Download to read offline
![-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
VhxtaUJ5M8wmnW98DZzZ9It2E5nc0SPYKbU1SPYGkwEK+sTwl/U5XGUEJX9u9lOw
E4s0yQ6wSqJP5hnxzcaOcw==
<SEC-DOCUMENT>0000950131-99-001586.txt : 19990322
<SEC-HEADER>0000950131-99-001586.hdr.sgml : 19990322
ACCESSION NUMBER: 0000950131-99-001586
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990319
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BAXTER INTERNATIONAL INC
CENTRAL INDEX KEY: 0000010456
STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS &
APPARATUS [3841]
IRS NUMBER: 360781620
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-04448
FILM NUMBER: 99568874
BUSINESS ADDRESS:
STREET 1: ONE BAXTER PKWY
CITY: DEERFIELD
STATE: IL
ZIP: 60015
BUSINESS PHONE: 8479482000
MAIL ADDRESS:
STREET 1: ONE BAXTER PARKWAY
CITY: DEERFIELD
STATE: IL
ZIP: 60015
FORMER COMPANY:
FORMER CONFORMED NAME: BAXTER TRAVENOL LABORATORIES INC
DATE OF NAME CHANGE: 19880522
FORMER COMPANY:
FORMER CONFORMED NAME: BAXTER LABORATORIES INC
DATE OF NAME CHANGE: 19760608
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<DESCRIPTION>FORM 10-K
<TEXT>
<PAGE>](https://image.slidesharecdn.com/1140373/85/baxter-international-1-320.jpg)
![-
-------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 31, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from __________ to __________
Commission file number 1-4448
-
-------------------------------------------------------------------------------
Baxter International Inc.
-
-------------------------------------------------------------------------------
(Exact Name of Registrant in its Charter)
Delaware 36-0781620
------------------------------------------- -------------------------
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
One Baxter Parkway, Deerfield, Illinois 60015
------------------------------- -------------------------
(Address of Principal Executive Offices) (Zip Code)
847.948.2000
Registrant's telephone number, including area code ____________________________
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
--------------------
Common stock, $1 par value New York Stock Exchange,
Inc.
Chicago Stock Exchange,
Inc.
Pacific Exchange, Inc.
Preferred Stock Purchase Rights New York Stock Exchange,
(currently traded with common stock) Inc.
Chicago Stock Exchange,
Inc.
Pacific Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
----------------
Indicate by check mark whether the registrant (1) has filed all reports](https://image.slidesharecdn.com/1140373/85/baxter-international-2-320.jpg)
![required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
X
Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting common equity held by non-
affiliates of the registrant (based on the per share closing sale price of
$73.25 on March 5, 1999, and for the purpose of this computation only, the
assumption that all registrant's directors and executive officers are
affiliates) was approximately $20.8 billion. There is no non-voting common
equity held by non-affiliates of the registrant.
The number of shares of the registrant's common stock, $1 par value,
outstanding as of March 5, 1999, was 287,041,108.
Documents Incorporated By Reference
Those sections or portions of the registrant's annual report to stockholders
for fiscal year ended December 31, 1998 and of the registrant's proxy
statement for use in connection with its annual meeting of stockholders to be
held on May 4, 1999, described in the cross reference sheet and table of
contents attached hereto are incorporated by reference in this report.
-
-------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
and
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Number or
(Reference)
(1)
--------------
<C> <S> <C>
Item 1. Business
(a) General Development of Business.................. 1(2)
(b) Financial Information about Industry Segments.... 1(3)
(c) Narrative Description of Business................ 1(4)
(d) Financial Information about Foreign and Domestic
Operations and Export Sales....................... 6(5)
Item 2. Properties........................................... 7
Item 3. Legal Proceedings.................................... 7
Item 4. Submission of Matters to a Vote of Security Holders.. 11
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.................................. 12(6)
Item 6. Selected Financial Data.............................. 12(7)
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 12(8)
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk................................................. 12(9)
Item 8. Financial Statements and Supplementary Data.......... 12(10)](https://image.slidesharecdn.com/1140373/85/baxter-international-3-320.jpg)
![the 1996 Form 10-K.
C 10.36* November 1997 Stock Option Grant Terms and Conditions, filed as
exhibit 10.36 to the 1997 Form 10-K.
C 10.37* 1998 Incentive Compensation Program, filed as exhibit 10.37 to
the 1997 Form 10-K.
C 10.38* Long Term Incentive Plan, filed as exhibit 10.38 to the 1997
Form 10-K.
C 10.39* Special Stock Option Plan adopted February 17, 1998, filed
under the Securities Act of 1933 as exhibit 4.6 to the
Company's registration statement on Form S-8 (No. 333-71553).
10.40 Stock Option Plan adopted February 17, 1998.
12. Statements re: computation of ratios.
13. 1998 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 PricewaterhouseCoopers LLP.
24. Powers of Attorney.
27. Financial Data Schedules.
</TABLE>
- -------
*Incorporated herein by reference.
CExhibit contemplated by Item 14(a)(3) of Form 10-K.
(All other exhibits are inapplicable or not required.)
22
[LOGO]
Printed on Recycled Paper
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.4
<SEQUENCE>2
<DESCRIPTION>CERTIFICATE OF DESIGNATION OF SERIES B STOCK
<TEXT>
<PAGE>
EXHIBIT 3.4
CERTIFICATE OF DESIGNATION
of
SERIES B JUNIOR PARTICIPATING PREFERRED STOCK
of
BAXTER INTERNATIONAL INC.
Pursuant to Section 151 of the General Corporation Law of the State of Delaware
The undersigned do hereby certify that the following resolution was duly adopted
by the Board of Directors of Baxter International Inc., a Delaware corporation
(the "Company"), at a meeting duly convened and held on November 17, 1998, at
which a quorum was present and acting throughout.
RESOLVED, that pursuant to the authority conferred upon the Board of Directors
of this Company by the Restated Certificate of Incorporation, a series of
Preferred Stock of the Company be and it hereby is created, and that the
designations, powers, preferences and relative and other special rights and](https://image.slidesharecdn.com/1140373/85/baxter-international-27-320.jpg)
baxter international
- 1. -----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type:2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VhxtaUJ5M8wmnW98DZzZ9It2E5nc0SPYKbU1SPYGkwEK+sTwl/U5XGUEJX9u9lOw E4s0yQ6wSqJP5hnxzcaOcw== <SEC-DOCUMENT>0000950131-99-001586.txt : 19990322 <SEC-HEADER>0000950131-99-001586.hdr.sgml : 19990322 ACCESSION NUMBER: 0000950131-99-001586 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAXTER INTERNATIONAL INC CENTRAL INDEX KEY: 0000010456 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 360781620 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04448 FILM NUMBER: 99568874 BUSINESS ADDRESS: STREET 1: ONE BAXTER PKWY CITY: DEERFIELD STATE: IL ZIP: 60015 BUSINESS PHONE: 8479482000 MAIL ADDRESS: STREET 1: ONE BAXTER PARKWAY CITY: DEERFIELD STATE: IL ZIP: 60015 FORMER COMPANY: FORMER CONFORMED NAME: BAXTER TRAVENOL LABORATORIES INC DATE OF NAME CHANGE: 19880522 FORMER COMPANY: FORMER CONFORMED NAME: BAXTER LABORATORIES INC DATE OF NAME CHANGE: 19760608 </SEC-HEADER> <DOCUMENT> <TYPE>10-K <SEQUENCE>1 <DESCRIPTION>FORM 10-K <TEXT> <PAGE>
- 2. - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGECOMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 1998 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from __________ to __________ Commission file number 1-4448 - ------------------------------------------------------------------------------- Baxter International Inc. - ------------------------------------------------------------------------------- (Exact Name of Registrant in its Charter) Delaware 36-0781620 ------------------------------------------- ------------------------- (State or Other Jurisdiction of Incorporation or (I.R.S. Employer Organization) Identification No.) One Baxter Parkway, Deerfield, Illinois 60015 ------------------------------- ------------------------- (Address of Principal Executive Offices) (Zip Code) 847.948.2000 Registrant's telephone number, including area code ____________________________ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered -------------------- Common stock, $1 par value New York Stock Exchange, Inc. Chicago Stock Exchange, Inc. Pacific Exchange, Inc. Preferred Stock Purchase Rights New York Stock Exchange, (currently traded with common stock) Inc. Chicago Stock Exchange, Inc. Pacific Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None ---------------- Indicate by check mark whether the registrant (1) has filed all reports
- 3. required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting common equity held by non- affiliates of the registrant (based on the per share closing sale price of $73.25 on March 5, 1999, and for the purpose of this computation only, the assumption that all registrant's directors and executive officers are affiliates) was approximately $20.8 billion. There is no non-voting common equity held by non-affiliates of the registrant. The number of shares of the registrant's common stock, $1 par value, outstanding as of March 5, 1999, was 287,041,108. Documents Incorporated By Reference Those sections or portions of the registrant's annual report to stockholders for fiscal year ended December 31, 1998 and of the registrant's proxy statement for use in connection with its annual meeting of stockholders to be held on May 4, 1999, described in the cross reference sheet and table of contents attached hereto are incorporated by reference in this report. - ------------------------------------------------------------------------------- <PAGE> CROSS REFERENCE SHEET and TABLE OF CONTENTS <TABLE> <CAPTION> Page Number or (Reference) (1) -------------- <C> <S> <C> Item 1. Business (a) General Development of Business.................. 1(2) (b) Financial Information about Industry Segments.... 1(3) (c) Narrative Description of Business................ 1(4) (d) Financial Information about Foreign and Domestic Operations and Export Sales....................... 6(5) Item 2. Properties........................................... 7 Item 3. Legal Proceedings.................................... 7 Item 4. Submission of Matters to a Vote of Security Holders.. 11 Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................................. 12(6) Item 6. Selected Financial Data.............................. 12(7) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 12(8) Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................................. 12(9) Item 8. Financial Statements and Supplementary Data.......... 12(10)
