, commercial paper and certain short-term notes together totaling $953 million and $1 billion 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 and $300 million as of December 31, 1994 and 1993, have been included in current maturities as they were supported by short-term credit facilities. The company had unamortized original issue discounts of $66 million for the Zero coupon notes due in 2000. 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 $128 million in 1994, $132 million in 1993 and $128 million in 1992. Future minimum lease payments (including interest) under capital and noncancelable operating leases and aggregate debt maturities at December 31, 1994, were as follows (in millions):
Aggregate debt maturities Operating and capital leases leases ---------------------------------------------------------- 1995 $ 88 $ 402 1996 61 208 1997 37 228 1998 27 102 1999 19 1,056 Thereafter 76 821 ---------------------------------------------------------- Total obligations and commitments $308 2,817 ========================================== Amounts representing interest, discounts, premiums and deferred financing costs 76 ---------------------------------------------------------- Present value of long-term debt and lease obligations $2,741 ==========================================================
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 forward contracts, options and interest-rate swaps from one to fifteen 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 company does not hold or issue financial instruments for trading purposes. The book values of debt at December 31, 1994, reflect deferred hedge gains of $7 million offset by $7 million of deferred hedge losses. 52 BAXTER INTERNATIONAL The notional amounts of derivatives summarized below are used to calculate amounts exchanged in future periods relating to interest rates, foreign exchange rates or other indices. While the company is exposed to credit-related losses equal to the market value of the derivative 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 risk management The company's types of interest-rate contracts, their market value gain (loss) on termination, and their weighted-average interest rates as of December 31 consisted of the following (in millions):
1994 1993 ------------------------------------------------------------------------------------------------------------------------------- Weighted- Weighted- Notional Market value average Notional Market value average amounts credit exposure interest rate amounts credit exposure interest rate ------------------------------------------------------------------------------------------------------------------------------- Floating to fixed rate hedges $950 $ 57 $300 $ 9 Average pay rate 5.8% 4.5% Average receive rate 6.2% 3.4% Fixed to floating rate (swapped notes) 395 (31) 405 22 Average pay rate 6.2% 3.4% Average receive rate 7.3% 7.3% Options 425 13 350 (5) Hedges of anticipated transactions 300 30 300 7 ===============================================================================================================================
Options principally consisted, in 1993, of swaptions which expired in 1994, and in 1994 of caps and floors that will lower the cost of associated debt if floating rates fall below 7.5% during the periods from 1996 through 2005. Hedges of anticipated transactions consisted of forward starting swaps hedging the debt expected to be issued upon the maturity of the company's notes in 1995 at a fixed rate of approximately 7%. Foreign exchange risk management The company enters into various types of foreign exchange contracts in managing its foreign exchange risk including their market gain (loss) on termination, as indicated in the following table at December 31 (in millions):
1994 1993 ------------------------------------------------------------------------------------------------------ Notional Market value Notional Market value amounts credit exposure amounts credit exposure ------------------------------------------------------------------------------------------------------ Foreign exchange contracts $462 $(40) $191 $(8) ======================================================================================================
The corporation enters into forward exchange contracts and options to hedge anticipated but not yet committed sales expected to be denominated in foreign currencies. The term of these currency derivatives are less than two years. The purpose of the company's foreign currency hedging activities is designed to protect the company from the risk that the eventual dollar net cash inflows resulting from the sale of products to foreign customers, 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 ten years, to hedge its net investments in foreign affiliates. The company principally hedges the following currencies: Japanese Yen, Belgian Franc, Canadian Dollar and French Franc. Deferred realized and unrealized gains and losses from hedging anticipated but not yet committed sales and purchase transactions are not material to the company. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair values of financial instruments 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 assets and liabilities of the company also include the following categories of financial instruments as of December 31 (in millions):
Carrying amounts Approximate fair values ----------------------------------------------------------------------------------------------- 1994 1993 1994 1993 ---------------------------------------------------------------------------------------------- Assets Long-term insurance receivables $ 446 $ 509 $ 248 $ 222 Investment in affiliates 163 180 235 180 Liabilities Notes payable to banks 131 271 131 271 Short-term borrowings classified as long-term 1,042 1,300 1,042 1,300 Other long-term debt and lease obligations 1,699 2,051 1,694 2,206 Interest rate and foreign exchange hedges N/A N/A (29) (25) Long-term litigation liabilities 458 674 254 384 ==============================================================================================