- 4. Item 9. Changesin and Disagreements with Accountants on Accounting and Financial Disclosure.................. 12 Item 10. Directors and Executive Officers of the Registrant (a) Identification of Directors...................... 13(11) (b) Identification of Executive Officers............. 13 (c) Compliance with Section 16(a) of the Securities Exchange Act of 1934................................. 15 Item 11. Executive Compensation............................... 15(12) Item 12. Security Ownership of Certain Beneficial Owners and Management........................................... 15(13) Item 13. Certain Relationships and Related Transactions....... 15 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 16 (a) Financial Statements............................. 16 (b) Reports on Form 8-K.............................. 16 (c) Exhibits ........................................ 16 </TABLE> - -------- (1) Information incorporated by reference to the Company's Annual Report to Stockholders for the year ended December 31, 1998 ("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 4, 1999 ("Proxy Statement"). (2) Annual Report, pages 36-50, section entitled "Notes to Consolidated Financial Statements" and pages 21-30, section entitled "Management's Discussion and Analysis." (3) Annual Report, pages 48-49, section entitled "Notes to Consolidated Financial Statements--Segment Information." (4) Annual Report, pages 21-30, section entitled "Management's Discussion and Analysis" and pages 48-49, section entitled "Notes to Consolidated Financial Statements--Segment Information." (5) Annual Report, pages 48-49, section entitled "Notes to Consolidated Financial Statements--Segment Information." (6) Annual Report, page 50, section entitled "Notes to Consolidated Financial Statements--Quarterly Financial Results and Market for the Company's Stock (Unaudited)." (7) Annual Report, inside back cover, section entitled "Five-Year Summary of Selected Financial Data." (8) Annual Report, pages 21-30, section entitled "Management's Discussion and Analysis." (9) Annual Report, pages 27-28, section entitled "Financial Instrument Market Risk." (10) Annual Report, pages 31-50, sections entitled "Report of Independent Accountants," "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Cash Flows," "Consolidated Statements of Stockholders' Equity" and "Notes to Consolidated Financial Statements." (11) Proxy Statement, pages 4-7, section entitled "Board of Directors-- Director Biographies." (12) Proxy Statement, pages 9 and 14-17, sections entitled "Compensation of Directors" and "Executive Compensation" and page 17, section entitled "Pension Plan, Excess Plans and Supplemental Plans." (13) Proxy Statement, pages 19-20, section entitled "Ownership of Baxter Stock." <PAGE> - ------------------------------------------------------------------------------- Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015 - ------------------------------------------------------------------------------- PART I
- 5. - ------------------------------------------------------------------------------- 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 28 countries and sold in over 100 countries. Health care is concerned with the preservation of health and with the diagnosis, cure, mitigation and treatment of disease and body defects and deficiencies. The Company's products are used by hospitals, clinical and medical research laboratories, blood and dialysis centers, rehabilitation centers, nursing homes, doctors' offices and by patients, at home, under physician supervision. For information regarding significant acquisitions, investments in affiliates and divestitures, see the Company's Annual Report to Stockholders for the year ended December 31, 1998 (the "Annual Report"), pages 37-39, section entitled "Notes to Consolidated Financial Statements--Acquisitions and Divestitures" which is incorporated by reference. See also "Recent Acquisitions." (b) Financial Information About Industry Segments. Incorporated by reference from the Annual Report, pages 48-49, section entitled "Notes to Consolidated Financial Statements--Segment Information." (c) Narrative Description of Business. Recent Acquisitions Somatogen, Inc. In May 1998, the Company acquired Somatogen, Inc. ("Somatogen"), a biopharmaceutical company which is developing recombinant hemoglobin technology. The purchase price was approximately $206 million and was principally settled with 3,547,004 shares of Baxter common stock. In addition, Somatogen shareholders are entitled to a contingent deferred cash payment of up to $2.00 per Somatogen share, based on a percentage of sales of certain future products through the year 2007. Bieffe Medital S.p.A. In early 1998, the Company acquired a majority interest in Bieffe Medital S.p.A., a European manufacturer of dialysis and intravenous solutions and containers, with the remaining shares purchased in July 1998. The total purchase price was approximately $188 million. 1 <PAGE> Company Overview The Company operates as a global leader in critical therapies for life- threatening conditions. It develops, manufactures and markets products and technologies related to the blood and circulatory system. The Company conducts
- 6. its businesses infour segments: Blood Therapies, which develops biopharmaceutical and blood collection and separation products and technologies; I.V. Systems/Medical Products, which develops technologies and systems to improve intravenous ("I.V.") medication delivery and distributes medical products; Renal, which develops products and provides services to treat end-stage kidney disease; and CardioVascular, which develops products and provides services to treat late-stage heart disease and vascular disorders. These four businesses enjoy leading positions in the medical products and services fields. Unless otherwise indicated, each of the factors discussed in this Part I do not materially differ in their impact across each of the Company's four segments. Information about operating results is incorporated by reference from the Annual Report, pages 21-30, section entitled "Management's Discussion and Analysis" and pages 48-49, section entitled "Notes to Consolidated Financial Statements--Segment Information." The Company's Businesses Blood Therapies The Company's Blood Therapies segment develops and manufactures therapeutic proteins from human blood plasma and through recombinant methods. These proteins are used to treat hemophilia, immune deficiencies and other blood- related disorders. The Blood Therapies business also manufactures blood- collection containers and automated blood-cell separation and collection systems used by hospitals and blood banks to collect blood components. These components are used to treat patients undergoing surgery, cancer therapy and other therapies. Products used by plasma centers to collect plasma for fractionation are also manufactured by this business. I.V. Systems/Medical Products The Company's I.V. Systems/Medical Products segment provides a range of products that deliver fluids and drugs to patients, and is the leading manufacturer and marketer of intravenous products for use in hospitals and other health-care settings. These products include I.V. solutions in flexible plastic containers, I.V. tubing sets, electronic infusion pumps, I.V. nutrition products, anesthesia products and pharmaceutical agents, and ambulatory I.V. delivery systems. Renal The Company's Renal segment provides products and services for kidney dialysis--the primary treatment for end-stage renal disease, or kidney failure. This business is a leading manufacturer of products for peritoneal dialysis, a home-based renal therapy, and it also manufactures products for hemodialysis, a treatment administered in a hospital or clinic. In selected international markets, through its Renal Therapy Services unit, this business operates dialysis clinics. Through Renal Management Strategies Inc., it also works in concert with United States nephrologists as a kidney-disease management company. CardioVascular The Company's CardioVascular segment develops and manufactures products to treat late-stage heart disease and vascular disorders. These products include replacement heart valves and valve-repair products; perfusion products, used to provide oxygen to the blood while the heart and lungs are stopped during open- heart surgery; vascular products which remove clots from peripheral blood vessels; cardiac monitoring catheters; heart-assist systems; and contract perfusion services. 2
- 7. <PAGE> United States Markets Thehealth-care marketplace continues to be competitive. There has been consolidation in the Company's customer base, and by its competitors, which has resulted in pricing and market share pressures. These industry trends are expected to continue. The Company intends to continue to manage these issues by capitalizing on its market-leading positions, developing new products and services, leveraging its cost structure and making acquisitions. International Markets The Company generates more than 50 percent of its revenues outside the United States. While health-care cost containment continues to be a focus around the world, demand for health-care products and services continues to be strong worldwide, particularly in developing markets. The Company's strategies emphasize global expansion and technological innovation to advance medical care worldwide. Joint Ventures The Company conducts a non-material amount of business through joint ventures. Many of these joint ventures are conducted by the Company's I.V. Systems/Medical Products and Renal businesses, and most are accounted for under the equity method of accounting. 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 and through independent distributors, dealers and sales agents. In the United States, Allegiance Healthcare Corporation distributes a significant portion of the Company's products. These distribution centers are generally stocked with adequate inventories to facilitate prompt customer service. Sales and distribution methods include frequent contact by sales representatives, automated communications via various electronic purchasing systems, circulation of catalogs and merchandising bulletins, direct-mail campaigns, trade publications and advertising. Customers may return defective merchandise for credit or replacement. In recent years, such returns have been insignificant. International sales and distribution are made in over 100 countries either on a direct basis or through independent local distributors. International subsidiaries employ their own field sales forces in Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, the Czech Republic, Denmark, Ecuador, Finland, France, Germany, Greece, Guatemala, Hungary, India, Indonesia, Ireland, Italy, Japan, Korea, Mexico, the Netherlands, New Zealand, Norway, Panama, Peru, the Philippines, Portugal, Russia, Singapore, Spain, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom and Venezuela. In other countries, sales are made through independent distributors or sales agents. Raw Materials Raw materials essential to the Company's business are purchased worldwide in the ordinary course of business from numerous suppliers. The vast majority of these materials are generally available, and no serious shortages or delays have been encountered. Certain raw materials used in producing some of the Company's products are available only from a small number of suppliers. In addition, certain biomaterials for medical implant applications (primarily polymers) are becoming more difficult to obtain due to market withdrawals by biomaterial suppliers, primarily as a result of perceived exposures to liability in the United States.
- 8. In some ofthese situations, the Company has long-term supply contracts with its suppliers, although it does not consider its obligations under such contracts to be material. The Company does not always recover cost increases through customer pricing due to contractual limits and market pressure on such price increases. See "Contractual Arrangements." 3 <PAGE> Patents and Trademarks 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. The Company owns a number of patents and trademarks throughout the world and is licensed under patents owned by others. The Company's policy is to protect its products and technology through patents and trademarks on a worldwide basis. This protection is sought in a manner that balances the cost of such protection against obtaining the greatest value for the Company. The Company also recognizes the need to promote the enforcement of its patents and trademarks. However, while the Company can not make any assurances that any of its patents will not be circumvented, it does not consider its overall business to be materially dependent upon any individual patent or trademark. Competition Historically, competition in the health-care industry has been characterized by the search for technological and therapeutic innovations in the prevention, diagnosis and treatment of disease. The Company believes that it has benefited from the technological advantages of certain of its products. While others will continue to introduce new products which compete with those sold by the Company, the Company believes that its research and development efforts will permit it to remain competitive in all presently material product areas. Although no single company competes with the Company in all of its businesses, the Company is faced with substantial competition in all of its markets. The changing health-care environment in recent years has led to increasingly intense competition among United States and certain European health-care suppliers. Competition is focused on price, service and product performance. Pressure in these areas is expected to continue. The Company continues to increase its efforts to minimize costs and meet price competition. The Company believes that its cost position will continue to benefit from improvements in manufacturing technology and increased economies of scale. The Company intends to continue to develop new products and services, invest in capital and human resources to upgrade and expand facilities, leverage its cost structure and make selected acquisitions. Credit and Working Capital Practices As of January 28, 1999, the Company's debt ratings on senior debt were A3 by Moody's, A by Standard & Poor's and A- by Duff & Phelps. The Company's credit practices and related working capital needs are comparable to those of other market participants. Collection periods tend to be longer for sales outside the United States. Quality Management The Company places significant emphasis on providing quality products and services to its customers. A major portion of the Company's quality systems relate to the manufacturing, packaging, sterilization, handling, distribution
- 9. and labeling ofthe products by the Company. These quality systems, including control procedures that are developed and implemented by technically trained professionals, result in rigid specifications for raw materials, packaging materials, labels, sterilization procedures and overall manufacturing process control. The quality systems integrate the efforts of suppliers of both raw materials and finished goods to provide the highest value to customers. On a statistical sampling basis, internal quality assurance organizations test components and finished goods at different stages in the manufacturing process to assure that exacting standards are met. 4 <PAGE> 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 31 research and development centers located around the world and include facilities in Australia, Austria, Belgium, Brazil, France, Japan, Malta, Sweden and the United States. Expenditures for Company- sponsored research and development activities were $379 million in 1998, $392 million in 1997 and $340 million in 1996. Principal areas of strategic focus for research include hemoglobin therapeutics, plasma-based therapies, vaccines, minimally-invasive surgical procedures, xenotransplantation, medication-delivery systems and left- ventricular assist systems. The Company's research efforts emphasize self- manufactured product development, and portions of that research relate to multiple product lines. For example, many product categories benefit from the Company's research effort as applied to the human body's circulatory systems. In addition, research relating to the performance and purity of plastic materials has resulted in advances that are applicable to a large number of the Company's products. Government Regulation Most products manufactured or sold by the Company are subject to regulation by the United States Food and Drug Administration (the "FDA"), as well as by other agencies, both within and outside the United States. In the United States, the federal agencies which regulate the Company's facilities, operations and personnel include the FDA, the Environmental Protection Agency, the Occupational Health & Safety Administration, the Customs Department, the Commerce Department, and others. State agencies also regulate the facilities, operations and personnel of the Company within their respective states. The federal agencies possess authority to regulate the introduction and advertising of the Company's products and devices as well as manufacturing procedures, labeling and recordkeeping. In addition, the FDA has the power, among other powers, to enjoin the manufacture or sale of products and devices, to seize adulterated or misbranded products and devices and to require the manufacturer to remove them from the market. 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. These foreign government agencies also regulate public health, environmental, employment, export, customs, and other aspects of the Company's global operations. Environmental policies of the Company mandate compliance with all applicable regulatory requirements concerning environmental quality and contemplate, among other things, appropriate capital expenditures for environmental protection. Various non-material capital expenditures for environmental protection were made by the Company during 1998 and similar expenditures are planned for 1999. See Item 3.--"Legal Proceedings."
- 10. Employees As of December31, 1998, the Company employed approximately 42,000 people. Contractual Arrangements A substantial portion of the Company's products are sold through contracts with both international and domestic purchasers. Some of these contracts are for terms of more than one year and include limits on price increases. In the case of hospitals, clinical laboratories and other facilities, these contracts may specify minimum quantities of a particular product or categories of products to be purchased by the customer. 5 <PAGE> Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 Statements throughout this report that are not historical facts, including but not limited to, statements in the "Company Overview," "International Markets" and "Recent Acquisitions" sections of this report (including material incorporated therein by reference) are forward-looking statements. These statements are based on the Company's current expectations and involve numerous risks and uncertainties. Some of these risks and uncertainties are factors that affect all international businesses, while some are specific to the Company and the health-care arenas in which it operates. The factors below in some cases have affected and could affect the Company's actual results, causing results to differ, and possibly differ materially, from those expressed in any such forward-looking statements. These factors include technological advances in the medical field, unforeseen information technology issues related to the Company or third parties, economic conditions, demand and market acceptance risks for new and existing products, technologies and health- care services, the impact of competitive products and pricing, manufacturing capacity, new plant start-ups, global regulatory, trade and tax policies, continued price competition, product development risks, including technological difficulties, ability to enforce patents and unforeseen commercialization and regulatory factors. In particular, the Company, as well as other companies in its industry, is experiencing increased regulatory activity by the FDA with respect to its plasma-based biologicals and its complaint-handling systems. Additionally, as discussed in Item 3.--"Legal Proceedings," upon the resolution of certain legal matters, the Company may incur charges in excess of presently established reserves. Any such charge could have a material adverse effect on the Company's results of operations or cash flows in the period in which it is recorded. Currency fluctuations are also a significant variable for global companies, especially fluctuations in local currencies where hedging opportunities are unreasonably expensive or unavailable. If the United States dollar continues to strengthen against most foreign currencies, the Company's ability to realize projected growth rates in its sales and net earnings outside the United States will continue to be negatively impacted. The Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, but there can be no assurance that the actual results or performance of the Company will conform to any future results or performance expressed or implied by such forward-looking statements. (d) Financial Information About Foreign and Domestic Operations and Export Sales. International operations are subject to certain additional risks inherent in