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 litigation liabilities were computed by discounting the expected cash flows based on currently available information. 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 earlier redeemed. 54 BAXTER INTERNATIONAL Adjustable rate preferred stock On April 1, 1992, the company redeemed all 6,771,408 outstanding shares of its adjustable rate preferred stock, no par value, $50 liquidation value, for a redemption price of $50 per share together with the regular quarterly dividend of 78.75 cents per share. No shares of this security may be issued in the future. COMMON STOCK In connection with a newly implemented Shared Investment Plan, 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 obligation of the participants. Baxter has agreed to guarantee repayment to the banks in the event of default by a participant. All common stock prices and outstanding shares for unfulfilled employee benefit plan obligations were, as of November 30, 1992, equitably adjusted to maintain the value of the benefits by taking into consideration the market price of Baxter stock before and after the Caremark distribution. The following tables reflect this adjustment. 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 20 shares. Stock purchase plan transactions for the three years ended December 31, 1994, are summarized below:
Shares subscribed 1994 1993 1992 ----------------------------------------------------------------------- Beginning of year 2,496,703 1,704,735 1,726,738 Subscriptions 1,968,058 3,303,465 1,993,581 Equitable adjustment -- -- 479,477 Purchases (1,881,757) (1,592,102) (1,488,925) Cancellations (532,034) (919,395) (1,006,136) ----------------------------------------------------------------------- End of year 2,050,970 2,496,703 1,704,735 ----------------------------------------------------------------------- Subscription price per share outstanding, end of year $17.21-$31.19 $17.21-$32.78 $19.59-$32.78 =======================================================================
At December 31, 1994, approximately 6,400 of approximately 32,000 eligible employees in the U.S. and Canada and approximately 900 of approximately 12,000 other eligible employees were participating in the plans. Expiration dates for these subscriptions run from 1995 to 1997. The weighted average subscription price approximated $20.87 for U.S. and Canadian employees and $20.21 for other employees at December 31, 1994. 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. Stock option transactions for employees and directors for the three years ended December 31, 1994, are summarized below:
Option shares outstanding 1994 1993 1992 ---------------------------------------------------------------------- Beginning of year 11,225,565 8,887,657 9,125,182 Granted 2,777,182 3,496,709 2,166,200 Equitable adjustment -- -- 555,223 Exercised (471,837) (466,105) (1,590,324) Cancelled/Expired (1,162,590) (692,696) (1,368,624) ---------------------------------------------------------------------- End of year 12,368,320 11,225,565 8,887,657 ====================================================================== Option price per share Exercised $ 8.35-$26.00 $10.32-$24.36 $8.74-$35.75 Outstanding, end of year $13.07-$36.66 $ 8.35-$36.66 $8.35-$36.66 ======================================================================
As of December 31, 1994, options were held by approximately 6,500 employees, of which 7,225,525 shares were exercisable. Expiration dates for these options range from 1995 to 2004. The weighted average option price approximated $27.83 at December 31, 1994. 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 1 million shares of common stock at $33.75 per share was granted on December 2, 1992, and expires in 2002. The Baxter Foundation sold its option to purchase 250,000 shares of common stock, exercisable at $18.1875 per share, to an unrelated not-for-profit organization, which then exercised the option during 1992. 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Restricted stock transactions for the three years ended December 31, 1994, are summarized below:
Restricted stock outstanding 1994 1993 1992 ------------------------------------------------------ Beginning of year 1,466,200 2,052,777 2,336,023 Granted 508,320 5,400 858,211 Vested (free of restrictions) (169,709) (313,353) (904,488) Cancelled (232,970) (278,624) (236,969) ------------------------------------------------------ End of year 1,571,841 1,466,200 2,052,777 ======================================================
At December 31, 1994, 158,340 shares were subject to restrictions which lapse between 1995 and 1998, and 1,413,501 shares were subject to restrictions that lapse upon achievement of future performance objectives. Performance share transactions for the three years ended December 31, 1994, are summarized below:
Performance shares outstanding 1994 1993 1992 ---------------------------------------------------- Beginning of the year 49,547 57,736 57,736 Granted/awarded 12,000 12,000 12,000 Issued (20,001) (20,189) (12,000) Cancelled (875) -- -- ---------------------------------------------------- End of year 40,671 49,547 57,736 ====================================================