- 11. conducting business outsidethe United States, such as changes in currency exchange rates, price and currency exchange controls, import restrictions, nationalization, expropriation and other governmental action. Financial information is incorporated by reference from the Annual Report, pages 48-49, section entitled "Notes to Consolidated Financial Statements-- Segment Information." 6 <PAGE> - -------------------------------------------------------------------------------- Item 2. Properties. The Company owns or has long-term leases on substantially all of its major manufacturing facilities. The Company maintains 27 manufacturing facilities in the United States, including six in Puerto Rico. The Company also manufactures in Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Costa Rica, the Dominican Republic, France, Germany, Indonesia, Ireland, Italy, Japan, Malta, Mexico, the Netherlands, New Zealand, the Philippines, Singapore, Spain, Switzerland, Tunisia, Turkey and the United Kingdom. While the majority of these facilities are shared by more than one of the Company's business segments, ten domestic facilities and 13 international facilities primarily manufacture for the I.V. Systems/Medical Products operations; nine domestic and 11 international facilities primarily manufacture for Blood Therapies operations; six domestic and three international facilities primarily manufacture for CardioVascular operations, and the Renal businesses are the primary operators of three of the Company's international facilities. The Company also owns or operates shared distribution facilities throughout the world, including 11 in the United States and Puerto Rico, and 111 located in 36 foreign countries. The Company maintains a continuing program for improving its properties, including the retirement or improvement of older facilities and the construction of new facilities. This program includes improvement of manufacturing facilities to enable production and quality control programs to conform to the current state of technology and government regulations. Capital expenditures were $492 million in 1998, $403 million in 1997 and $318 million in 1996. Moreover, additions to the installed base of equipment leased to customers was $104 million in 1998, $93 million in 1997 and $80 million in 1996. - -------------------------------------------------------------------------------- Item 3. Legal Proceedings. Baxter and certain of its subsidiaries are named as defendants in a number of lawsuits, claims and proceedings, including product liability claims involving products now or formerly manufactured or sold by the Company or by companies that were acquired by the Company. These cases and claims raise difficult and complex factual and legal issues and are subject to many uncertainties and complexities, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is brought, and differences in applicable law. Accordingly, in many cases, the Company is not able to estimate the amount of its liabilities with respect to such matters. Upon resolution of any of the legal matters discussed below, Baxter may incur charges in excess of presently established reserves. While such a future charge could have a material adverse impact on the Company's net income and net cash flows in the period in which it is recorded or paid, management believes that
- 12. no such chargewould have a material adverse effect on Baxter's consolidated financial position. Mammary Implant Litigation The Company, together with certain of its subsidiaries, is currently a defendant in various courts in a number of lawsuits brought by individuals, all seeking damages for injuries of various types allegedly caused by silicone mammary implants formerly manufactured by the Heyer-Schulte division ("Heyer- Schulte") of American Hospital Supply Corporation ("AHSC"). AHSC, which was acquired by the Company in 1985, divested its Heyer-Schulte division in 1984. It is not known how many of these claims and lawsuits involve products manufactured and sold by Heyer-Schulte, as opposed to other manufacturers. On December 1, 1998, a panel of independent medical experts appointed by a federal judge announced their findings that reported medical studies contained no clear evidence of a connection between silicone mammary implants and traditional or atypical systemic diseases. It is not yet clear what effect this report will have on the mammary implant litigation described below. 7 <PAGE> As of December 31, 1998, Baxter, together with certain of its subsidiaries, had been named as a defendant or co-defendant in 5,805 lawsuits and 1,870 claims relating to mammary implants, brought by approximately 14,584 plaintiffs, of which 11,272 are implant plaintiffs and the remainder are consortium or second generation plaintiffs. Of those plaintiffs, 5,417 currently are included in the Lindsey class action Revised Settlement described below, which accounts for 2,209 of the pending lawsuits against the Company. Additionally, 5,685 plaintiffs have opted out of the Revised Settlement (representing 3,463 pending lawsuits), and the status of the remaining plaintiffs with pending lawsuits is unknown. Some of the opt-out plaintiffs filed their cases naming multiple defendants and without product identification; thus, not all of the opt-out plaintiffs will have viable claims against the Company. As of December 31, 1998, 2,264 of the opt-out plaintiffs had confirmed Heyer-Schulte mammary implant product identification. Furthermore, during 1998, Baxter obtained dismissals, or agreements for dismissals, with respect to 7,324 plaintiffs. In addition to the individual suits against the Company, a class action on behalf of all women with silicone mammary implants was filed on March 23, 1994 and is pending in the United States District Court ("U.S.D.C.") for the Northern District of Alabama involving most manufacturers of such implants, including Baxter, as successor to AHSC (Lindsey, et al., v. Dow Corning, et al., U.S.D.C., N. Dist. Ala., CV 94-P-11558-S). The class action was certified for settlement purposes only by the court on September 1, 1994, and the settlement terms were subsequently revised and approved on December 22, 1995 (the "Revised Settlement"). The monetary provisions of the Revised Settlement provide compensation for all present and future plaintiffs and claimants through a series of specific funds and a disease-compensation program involving certain specified medical conditions. All appeals directly challenging the Revised Settlement have been dismissed. On January 16, 1996, Baxter, Bristol-Myers Squibb Company and Minnesota Mining and Manufacturing Company each paid $125 million into the court- established fund as an initial fund to pay claims under the Revised Settlement. Union Carbide Corporation and McGhan Medical Corporation also are parties to the Revised Settlement. In addition to the Lindsey class action, the Company also has been named in 11 other purported class actions in various state and provincial courts, only one of which is certified: Harrington v. Dow Corning Corp., et al., Supreme Court, British Columbia, C954330. The class action in British Columbia has been certified solely with respect to the issue of whether silicone gel breast
- 13. implants are reasonablyfit for their intended purpose. In the fourth quarter of 1993, Baxter accrued $556 million for its estimated liability resulting from the settlement of the Lindsey class action and recorded a receivable for estimated insurance recoveries totaling $426 million, resulting in a net charge of $130 million. Based on its continuing evaluation of the remaining opt-outs, the Company accrued an additional $298 million for its estimated liability to litigate or settle cases and claims involving opt- outs and recorded an additional receivable for estimated insurance recoveries totaling $258 million, resulting in an additional net charge of $40 million in the first quarter of 1995. In the third quarter of 1998, Baxter accrued an additional $250 million for its estimated liability resulting from the class action settlement and remaining opt-out cases and claims. Substantially more women have both participated in, and opted out of, the global class action than originally anticipated, thereby increasing the total estimated costs of this litigation and necessitating an increase in litigation reserves. Baxter recorded a receivable for related estimated insurance recoveries of $121 million, resulting in an additional net charge of $129 million. The mammary implant litigation includes issues related to which of Baxter's insurers are responsible for covering each matter and the extent of the Company's claims for contribution against third parties. Baxter believes that a substantial portion of its liability and defense costs for mammary implant litigation will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. The Company has entered into "coverage-in-place" agreements with a number of its insurers, each of which issued or subscribed to policies of insurance between 1974 and 1985. These agreements resolve the signatory insurers' coverage defenses and specify rules and procedures for allocation and payment of defense and indemnity costs pursuant to which signatory insurers will reimburse Baxter for mammary implant losses. Five of the Company's claims-made insurers, which issued policies subsequent to 1985, have agreed to pay under their policies with respect to mammary implant claims. The combined total of the amount thus far paid by insurers, committed for payment, and projected by Baxter to be paid by insurers under these agreements is in excess of $700 million, based on the Company's current estimate of mammary implant expenditures. The 8 <PAGE> insurers with which Baxter has not reached coverage agreements generally have reserved (i.e., neither admitted nor denied), and may attempt to reserve in the future, the right to deny coverage, in whole or in part, due to differing theories regarding, among other things, the applicability of coverage and when coverage may attach. Baxter is engaged in active litigation with each of these insurers and is negotiating with certain of them to resolve outstanding insurance coverage issues. Plasma-Based Therapies Litigation Baxter currently is a defendant in a number of claims and lawsuits brought by individuals who have hemophilia, all seeking damages for injuries allegedly caused by anti-hemophilic factor concentrates VIII or IX derived from human blood plasma ("factor concentrates") processed by the Company from the late 1970s to the mid-1980s. The typical case or claim alleges that the individual was infected with the HIV virus by factor concentrates, which contained the HIV virus. None of these cases involves factor concentrates currently processed by the Company. As of December 31, 1998, Baxter had been named in 328 lawsuits and 411 claims in the United States, Canada, Ireland, Italy, Taiwan, Japan, Argentina, France and the Netherlands. All U.S. federal court factor concentrate cases have been
- 14. transferred to theU.S.D.C. for the Northern District of Illinois for case management under Multi District Litigation ("MDL") rules (MDL Docket No. MDL- 986), and will be remanded in 1999 to the courts in which they were filed. The Company also has been named in four purported class actions. None of these class actions has been certified. In most states, Baxter's potential liability is limited by laws that provide that the sale of blood or blood derivatives, including factor concentrates, is not covered by the doctrine of strict liability. As a result, each claimant must prove that his or her injuries were caused by the Company's negligence. On May 6, 1997, the U.S.D.C. approved a class action settlement submitted by the plaintiffs' steering committee for the MDL, Baxter, Alpha Therapeutic Corporation, Armour Pharmaceutical and Bayer Corporation. The essential terms of the settlement provide payments of $100,000 to each HIV-positive person with hemophilia in the United States who can demonstrate use of factor concentrates produced by one of the settling defendants between 1978 and 1985. Additionally, the defendants have established a $40 million fund for payment of attorneys' fees, costs and court-administration expenses. Baxter's agreed contribution to the proposed settlement is 20% of the total settlement proceeds. The settlement requires insurance-carrier approval and the signing of releases. Baxter and the other defendants have reached agreements to settle potential subrogation and reimbursement claims with most private insurers, the federal government and all 50 states, the District of Columbia and Puerto Rico. As of December 31, 1998, approximately 6,140 claimant groups had been found eligible to participate in the settlement, and approximately 350 claimants had opted out of the settlement. Approximately 5,765 of the claimant groups had received payments as of December 31, 1998, and payments are expected to continue through the first quarter of 1999 as releases are received from the remaining claimant groups. In Japan, Baxter is a defendant, along with the Japanese government and four other co-defendants, in factor concentrates cases in Osaka, Tokyo, Nagoya, Tohoku, Fukuoka, Sapporo and Kumamoto. As of December 31, 1998, the cases involved 1,295 plaintiffs, of whom 1,265 have settled their claims. Based upon the Osaka and Tokyo courts' recommendations, the parties have agreed to a settlement of all pending and future factor concentrate cases. In general, the settlement provides for payment of an up-front, lump-sum amount of approximately $360,000 per plaintiff to be funded 40% by the Japanese government and 60% by the corporate defendants. The share of the settlement to be paid by each corporate defendant was determined based upon its market share, resulting in a contribution by Baxter of approximately 15.36%. The portion of the settlement to be funded by the corporate defendants will include credits for certain prior payments made by the corporate defendants under a separate Japanese government-administered program, which pays monthly amounts to HIV- positive and AIDS-manifested people with hemophilia and their survivors. Additionally, monthly payments will be made to each plaintiff according to a set schedule. In Spain, Baxter was notified in 1995 that approximately 1,370 HIV-positive people with hemophilia wished to explore settlement possibilities with the Company in lieu of filing suit in both Spain and the United States. 9 <PAGE> The parties have reached agreement on the terms of a settlement whereby each claimant will receive $25,000 (including attorneys' fees and costs) in return for a general release and protection against contribution claims by other defendants. As of December 31, 1998, all 1,370 claimants had agreed to the settlement. Baxter does not expect any additional claimants to come forward. In addition, Immuno International AG ("Immuno") has unsettled claims for
- 15. damages for injuriesallegedly caused by its plasma-based therapies. The typical claim alleges that the individual with hemophilia was infected with HIV by factor concentrates containing the HIV virus. Additionally, Immuno faces multiple claims stemming from its vaccines and other biologically derived therapies. A portion of the liability and defense costs related to these claims will be covered by insurance, subject to exclusions, conditions, policy limits and other factors. In addition, pursuant to the stock purchase agreement between the Company and Immuno, approximately 84 million Swiss francs (or approximately $61 million at year-end) of the purchase price was withheld to cover these contingent liabilities. Based on management's estimates, the Company has recorded a liability and a related insurance receivable with regard to certain of the matters above. Baxter is currently a defendant in a number of claims and lawsuits brought by individuals who infused the Company's Gammagard(R) IVIG (intravenous immuno- globulin), all of whom are seeking damages for Hepatitis C infections allegedly caused by infusing Gammagard(R) IVIG. As of December 31, 1998, Baxter was a defendant in 53 lawsuits and 50 claims in the United States, Denmark, France, Germany, Italy, Spain and the United Kingdom. Five suits currently pending in the United States have been filed as purported class actions but only one has been certified. All U.S. federal court Gammagard(R) IVIG cases have been transferred to the U.S.D.C. for the Central District of California for case management under MDL rules. On February 21, 1996, the court certified a nationwide class of persons who had infused Gammagard(R) IVIG (Fayne, et al., v. Baxter Healthcare Corporation, U.S.D.C., C.D., CA, ML-95-160-R) and, after an unsuccessful appeal by Baxter, refused to reconsider the propriety of the class certification. Baxter intends to appeal certain class issues to the 9th Circuit Court of Appeals while continuing to vigorously defend these cases. Baxter has entered into coverage in place agreements covering factor concentrates lawsuits with certain of its insurers that issued or subscribed to policies of insurance between 1978 and 1985. These agreements resolve the signatory insurers' coverage defenses and specify rules and procedures for allocation and payment of defense and indemnity costs pursuant to which the signatory insurers will reimburse the Company for factor concentrates losses. The insurers with which Baxter has not reached coverage agreements generally have reserved (i.e., neither admitted nor denied), and may attempt to reserve in the future, the right to deny coverage, in whole or in part, due to differing theories regarding, among other things, the applicability of coverage and when coverage may attach. Baxter is engaged in active litigation and negotiations with certain of these insurers to resolve outstanding insurance coverage issues. The Company believes that a substantial portion of the liability and defense costs related to all of its plasma-based therapies litigation will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. In the fourth quarter of 1993, the Company accrued $131 million for its estimated worldwide liability for litigation and settlement expenses involving factor concentrates cases and recorded a receivable for insurance coverage of $83 million, resulting in a net charge of $48 million. In the third quarter of 1995, significant developments occurred, primarily in the United States, Europe and Japan relative to claims and litigation pertaining to Baxter's plasma-based therapies. After analyzing circumstances in light of such developments and considering various factors and issues unique to each geography, the Company revised its estimated exposure from the $131 million previously recorded for factor concentrates litigation to $378 million for all litigation relating to plasma-based therapies, including the factor concentrates litigation and the Gammagard(R) IVIG litigation. Related estimated insurance recoveries were revised from $83 million for factor concentrates to $274 million for all plasma-based therapies. This resulted in a net charge of $56 million in the third quarter of 1995. Baxter has settled and continues to settle claims and lawsuits relating to its plasma-based therapies through court-ordered mediation and other
- 16. mechanisms. Based onthis and other currently available information, the Company revised its estimate of liabilities and insurance recoveries and, in the third quarter of 1998, accrued an additional $180 million for its estimated liability for plasma-based therapies litigation and other litigation and recorded a receivable for related estimated insurance recoveries of $131 million, for a net charge of $49 million. 