The company's board of directors had previously authorized the purchase of common stock to fund various employee-benefit plans and for other corporate purposes. The company purchased 1.8 million shares of common stock for $47 million in 1994 under this authorization. In February 1995, the board of directors authorized the purchase of up to $500 million of common stock, which replaced the prior authorization. At December 31, 1994, the company's common stock was reserved for issuance as follows: -------------------------------------------------------- Acquisitions 986,525 Stock purchase plans 4,585,012 Management incentive compensation programs 21,744,305 Other 2,047,000 -------------------------------------------------------- Total shares reserved 29,362,842 ========================================================
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 1994 pension expense was 7.5% and the assumed long-term rate of return on assets was 10.5% for the U.S. and Puerto Rico plans. These rates averaged 7.4% and 8.0% respectively, for the international plans. Pension expense includes the following components (in millions):
1994 1993 1992 ---------------------------------------------------------------------------- Service cost-benefits earned during the period $ 51 $ 50 $ 42 Interest cost on projected benefit obligation 74 72 63 Actual return on assets (70) (67) (50) Net amortization and deferral 10 21 7 ---------------------------------------------------------------------------- Total pension expense $ 65 $ 76 $ 62 ============================================================================
Assumptions used in determining the funded status of these plans as of December 31, 1994 and 1993, were:
December 31, 1994 1993 ------------------------------------------------------------------------------ Annual rate of increase in compensation levels: U.S. plans 4.5% 4.5% Puerto Rico plan 4.0% 4.0% International plans (average) 4.8% 4.6% Discount rate applied to benefit obligations: U.S. plans 9.0% 7.5% Puerto Rico plan 9.0% 7.5% International plans (average) 7.4% 7.7% Return on assets: U.S. plans 9.5% 10.5% Puerto Rico plan 9.5% 10.5% International plans (average) 8.0% 8.4% ==============================================================================
56 BAXTER INTERNATIONAL The following table sets forth the funded status and amount included in the consolidated balance sheets at December 31, 1994 and 1993, (in millions):
Plans whose Plans whose accumulated assets exceed benefits exceed accumulated assets benefits ------------------------------------------------------------------------------- December 31, December 31, 1994 1993 1994 1993 ------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefits $56 $789 $683 $ 46 ------------------------------------------------------------------------------- Accumulated benefits $59 $817 $702 $ 48 ------------------------------------------------------------------------------- Projected benefits $80 $924 $782 $ 61 Less plan assets at fair value 13 675 761 73 ------------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets 67 249 21 (12) Unrecognized net gains and unrecognized prior service cost 8 (100) 17 (4) Unrecognized obligation at January 1, net of amortization (7) (59) (37) 4 Additional minimum liability -- 62 -- -- ------------------------------------------------------------------------------- Net pension liability (asset) $68 $152 $ 1 $(12) ===============================================================================
The company also offers non-qualified supplemental retirement benefits to certain individuals. The liability for these benefits was $9 million and $6 million at December 31, 1994 and 1993, 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 1994 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 $27 million in 1994, $28 million in 1993 and $27 million in 1992. In addition to pension benefits, the company sponsors certain contributory health-care and life insurance benefits for substantially all domestic retired employees. Effective January 1, 1992, the company adopted FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" which requires companies to accrue costs for postretirement benefits over the service years of employees. The company recorded the transition obligation as a cumulative effect of an accounting change for $165 million (net of $50 million in related income tax benefits). Net postretirement health-care and life insurance expense includes the following components (in millions):
1994 1993 ----------------------------------------------------------------------------- Service cost-benefits earned during the period $ 5 $ 7 Interest cost on projected benefit obligation 16 16 Net amortization and deferral (1) -- ----------------------------------------------------------------------------- Net postretirement benefits cost $20 $23 =============================================================================
Assumptions used in determining the net postretirement benefits cost in 1994 and 1993 were:
1994 1993 ----------------------------------------------------------------------------- Discount rate 7.5% 8% Annual rate of increase in the per capita cost 13% 14% Rate to decrease to 5% 6% by the year ended 2002 2002 =============================================================================
The postretirement benefit plans are not funded. The present value of the company's obligation included in the consolidated balance sheets at December 31, 1994 and 1993, is as follows (in millions):
December 31, 1994 1993 ----------------------------------------------------------------------------- Accumulated postretirement benefit obligation ("APBO"): Retirees $118 $112 Fully eligible active participants 6 11 Other active participants 61 85 Unrecognized net gains 73 45 ----------------------------------------------------------------------------- Accrued postretirement benefit liability $258 $253 =============================================================================
Assumptions used in determining the APBO at December 31, 1994 and 1993, were:
December 31, 1994 1993 ----------------------------------------------------------------------------- Discount rate applied to APBO 9.0% 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 Increase if health-care trend rates increase by 1% in each year (in $ millions) APBO $29 $30 Expense $ 3 $ 3 =============================================================================
57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $35 million and $29 million at December 31, 1994 and 1993, respectively. INTEREST AND OTHER NON-OPERATING EXPENSES For the three years ended December 31, 1994, the components of interest-net and other non-operating expenses (income) are as follows (in millions):
1994 1993 1992 --------------------------------------------------------------- Interest-net Interest costs $242 $232 $221 Interest costs capitalized (5) (10) (10) --------------------------------------------------------------- Interest expense 237 222 211 Interest income (44) (30) (24) --------------------------------------------------------------- Total interest-net $193 $192 $187 =============================================================== Other expenses (income) Equity in losses of affiliates $ 18 $ 25 $ 32 Asset dispositions, net (21) (44) 21 Minority interests 9 11 13 Foreign exchange 17 28 26 Termination of interest-rate hedging contracts (10) -- -- Settlement of anti-boycott investigations -- 8 -- Other 16 19 13 --------------------------------------------------------------- Total non-operating expenses $ 29 $ 47 $105 ===============================================================
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 (in millions):
1994 1993 1992 --------------------------------------------------------------- U.S. $327 $(585) $390 International 474 255 363 --------------------------------------------------------------- Income (loss) from continuing operations before income tax expense $801 $(330) $753 ===============================================================
Income tax expense (benefit) related to continuing operations and before cumulative effect of accounting changes by category and by income statement classification is as follows (in millions):
1994 1993 1992 --------------------------------------------------------------- Current U.S. Federal $ 38 $ 15 $ 55 State and local 40 35 55 International 97 60 50 --------------------------------------------------------------- Current income tax expense 175 110 160 --------------------------------------------------------------- Deferred U.S. Federal 18 (137) 4 State and local 10 (24) 4 International 2 (11) 24 --------------------------------------------------------------- Deferred income tax expense (benefit) 30 (172) 32 --------------------------------------------------------------- Income tax expense (benefit) $205 $(62) $192 ===============================================================
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 58 BAXTER INTERNATIONAL change. The components of deferred tax assets and liabilities are as follows (in millions):
December 31, January 1, 1994 1993 1993 ---------------------------------------------------------------------------- Deferred tax assets Accrued expenses $247 $ 302 $237 Accrued postretirement benefits 91 90 82 Merger and restructuring costs 148 262 46 Alternative minimum tax credit 77 75 73 Tax credits and net operating losses 26 24 16 Valuation allowances (43) (37) (23) ---------------------------------------------------------------------------- Total deferred tax assets 546 716 431 ---------------------------------------------------------------------------- Deferred tax liabilities Asset basis differences 295 337 317 Subsidiaries' unremitted earnings 132 195 87 Other 12 47 81 ---------------------------------------------------------------------------- Total deferred tax liabilities 439 579 485 ---------------------------------------------------------------------------- Net deferred tax assets (liabilities) $107 $137 $(54) ============================================================================
Prior to 1993, deferred income taxes were provided under the accounting rules then in effect. The components of the deferred income tax provisions were (in millions):
1992 ----------------------------------------------------- Accelerated depreciation and amortization $15 Restructuring costs 27 Alternative minimum tax (2) Asset dispositions (3) Accrued expenses (16) Other timing differences 11 ----------------------------------------------------- Deferred income tax expense $32 =====================================================
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 (in millions):
1994 1993 1992 -------------------------------------------------------- Income tax expense (benefit) at statutory rate $ 280 $(116) $ 256 Tax-exempt operations (129) (128) (123) Unremitted foreign earnings -- 151 -- Nondeductible goodwill 23 30 22 State and local taxes 15 (18) 12 Tax credit carryforwards -- -- 12 Foreign tax expense 7 20 8 Other factors 9 (1) 5 -------------------------------------------------------- Income tax expense (benefit) $ 205 $ (62) $ 192 ========================================================
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 $173 million as of December 31, 1994. A federal 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. for restructuring costs. LEGAL PROCEEDINGS During 1993, the company recorded a special charge for major litigation settlements and minimum liability exposures, and recorded significant estimated insurance recoveries with respect to these liabilities. The net results of the charges and recoveries are as follows (in millions):
Estimated Gross litigation insurance Net litigation charge recoveries charge ---------------------------------------------------------------------- Mammary implant product liabilities $556 $426 $130 HIV/hemophilia product liabilities 131 83 48 Patent infringement settlement 105 -- 105 Legal fees and other 47 -- 47 ---------------------------------------------------------------------- Total $839 $509 $330 ======================================================================