10 <PAGE> Other Litigation As of September 30, 1996, the date of the spin-off of Allegiance Corporation ("Allegiance") from Baxter, Allegiance assumed the defense of litigation involving claims related to Allegiance's businesses, including certain claims of alleged personal injuries as a result of exposure to natural rubber latex gloves. Allegiance has not been named in most of this litigation but will be defending and indemnifying Baxter pursuant to certain contractual obligations for all expenses and potential liabilities associated with claims pertaining to latex gloves. As of December 31, 1998, the Company had been named as a defendant in 347 lawsuits, including the following purported class action: Swartz v. Baxter Healthcare Corporation, et al. Court of Common Pleas, Jefferson County, PA, 656-1997 C.D. On February 26, 1997, all federal cases involving latex gloves were ordered to be transferred to the U.S.D.C. for the Eastern District of Pennsylvania for case management under the MDL rules (MDL Docket No. 1148). A purported class action was filed against Baxter, Caremark International Inc. ("Caremark"), C.A. (Lance) Piccolo, James G. Connelly and Thomas W. Hodson (all former 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 (the "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). On March 26, 1997, the Court dismissed the action against the Company essentially on the ground that plaintiffs lacked standing to bring this action, and on February 10, 1998, the 7th Circuit Court of Appeals affirmed the trial court's ruling. The plaintiffs' petition for certiorari to the United States Supreme Court was denied on October 5, 1998 and this federal suit is now concluded. Additionally, in February 1997, the plaintiffs served a separate state court action, styled as a class action, against Mr. Piccolo, Vernon R. Loucks Jr., William H. Gantz, William B. Graham and James R. Tobin, alleging violations of various state laws pertaining to the Caremark spin-off (Isquith, et al. v. C. A. (Lance) Piccolo, et al; Circuit Court, Cook County, IL, Chancery Division, 96CH0013652). On April 9, 1998, the trial court dismissed the plaintiffs' case with prejudice. Plaintiffs' appeal to the Illinois Appellate Court was voluntarily dismissed in December 1998 by the plaintiffs, also concluding this litigation. Baxter has been named a potentially responsible party (a "PRP") for environmental cleanup costs at 19 hazardous-waste sites. Under the United States Superfund statute and many state laws, generators of hazardous waste that is sent to a disposal or recycling site are liable for cleanup of the site if contaminants from that property later leak into the environment. The laws generally provide that a PRP may be held jointly and severally liable for the costs of investigating and remediating the site. Allegiance has assumed responsibility for 10 of these sites, the largest of which is the Thermo-Chem site in Muskegon, Michigan. In 1998, Baxter settled liability at one of the nine sites not assumed by Allegiance. The estimated exposure for Baxter's remaining eight sites is approximately $2 million, which has been accrued (and not discounted) in the Company's financial statements. In addition to the cases discussed above, Baxter is a defendant in a number of other claims, investigations and lawsuits. Based on the advice of counsel, management does not believe that, individually or in the aggregate, these other
- 17. claims, investigations andlawsuits will have a material adverse effect on the Company's results of operations, cash flows or consolidated financial position. - -------------------------------------------------------------------------------- Item 4. Submission of Matters to a Vote of Security Holders. None. 11 <PAGE> - -------------------------------------------------------------------------------- PART II - -------------------------------------------------------------------------------- Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. Incorporated by reference from the Annual Report, page 50, section entitled "Notes to Consolidated Financial Statements--Quarterly Financial Results and Market for the Company's Stock (Unaudited)." Item 6. Selected Financial Data. Incorporated by reference from the Annual Report, inside back cover, section entitled "Five-Year Summary of Selected Financial Data." - -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Incorporated by reference from the Annual Report, pages 21-30, section entitled "Management's Discussion and Analysis." - -------------------------------------------------------------------------------- Item 7a. Quantitative and Qualitative Disclosures About Market Risk. Incorporated by reference from the Annual Report, pages 27-28, section entitled "Financial Instrument Market Risk." - -------------------------------------------------------------------------------- Item 8. Financial Statements and Supplementary Data. Incorporated by reference from the Annual Report, pages 31-50, sections entitled "Report of Independent Accountants," "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Cash Flows," "Consolidated Statements of Stockholders' Equity" and "Notes to Consolidated Financial Statements." - --------------------------------------------------------------------------------
- 18. Item 9. Changesin and Disagreements with Accountants on Accounting and Financial Disclosure. None. 12 <PAGE> - -------------------------------------------------------------------------------- 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 4, 1999 (the "Proxy Statement"), pages 4-7, section entitled "Board of Directors--Director Biographies." (b) Identification of Executive Officers Following are the names and ages, as of March 1, 1999, 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 on the date of the annual meeting of stockholders. All executive officers of Healthcare and World Trade are elected or appointed by the boards of directors of the applicable subsidiary and hold office until their respective successors are elected and qualified. As permitted by applicable law, actions by these boards (and their sole stockholder, Baxter) may be taken by written consent in lieu of a meeting. (1) Baxter International Inc. Executive Officers Vernon R. Loucks Jr., age 64, has been chairman of the board of directors since 1987 and previously served as Baxter's chief executive officer from 1980 through 1998. Mr. Loucks was first elected an officer of Baxter in 1971. Harry M. Jansen Kraemer, Jr., age 44, has been chief executive officer since January 1999, and president of Baxter since March 1997. Mr. Kraemer previously was the senior vice president and chief financial officer of Baxter from 1993 to 1997, and prior to that, was the vice president of finance and operations for a subsidiary of Baxter. Brian P. Anderson, age 48, has been senior vice president and chief financial officer of Baxter since February 1998. Mr. Anderson previously was the vice president of finance of Baxter since March 1997, and the corporate controller since 1993. Fabrizio Bonanni, age 52, has been a vice president of Baxter since 1995. From 1994 to 1995, he was a corporate vice president of World Trade. Dr. Bonanni previously was a vice president of a division of World Trade. John F. Gaither, Jr., age 49, has been a vice president of Baxter since 1994.
- 19. Between 1991 and1994, Mr. Gaither was vice president of law and strategic planning for a subsidiary of Baxter, and prior to that, was secretary and deputy general counsel of Baxter. David C. McKee, age 51, has been a vice president of Baxter since 1996, and was also secretary from February 1997 to February 1998. Since 1994, Mr. McKee has been deputy general counsel of Baxter. Prior to that, he was associate general counsel of Healthcare and World Trade. Steven J. Meyer, age 42, has been treasurer of Baxter since February 1997. From 1993 to 1997, Mr. Meyer was a vice president of international finance of a business group of World Trade. Kshitij Mohan, age 54, has been a vice president of Baxter since 1995. In 1995, Dr. Mohan also was a corporate vice president of World Trade. Dr. Mohan previously was a vice president of a division of Healthcare. 13 <PAGE> John L. Quick, age 54, has been a vice president of Baxter since 1995. From 1994 to 1995, he was a corporate vice president of Healthcare. Mr. Quick previously was a vice president of a division of Healthcare. Jan Stern Reed, age 39, has been corporate secretary of Baxter since February 1998. She was assistant corporate secretary from February 1997 to February 1998. From 1995 to 1997, Ms. Reed was assistant corporate secretary of, and counsel to, Wheelabrator Technologies Inc. Prior to that, she was counsel to Waste Management, Inc. and Wheelabrator Technologies Inc. Thomas J. Sabatino, age 40, has been a vice president and general counsel of Baxter since December 1997. He was also assistant secretary from February 1997 to December 1997. From 1995 to December 1997, Mr. Sabatino was associate general counsel of Healthcare. Prior to that, he was vice president and assistant general counsel of Tenet Healthcare Corporation from March 1995 to July 1995. From April 1994 to March 1995, he was vice president and general counsel of American Medical International, Inc., and from September 1993 to March of 1994, he was acting general counsel of that company. Michael J. Tucker, age 46, has been a senior vice president of Baxter since 1995. From 1994 to 1995, he was a corporate vice president of World Trade. Mr. Tucker previously was a vice president of a division of World Trade, and prior to that, was a vice president of another division of a subsidiary of Baxter. (2) Healthcare and World Trade Executive Officers Timothy B. Anderson, age 52, has been a group vice president of Healthcare and World Trade since 1994. Prior to that, Mr. Anderson was a vice president of Baxter. Eric A. Beard, age 47, has been a corporate vice president of World Trade since October 1998. Prior to that, he was president of a division of a subsidiary of World Trade. Carlos del Salto, age 56, has been a senior vice president of World Trade since 1996. From 1994 to 1996, Mr. del Salto was a corporate vice president of World Trade. Prior to that, Mr. del Salto was a vice president of Baxter. David F. Drohan, age 60, has been a corporate vice president of Healthcare since 1996. Prior to that, Mr. Drohan was president of a division of Healthcare. James M. Gatling, age 49, has been a corporate vice president of Healthcare since 1996. Prior to that, Mr. Gatling was a vice president of a division of