59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 1994, the company was a defendant, together with other defendants, in 6,235 lawsuits and had 1,757 pending claims from individuals, all of which seek damages for injuries allegedly caused by silicone mammary prostheses ("mammary implants") manufactured by the American Heyer-Schulte division of American. The comparable number of cases and claims was 4,870 as of December 31, 1993. In 1994, 311 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)). The company has been named in several other similar certified or purported class actions. 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. N.Y., 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 is 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. Two of the company's claims-made insurers have tendered the full amounts of their policies to the company and a third has tendered the full amounts of its policy on a prorata basis as claims are paid. Additionally, the company received certain funds in settlement of claims pending against a carrier in liquidation. The total amount tendered is $85 million. Also, 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. Representatives of the plaintiffs and certain defendants in these cases have negotiated a global settlement of the issues under the jurisdiction of the Court in the Dante v. Dow Corning, et al. case (now known as Lindsay, et al., v. Dow Corning, et al.). The monetary provisions of the settlement providing compensation for all present and future plaintiffs and claimants 60 BAXTER INTERNATIONAL based on a series of specific funds and scheduled medical conditions have been agreed upon by most of the significant defendants and representatives of the plaintiffs. The total of all of the specific funds, that would be paid-in and made available over approximately thirty years following final approval of the settlement by the courts, is capped at $4.75 billion. The settling defendants have agreed to fund $4.255 billion of this amount. The company's share of this settlement has been established by the settlement negotiations at $556 million. Appeals have been filed challenging the global settlement. The global settlement gave individual plaintiffs and claimants the opportunity to elect to remove themselves from the settlement ("opt-out"). The initial opt- out period ended July 1, 1994. As of January 1995, approximately 11,360 individuals have opted out of the global settlement, of which 3,757 allege claims against Baxter. Of the opt-outs who filed claims against Baxter, 2,101 represent U.S. claimants, 1,656 represent foreign claimants. The number of opt- outs against Baxter will change as some claimants elect to rescind their opt-out notice, others are found to not have valid claims against Baxter, and others are identified as having claims against Baxter. In December 1994, and January 1995, over 1,600 opt-out claimants asserting a claim against Baxter rescinded their opt-out notices and returned to the global settlement. 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. At present, the company is not able to estimate the nature and extent of its potential future liability with respect to opt-outs. The company believes that most of its potential future liability with respect to opt-outs is covered by insurance. The company intends to continue to litigate pending mammary implant cases. 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. The reserves for the settlement do not include any provisions for opt-outs. Upon resolution of any of the uncertainties concerning these cases, the company will 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 31, 1994, the company was a defendant, together with other defendants, in 246 lawsuits, and had one pending claim, in the United States and Canada involving individuals who have hemophilia, or their representatives. Those cases and the claim 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. Furthermore, 57 lawsuits seeking damages based on similar allegations are pending in Ireland and Japan. 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). The court has certified the class only for the purpose of determining whether the defendants' actions were negligent. Baxter has also been named in three other purported class actions, none of which have been certified and all of which have been transferred to the MDL for discovery purposes. 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 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 product was used. The company denies these allegations and has filed a challenge to the class proceedings. 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 (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. 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 tender, notice, and the like under the policies. 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 and Zurich and Columbia Casualty Company for failure to indemnify it. Subsequently, the company's excess liability insurance carriers also brought suit for a declaratory judgment as to the parties' respective liabilities. The suit filed by Zurich has been stayed pending resolution of the company's case against Zurich and its excess carriers. Zurich has appealed that stay. 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. 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. Upon resolution of any of the uncertainties concerning these cases, or if the company, along with the other defendants, enters into a comprehensive settlement of the 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 this litigation will not have a material adverse effect on the company's consolidated financial position. On February 21, 1994, the company began the voluntary withdrawal world-wide of its Gammagard(R) IGIV (intravenous immune globulin) because of indications that it might be implicated in Hepatitis C infections occurring in users of the product. Gammagard is a concentration of antibodies derived from human plasma and is used to treat immune-suppressed patients. A new immune globulin product, Gammagard(R) 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, 1994, the company had received reports of Hepatitis C transmission from 219 patients. The exact cause for these reports has not been determined; however, all 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(R) IGIV produced from the second generation screened plasma is not yet known, nor is the number of patients claiming exposure to Hepatitis C known. 62 BAXTER INTERNATIONAL As of December 31, 1994, 14 suits resulting from this incident have been served on the company. Two suits have been filed as purported class actions, Lowe v. Baxter, U.S.D.C., W.D. KY, C94-0125, and Mock v. Baxter, U.S.D.C., ID, CIV-94-0524-S-LMV. The suits allege infection with the Hepatitis C virus from the use of Gammagard(R). The company is defending these cases. At this time the company cannot estimate its level of exposure to claims or lawsuits stemming from the market withdrawal. The company does not, however, at this time expect the exposure to have a material adverse effect on the company's operations or its consolidated financial condition. At the start of 1993, the company was a defendant in patent litigation brought by Scripps Clinic and Research Foundation ("Scripps") and Rhone-Poulenc Rorer, Inc. (formerly Rorer Group, Inc.) ("Rorer") in which the plaintiffs alleged that the company's monoclonal anti-hemophilic Factor VIII and its Recombinate(TM) Factor VIII infringed a patent. The company entered into a worldwide settlement of the litigation with Scripps and Rorer. The settlement agreement required Baxter to pay $105 million to Rorer to settle claims relating to certain anti- hemophilic Factor VIII products. As of December 31, 1994, the company has been named as a potentially responsible party for cleanup costs at 15 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 has been reserved 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 reserved 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. SEGMENT INFORMATION Industry Segments Baxter is a world leader in global manufacturing and distribution of health-care products and services for use in hospitals and other health-care and industrial settings. It offers a broad array of products and services. The company's operations are reported in the following two industry segments: Medical specialties Baxter develops, manufactures and markets on a global basis highly specialized medical products for treating kidney and heart disease and blood disorders and for collecting and processing blood. These products include 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 distribution, marketing, and administrative infrastructure. The company's International Hospital unit, which manufactures and distributes intravenous solutions and other medical products outside the United States is also included in this segment because it shares facilities, resources and customers with the other medical specialty businesses in several locations worldwide. Medical/laboratory products and distribution Baxter manufactures medical and laboratory supplies and equipment, including intravenous solutions and pumps, surgical instruments and procedure kits, and a range of disposable and reusable medical products. These self-manufactured products, as well as a significant volume of third-party manufactured medical products, are primarily distributed through the company's extensive distribution system to U.S. hospitals, alternate-site care facilities, medical laboratories, and industrial and educational facilities. 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Financial information by industry segments for the three years ended December 31, 1994, is summarized as follows (in millions):
Medical/ laboratory General Medical products and corporate Interest- 1994 specialties distribution and other net Total ---------------------------------------------------------------------------------------------------------------------- Net sales $3,557 5,767 -- -- $ 9,324 Pretax income (loss) $ 621 474 (101) (193) $ 801 Identifiable assets $3,212 4,091 2,699 -- $10,002 Capital expenditures $ 289 199 14 -- $ 502 Depreciation and amortization $ 176 295 53 -- $ 524 ====================================================================================================================== 1993 ---------------------------------------------------------------------------------------------------------------------- Net sales $3,250 5,629 -- -- $ 8,879 Pretax income (loss) before restructuring and litigation charges $ 605 422 (135) (192) $ 700 Restructuring and litigation charges $ (253) (550) (227) -- $(1,030) ---------------------------------------------------------------------------------------------------------------------- Pretax income (loss) $ 352 (128) (362) (192) $ (330) Identifiable assets $2,946 4,788 2,811 -- $10,545 Capital expenditures $ 266 300 39 -- $ 605 Depreciation and amortization $ 170 253 71 -- $ 494 ====================================================================================================================== 1992 ---------------------------------------------------------------------------------------------------------------------- Net sales $3,096 5,375 -- -- $ 8,471 Pretax income (loss) $ 556 512 (128) (187) $ 753 Identifiable assets $2,783 4,589 1,783 -- $ 9,155 Capital expenditures $ 259 365 16 -- $ 640 Depreciation and amortization $ 150 226 71 -- $ 447 =====================================================================================================================