- 20. Healthcare. Thomas H. Glanzmann,age 40, has been a corporate vice president of World Trade and Healthcare since October 1998. Prior to that, he was president of a division of a subsidiary of World Trade. J. Robert Hurley, age 49, has been a corporate vice president of World Trade since 1993. Donald W. Joseph, age 61, has been a group vice president of Healthcare and World Trade since 1994. Prior to that, Mr. Joseph was a vice president of Baxter. Jack L. McGinley, age 52, has been a group vice president of Healthcare since 1994. Prior to that, Mr. McGinley was a vice president of Baxter. Michael A. Mussallem, age 46, has been a group vice president of Healthcare since 1994. From 1993 to 1994, Mr. Mussallem was president of a division of Healthcare, and prior to that, was president of another division of that subsidiary. Roberto E. Perez, age 49, has been a corporate vice president of Healthcare and World Trade since 1995. Prior to that, Mr. Perez was president of a division of a subsidiary of Baxter. (c) Compliance with Section 16(a) of the Securities Exchange Act of 1934. Not applicable. 14 <PAGE> - -------------------------------------------------------------------------------- Item 11. Executive Compensation. Incorporated by reference from the Proxy Statement, pages 9 and 14-17, sections entitled "Compensation of Directors" and "Executive Compensation" and page 17, section entitled "Pension Plan, Excess Plans and Supplemental Plans." Item 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated by reference from the Proxy Statement, pages 19-20, section entitled "Ownership of Baxter Stock." Item 13. Certain Relationships and Related Transactions. None. 15 <PAGE> - ------------------------------------------------------------------------------- PART IV - ------------------------------------------------------------------------------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- 21. The following documentsare 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 32 Consolidated Statements of Income Annual Report, page 33 Consolidated Statements of Cash Flows Annual Report, page 34 Consolidated Statements of Stockholders' Equity Annual Report, page 35 Notes to Consolidated Financial Statements Annual Report, pages 36- Report of Independent Accountants 50 Annual Report, page 31 Schedules Required By Article 12 of Regulation S-X Report of Independent Accountants on Financial Statement Schedule page 17 II Valuation and Qualifying Accounts page 18 All other schedules have been omitted because they are not applicable or not required. (b) Reports on Form 8-K During the fourth quarter of 1998, the Company filed two current reports on Form 8-K; each under Item 5., "Other Events." The first, dated December 2, 1998, filed a press release disclosing the adoption of a replacement stockholder rights plan. The second, dated December 15, 1998, filed the related rights agreement as an exhibit. (c) Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated herein by reference. Exhibits in the Exhibit Index marked with a "C" in the left margin constitute management contracts or compensatory plans or arrangements contemplated by Item 14(a) of Form 10-K. The list of exhibits so designated is incorporated by reference in this Part IV, Item 14. 16 <PAGE> REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Baxter International Inc. Our audits of the consolidated financial statements referred to in our report dated February 5, 1999 (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. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Chicago, Illinois February 5, 1999 17 <PAGE> SCHEDULE II -
- 22. -------------------------------------------------------------------------------- Valuation and QualifyingAccounts (in millions of dollars) <TABLE> - -------------------------------------------------------------------------------- <CAPTION> Additions ----------------------- Balance at Charged to Charged to Deductions Balance beginning costs and other from at end of of period expenses accounts (A) reserves period - -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Year ended December 31, 1998: Allowance for doubtful accounts $ 29 $ 15 $ 0 $ (3) $ 41 Inventory reserves 77 139 2 (112) 106 Litigation reserves 599 430 0 (331) 698 Restructuring reserves 44 131 (1) (108) 66 Acquisition reserves 150 0 30 (53) 127 Deferred tax asset valuation allowance 45 7 1 (19) 34 - -------------------------------------------------------------------------------- Year ended December 31, 1997: Allowance for doubtful accounts 24 9 (1) (3) 29 Inventory reserves 64 90 0 (77) 77 Litigation reserves 807 0 109 (317) 599 Restructuring reserves 74 0 (2) (28) 44 Acquisition reserves 65 0 107 (22) 150 Deferred tax asset valuation allowance 36 13 12 (16) 45 - -------------------------------------------------------------------------------- Year ended December 31, 1996: Allowance for doubtful accounts 22 5 (2) (1) 24 Inventory reserves 44 84 1 (65) 64 Litigation reserves 1,124 0 0 (317) 807 Restructuring reserves 147 0 (2) (71) 74 Acquisition reserves 0 0 92 (27) 65 Deferred tax asset valuation allowance 30 11 5 (10) 36 </TABLE> - -------------------------------------------------------------------------------- (A) Valuation accounts of acquired or divested companies and foreign currency translation adjustments. Reserves are deducted from assets to which they apply. 18 <PAGE> SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities
- 23. Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Baxter International Inc. /s/ Harry M. Jansen Kraemer, Jr. By:____________________________________ Harry M. Jansen Kraemer, Jr. A Director, and Chief Executive Officer Date: March 18, 1999 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 Officers: (iv)A Majority of the Board of Directors /s/ Vernon R. Loucks Jr. Walter E. Boomer Vernon R. Loucks Jr. Pei-yuan Chia Chairman of the Board of Directors John W. Colloton Susan Crown /s/ Harry M. Jansen Kraemer, Jr. Mary Johnston Evans Frank R. Frame Harry M. Jansen Kraemer, Jr. Martha R. Ingram Director, and Chief Executive Arnold J. Levine Officer Georges C. St. Laurent, Jr. Vernon R. Loucks Jr. (ii) Principal Financial Officer: Monroe E. Trout, M.D. Fred L. Turner /s/ Brian P. Anderson /s/ Harry M. Jansen Kraemer, Jr. Brian P. Anderson By: ____________________________________ Senior Vice President and Chief Harry M. Jansen Kraemer, Jr. Financial Officer Director and Attorney-in-Fact (iii) Controller: /s/ Brian P. Anderson Brian P. Anderson Senior Vice President and Chief Accounting Officer 19 <PAGE> - -------------------------------------------------------------------------------- APPENDICES <TABLE> <CAPTION>
- 24. Description Page - --------------- <S> <C> Computation of Ratio of Earnings to Fixed Charges (Exhibit 12) 23 Subsidiaries of the Company (Exhibit 21) 24 </TABLE> - -------------------------------------------------------------------------------- EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION <TABLE> <CAPTION> Number and Description of Exhibit --------------------------------- <C> <C> <S> 3. Certificate of Incorporation and Bylaws 3.1* Restated Certificate of Incorporation, filed as exhibit 3.1 to the Company's annual report on Form 10-K for the year ended December 31, 1992, file number 1-4448 (the "1992 Form 10-K"). 3.2* Certificate of Designation of Series A Junior Participating Preferred Stock, filed under the Securities Act of 1933 as exhibit 4.3 to the Company's registration statement on Form S-8 (No. 33-28428). 3.3* Amended and Restated Bylaws, filed as Exhibit 3.3 to the Company's annual report on Form 10-K for the year ended December 31, 1997, file number 1-4448 (the "1997 Form 10-K"). 3.4 Certificate of Designation of Series B Junior Participating Preferred Stock. Instruments defining the rights of security holders, including 4. indentures 4.1* 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. 4.2* Amended and Restated Indenture dated November 15, 1985 (the "Indenture"), between the Company and Continental Illinois National Bank and Trust Company of Chicago ("Continental"), filed under the Securities Act of 1933 as exhibit 4.1 to the Company's registration statement on Form S-3 (No. 33-1665). 4.3* First Supplemental Indenture to the Indenture between the Company and Continental, filed under the Securities Act of 1933 as exhibit 4.1(A) to the Company's registration statement on Form S-3 (No. 33-6746). 4.4* Supplemental Indenture dated as of January 29, 1997, between the Company and First Trust National Association (as successor to Continental), filed under the Securities Act of 1933 as exhibit 4.1B to the Company's debt securities shelf registration statement on Form S-3 (No. 333-19025) (the "1997 Shelf"). 4.5* 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 Company's annual report on Form 10-K for the year ended December 31, 1985 (the "1985 Form 10-K"). 4.6* 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"). 4.7* 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. 4.8* 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
- 25. 1-4448. 4.9* Specimen 91/4% 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. </TABLE> 20 <PAGE> <TABLE> <CAPTION> Number and Description of Exhibit --------------------------------- <C> <C> <S> 4.10* Specimen 7.125% Note, filed as exhibit 4.10 to the Company's annual report on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K"). 4.11* Specimen 7.65% Debenture, filed as exhibit 4.11 to the 1996 Form 10-K. 4.12* Contingent Payment Rights Agreement, filed under the Securities Act of 1933 as exhibit 4.2 to the Company's registration statement on Form S-4 (No. 333-47927). 10. Material Contracts C 10.1* Form of Indemnification Agreement entered into with directors and officers, filed as exhibit 19.4 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1986, file no. 1-4448. C 10.2* 1988 Long-Term Incentive Plan, filed as exhibit 10.12 to the 1987 Form 10-K. C 10.3* 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"). C 10.4* 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"). C 10.5* Stock Option Plan Adopted July 25, 1988, filed as exhibit 10.13 to the 1988 Form 10-K. C 10.6* 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"). C 10.7* Baxter International Inc. and Subsidiaries Incentive Investment Excess Plan, filed as exhibit 10.17 to the 1988 Form 10-K. C 10.8* Baxter International Inc. and Subsidiaries Supplemental Pension Plan, filed as exhibit 10.18 to the 1988 Form 10-K. C 10.9* Limited Rights Plan, filed as exhibit 19.6 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1989, file no. 1-4448 (the "September, 1989 Form 10-Q"). C 10.10* Amendments to various plans regarding disability, filed as exhibit 19.9 to the September, 1989 Form 10-Q. C 10.11* 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. C 10.12* 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. 10.13* 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. C 10.14* Amendment to 1987 Incentive Compensation Program, filed as exhibit 19.1 to September, 1989 Form 10-Q.