64 BAXTER INTERNATIONAL Geographic Segments Financial information by geographic area for the three years ended December 31, 1994, is summarized as follows (in millions):
General Other corporate and Inter-area 1994 United States Europe international interest-net eliminations Total ---------------------------------------------------------------------------------------------------------------------------------- Trade sales $6,831 1,245 1,248 -- -- $ 9,324 Inter-area sales $ 605 129 331 -- (1,065) -- ---------------------------------------------------------------------------------------------------------------------------------- Total sales $7,436 1,374 1,579 -- (1,065) $ 9,324 Pretax income $ 453 251 393 (294) (2) $ 801 Identifiable assets $5,497 1,030 920 2,699 (144) $10,002 ================================================================================================================================== 1993 Trade sales $6,581 1,177 1,121 -- -- $ 8,879 Inter-area sales $ 524 107 329 -- (960) -- ---------------------------------------------------------------------------------------------------------------------------------- Total sales $7,105 1,284 1,450 -- (960) $ 8,879 Pretax income (loss) $ (211) 190 253 (554) (8) $ (330) Identifiable assets $5,925 1,045 884 2,811 (120) $10,545 ================================================================================================================================== 1992 Trade sales $6,215 1,227 1,029 -- -- $ 8,471 Inter-area sales $ 559 86 278 -- (923) -- ---------------------------------------------------------------------------------------------------------------------------------- Total sales $6,774 1,313 1,307 -- (923) $ 8,471 Pretax income $ 504 260 311 (315) (7) $ 753 Identifiable assets $5,570 1,094 813 1,783 (105) $ 9,155 ==================================================================================================================================
Inter-area transactions are accounted for using arm's-length principles. Identifiable assets are those assets associated with a specific industry segment or geographic area. General corporate assets consist primarily of cash and equivalents, the corporate headquarters facility and various other investments and assets that are not specific to an industry segment or geographic area. Goodwill and amortization have been allocated to industry segments as applicable. 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, 1994, are as follows (in millions):
1994 1993 1992 -------------------------------------------------------------------------- Foreign net sales $2,631 $2,428 $2,391 Foreign assets net of liabilities at end of year $1,308 $1,248 $1,287 ==========================================================================
65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 --------------------------------------------------------------------------------------------- 1994 Net sales $2,193 $2,316 $2,315 $2,500 $9,324 Gross profit 760 812 821 899 3,292 Net income (loss) 131 144 149 172 596 Per common share: 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 --------------------------------------------------------------------------------------------- 1993 Net sales $2,041 $2,215 $2,228 $2,395 $8,879 Gross profit 748 802 805 867 3,222 Income from continuing operations before cumulative effect of accounting changes 57 132 135 (592) (268) Net income (loss) 127 132 135 (592) (198) Per common share: Income from continuing operations/1/ .20 .48 .49 (2.14) (.97) Net income (loss) .45 .48 .49 (2.14) (.72) Dividends .25 .25 .25 .25 1.00 Market price High 32.75 30.63 29.00 24.75 Low 27.13 27.25 20.00 21.38 =============================================================================================
(1) In the fourth quarter of 1993, the company recorded pretax charges of $925 million against earnings. The charges include $700 million to cover the costs associated with restructuring initiatives (see "Restructuring Charge" footnote) and a $225 million special charge for major litigation (see "Legal Proceedings" footnote). Baxter common stock is listed on the New York, Midwest 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. On January 27, 1995, there were approximately 77,800 holders of record of the company's common stock. 66 SEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA
Year Ended December 31 1994 1993/1/ 1992 1991 1990/2/ 1989 1988 ----------------------------------------------------------------------------------------------------------------------------------- OPERATIONS Net sales $ 9,324 8,879 8,471 7,799 7,234 6,740 6,359 (in millions) Income (loss) from continuing operations $ 596 (268) 561 507 (24) 410 360 Net income (loss) $ 596 (198) 441 591 40 446 388 Depreciation and amortization $ 524 494 447 411 368 356 327 Research and development charges $ 343 337 317 288 262 245 237 ----------------------------------------------------------------------------------------------------------------------------------- CAPITAL EMPLOYED Working capital $ 1,574 1,489 1,221 1,470 1,007 1,378 1,233 (in millions) Capital expenditures/3/ $ 502 605 640 592 417 370 483 Net property, plant and equipment $ 2,562 2,655 2,647 2,387 2,122 2,058 1,983 Total assets $ 10,002 10,545 9,155 9,171 8,407 8,401 8,442 Net debt/4/ $ 2,401 3,143 2,901 2,336 2,143 2,388 2,661 Long-term obligations $ 2,341 2,800 2,433 2,246 1,727 2,048 2,311 Stockholders' equity -- continuing operations $ 3,720 3,185 3,795 4,086 3,877 4,032 3,750 -- discontinued operations $ -- -- -- 287 215 214 226 -- total $ 3,720 3,185 3,795 4,373 4,092 4,246 3,976 Total capitalization $ 6,061 5,985 6,228 6,619 5,819 6,294 6,287 ----------------------------------------------------------------------------------------------------------------------------------- PER COMMON Average number of common shares SHARE outstanding (in millions)/5/ $ 280 277 279 280 253 248 243 Earnings (loss) Continuing operations $ 2.13 (0.97) 1.99 1.73 (0.30) 1.37 1.21 Net income $ 2.13 (0.72) 1.56 2.03 (0.05) 1.50 1.31 Cash dividends declared $ 1.025 1.00 0.86 0.74 0.64 0.56 0.50 Market price -- high $ 28.88 32.75 40.50 40.88 29.38 25.88 26.13 Market price -- low $ 21.63 20.00 30.50 25.63 20.50 17.63 16.25 Net book value $ 13.18 11.52 13.59 14.45 13.45 13.49 12.61 ----------------------------------------------------------------------------------------------------------------------------------- PRODUCTIVITY Employees at year-end 53,500 60,400 61,300 60,400 60,600 61,000 61,500 MEASURES Sales per year-end employee $174,280 147,003 138,189 129,123 119,373 110,492 103,398 Operating assets per employee/6/ $112,430 101,043 96,988 90,613 82,937 82,000 76,407 ----------------------------------------------------------------------------------------------------------------------------------- GROWTH STATISTICS Net sales 5.0% 4.8 8.6 7.8 7.3 6.0 9.1 (percent change Income (loss) from continuing operations N/A (147.8)% 10.7 N/A (105.9) 13.9 19.6 from prior year) Cash dividends per common share 2.5% 16.3 16.2 15.6 14.3 12.0 13.6 Net book value per year-end common share 14.4% (15.2) (5.9) 7.4 (0.3) 7.0 7.0 ----------------------------------------------------------------------------------------------------------------------------------- FINANCIAL RETURNS Income from continuing operations as a AND STATISTICS percent of sales 6.4% (3.0) 6.6 6.5 (0.3) 6.1 5.7 Return on average common stockholders' equity -- continuing operations 17.3% (7.7) 14.7 13.3 (1.3) 10.9 10.1 Long-term debt as a percent of total year-end capital 38.6% 46.8 39.1 33.9 29.7 32.5 36.8 ===================================================================================================================================
1. Results include a provision for restructuring charges of a pretax amount of $700 million and a special charge for litigation of a pretax amount of $330 million. 2. Results include a provision for restructuring program costs of a pretax amount of $562 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. Appendix of Graphs: The following is a listing of the graphs contained within the Annual Report, Pages 31-44, section entitled "Management's Discussion and Analysis" which is incorporated by reference. "OPERATIONAL CASH FLOW" On page 32 of the annual report there is a graphical representation of the internal performance measure of "Operational Cash Flow". The data points in millions of dollars are as follows: 1992 207 1993 292 1994 954 NET DEBT On page 32 of the annual report there is a graphical representation of Net Debt balances. The data points in millions of dollars are as follows: 1992 2,901 1993 3,143 1994 2,401 MED/LAB SEGMENT NET SALES On page 34 of the annual report there is a graphical representation of the relationship between self-manufactured net sales and distributed net sales for the Med/Lab segment. The data points in billions of dollars are as follows: Self-Manufactured Distributed Products Products 1992 3.2 2.2 1993 3.2 2.4 1994 3.1 2.7 MEDICAL SPECIALTIES NET SALES On page 34 of the annual report there is a graphical representation of the relationship between self-manufactured net sales and distributed net sales for the Medical Specialties segment. The data points in billions of dollars are as follows: Self-Manufactured Distributed Products Products 1992 2.7 0.4 1993 2.9 0.4 1994 3.2 0.4 Page 1 MARKETING AND ADMINISTRATIVE EXPENSES On page 35 of the annual report there is a graphical representation of total company marketing and administrative expenses as a percentage of total company net sales. The data points are as follows: 1990 21.3% 1991 21.1% 1992 21.2% 1993 21.2% 1994 19.9% DIVIDENDS PER COMMON SHARE On page 41 of the annual report there is a graphical representation of dividends per common share. The data points in dollars are as follows: 1990 0.64 1991 0.74 1992 0.86 1993 1.00 1994 1.025 Page 2 EX-21 8 SUBSIDIARIES EXHIBIT 21 -------------------------------------------------------------------------------- SUBSIDIARIES OF THE COMPANY, AS OF FEBRUARY 22, 1995
% Owned by Organized under the 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 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) Baxter Corporation ......................... Canada 100 -------------------------------------------------------------------------------
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. EX-23 9 CONSENT OF PRICE WATERHOUSE 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 13, 1995 appearing on page 44 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 19 of this Form 10-K. PRICE WATERHOUSE LLP Chicago, Illinois March 24, 1995 EX-24 10 POWER OF ATTORNEY Exhibit 24 P O W E R O F A T T O R N E Y 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, 1994, 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 or her] and in [his or her] name as a director to be [his or 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. Executed by: /s/ Silas S. Cathcart /s/ John W. Colloton /s/ Susan Crown /s/ Mary Johnston Evans /s/ Frank R. Frame /s/ William B. Graham /s/ David W. Grainger /s/ Martha R. Ingram /s/ Georges C. St. Laurent, Jr. /s/ Arnold J. Levine /s/ Monroe E. Trout, M.D. /s/ Fred L. Turner Dated: As of March 20, 1995 EX-27 11 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEET AS OF 12/31/94 AND CONSOLIDATED STATEMENT OF INCOME FOR YEAR ENDED 12/31/94 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 U.S. DOLLARS YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 1 471 0 1,955 39 1,537 4,340 4,431 1,869 10,002 2,766 2,341 288 0 0 3,432 10,002 9,324 9,324 6,032 6,032 410 14 237 801 205 596 0 0 0 596 2.13 2.11 Includes R&D expense and goodwill amortization.