- 26. C 10.15* RestrictedStock Grant Terms and Conditions, filed as exhibit 10.25 to the Company's annual report on Form 10-K for the year ended December 31, 1991, file number 1-4448 (the "1991 Form 10- K"). C 10.16* Vernon R. Loucks Restricted Stock Grant Terms and Conditions, filed as exhibit 10.26 to the 1991 Form 10-K. C 10.17 Deferred Compensation Plan, amended and restated effective January 1, 1998. C 10.18* Restricted Stock Plan for Non-Employee Directors (as amended and restated in 1992), filed as exhibit 10.28 to the 1992 Form 10-K. C 10.19* Restricted Stock Grant Terms and Conditions (as amended), filed as exhibit 10.31 to the 1992 Form 10-K. </TABLE> 21 <PAGE> <TABLE> <CAPTION> Number and Description of Exhibit --------------------------------- <C> <C> <S> C 10.20* 1992 Officer Incentive Compensation Plan, filed as exhibit 10.29 to the 1992 Form 10-K. C 10.21* 1993 Officer Incentive Compensation Plan, filed as exhibit 10.30 to the 1992 Form 10-K. C 10.22* 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"). C 10.23* Corporate Aviation Policy, filed as exhibit 10.33 to the 1992 Form 10-K. C 10.24* Plan and Agreement of Reorganization between Baxter and Caremark International Inc., filed as exhibit 10.34 to the 1992 Form 10-K. C 10.25* 1994 Incentive Compensation Program, filed as exhibit A to the Company's proxy statement for use in connection with its April 29, 1994 annual meeting of stockholders, file no. 1-4448. C 10.26* 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. C 10.27* 1995 Officer Incentive Compensation Plan, filed as exhibit 10.31 to the Company's annual report on Form 10-K for the year ended December 31, 1994 (the "1994 Form 10-K"). C 10.28* Baxter International Inc. Restricted Stock Plan for Non- Employee Directors, as amended and restated effective May 8, 1995, filed as exhibit 10.32 to the 1994 Form 10-K. C 10.29* 1996 Officer Incentive Compensation Plan, filed as exhibit 10.33 to the Company's annual report on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K"). C 10.30* 1995 Stock Option Grant Terms and Conditions, filed as exhibit 10.34 to the 1995 Form 10-K. 10.31* Reorganization Agreement between Baxter and Allegiance Corporation, filed as exhibit 2 to the Form 10 registration statement, file no. 1-11885, dated September 20, 1996. C 10.32* Supplemental Pension Agreement: Jack L. McGinley, filed as exhibit 10.32 to the 1996 Form 10-K. C 10.33* November 1996 Stock Option Grant Terms and Conditions, filed as exhibit 10.33 to the 1996 Form 10-K. C 10.34* November 1996 Premium Price Stock Option Grant Terms and Conditions, filed as exhibit 10.34 to the 1996 Form 10-K. C 10.35* Officer Incentive Compensation Plan, filed as exhibit 10.35 to
- 27. the 1996 Form10-K. C 10.36* November 1997 Stock Option Grant Terms and Conditions, filed as exhibit 10.36 to the 1997 Form 10-K. C 10.37* 1998 Incentive Compensation Program, filed as exhibit 10.37 to the 1997 Form 10-K. C 10.38* Long Term Incentive Plan, filed as exhibit 10.38 to the 1997 Form 10-K. C 10.39* Special Stock Option Plan adopted February 17, 1998, filed under the Securities Act of 1933 as exhibit 4.6 to the Company's registration statement on Form S-8 (No. 333-71553). 10.40 Stock Option Plan adopted February 17, 1998. 12. Statements re: computation of ratios. 13. 1998 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 PricewaterhouseCoopers LLP. 24. Powers of Attorney. 27. Financial Data Schedules. </TABLE> - ------- *Incorporated herein by reference. CExhibit contemplated by Item 14(a)(3) of Form 10-K. (All other exhibits are inapplicable or not required.) 22 [LOGO] Printed on Recycled Paper </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.4 <SEQUENCE>2 <DESCRIPTION>CERTIFICATE OF DESIGNATION OF SERIES B STOCK <TEXT> <PAGE> EXHIBIT 3.4 CERTIFICATE OF DESIGNATION of SERIES B JUNIOR PARTICIPATING PREFERRED STOCK of BAXTER INTERNATIONAL INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware The undersigned do hereby certify that the following resolution was duly adopted by the Board of Directors of Baxter International Inc., a Delaware corporation (the "Company"), at a meeting duly convened and held on November 17, 1998, at which a quorum was present and acting throughout. RESOLVED, that pursuant to the authority conferred upon the Board of Directors of this Company by the Restated Certificate of Incorporation, a series of Preferred Stock of the Company be and it hereby is created, and that the designations, powers, preferences and relative and other special rights and
- 28. qualifications, limitations orrestrictions thereof are as follows: SECTION 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series B Junior Participating Preferred Stock" and the number of shares constituting such series shall be 3,500,000. SECTION 2. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series B Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series B Junior Participating Preferred Stock shall be entitled to receive, when, as and if declared by the board of directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series B Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $5.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all noncash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the <PAGE> Common Stock, par value $1 per share, of the Company (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series B Junior Participating Preferred Stock. In the event the Company shall at any time after November 17, 1998 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series B Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Company shall declare a dividend or distribution on the Series B Junior Participating Preferred Stock as provided in Paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior to and superior to the shares of Series B Junior Participating Preferred Stock with respect to dividends, a dividend of $5.00 per share on the Series B Junior Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series B Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series B Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case
- 29. dividends on suchshares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series B Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series B Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series B Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 60 days prior to the date fixed for the payment thereof. Page 2 <PAGE> SECTION 3. VOTING RIGHTS. The holders of shares of Series B Junior Participating Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series B Junior Participating Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Company. In the event the Company shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series B Junior Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series B Junior Participating Preferred Stock and the holders of shares of Common Stock shall vote collectively as one class on all matters submitted to a vote of stockholders of the Company. (C) If at the time of any annual meeting of stockholders for the election of directors a default in preference dividends on the Preferred Stock shall exist, the number of directors constituting the board of directors of the Company shall be increased by two, and the holders of the Preferred Stock of all series shall have the right at such meeting, voting together as a single class without regard to series, to the exclusion of the holders of Common Stock, to elect two directors of the Company to fill such newly created directorships. Such right shall continue until there are no dividends in arrears upon the Preferred Stock. Each director elected by the holders of shares of Preferred Stock (herein called a "Preferred Director"), shall continue to serve as such director for the full term for which he shall have been elected, notwithstanding that prior to the end of such term a default in preference dividends shall cease to exist. Any Preferred Director may be removed by, and shall not be removed except by, the vote of the holders of record of the outstanding shares of Preferred Stock, voting together as a single class without regard to series, at a meeting of the stockholders, or of the holders of shares of Preferred Stock, called for the purpose. So long as a default in any preference dividends on the Preferred Stock shall exist (A) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause (B)) by an instrument in writing signed by the remaining Preferred Director and filed with the Company and (B) in the case of the removal of any Preferred Director, the vacancy may be filled by
- 30. the vote ofthe holders of the outstanding shares of Preferred Stock, voting together as a single class without regard to series, at the same meeting at which such removal shall be voted. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. Whenever the term of office of the Preferred Directors shall end and a default in preference dividends shall no longer exist, the number of directors constituting the board of directors of the Company shall be reduced by two. For the purposes hereof, a "default in preference dividends" on the Preferred Stock shall be deemed to have occurred whenever the amount of accrued dividends upon any series of the Preferred Stock shall be equivalent to six full quarter yearly Page 3 <PAGE> dividends or more, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accrued dividends on all shares of Preferred Stock of each and every series then outstanding shall have been paid or declared and set apart for payment to the end of the last preceding quarterly dividend period. (D) Except as set forth herein, holders of Series B Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. SECTION 4. CERTAIN RESTRICTIONS. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series B Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series B Junior Participating Preferred Stock outstanding shall have been paid in full, the Company shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B Junior Participating Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series B Junior Participating Preferred Stock, except dividends paid ratably on the Series B Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series B Junior Participating Preferred Stock, provided that the Company may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Company ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series B Junior Participating Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series B Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series B Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the board of directors) to all holders of such shares upon such terms as the board of directors, after consideration of the
- 31. respective annual dividendrates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. Page 4 <PAGE> (B) The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Company could, under Paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. SECTION 5. REACQUIRED SHARES. Any shares of Series B Junior Participating Preferred Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING UP. (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Company, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series B Junior Participating Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series B Liquidation Preference"). Following the payment of the full amount of the Series B Liquidation Preference, no additional distributions shall be made to the holders of shares of Series B Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series B Liquidation Preference by (ii) 100 (as appropriately adjusted as set forth in subparagraph (C) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). Following the payment of the full amount of the Series B Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series B Junior Participating Preferred Stock and Common Stock, respectively, holders of Series B Junior Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series B Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series B Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. Page 5 <PAGE>
- 32. (C) In theevent the Company shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. SECTION 7. CONSOLIDATION, MERGER, ETC. In case the Company shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series B Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Company shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series B Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. SECTION 8. NO REDEMPTION. The shares of Series B Junior Participating Preferred Stock shall not be redeemable. SECTION 9. RANKING. The Series B Junior Participating Preferred Stock shall rank junior to all other series of the Company's Preferred Stock as to the payment of dividends and the distribution of assets whether or not upon the dissolution, liquidation or winding up of the Company, unless the terms of any such series shall provide otherwise. SECTION 10. AMENDMENT. The Restated Certificate of Incorporation of the Company shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Series B Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series B Junior Participating Preferred Stock, voting separately as a class. Page 6 <PAGE> SECTION 11. FRACTIONAL SHARES. Series B Junior Participating Preferred Stock may be issued in fractions of a
- 33. share which shallentitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series B Junior Participating Preferred Stock. BAXTER INTERNATIONAL INC. has caused its corporate seal to be hereunto affixed and this certificate to be signed by Thomas J. Sabatino, Jr., its Corporate Vice President and General Counsel, and the same to be attested to by Jan Stern Reed, its Corporate Secretary, this 1st day of March, 1999. BAXTER INTERNATIONAL INC. (Corporate Seal) By: ___________________________ Thomas J. Sabatino, Jr. Corporate Vice President and General Counsel Attest: __________________________ Jan Stern Reed Corporate Secretary Page 7 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.40 <SEQUENCE>3 <DESCRIPTION>STOCK OPTION PLAN ADOPTED 2/17/98 <TEXT> <PAGE> EXHIBIT 10.40 BAXTER INTERNATIONAL INC. Stock Option Plan Adopted November 16, 1998 1. Purpose ------- The Stock Option Plan ("Plan") is adopted pursuant to the Baxter International Inc. 1998 Incentive Compensation Program ("Program") for the purposes stated in the Program. 2. Participants ------------ Participants in this Plan ("Optionee") shall be valued employees of Baxter International Inc. or its subsidiaries ("Company") who have been selected by the Committee, as defined in the Program ("Committee"), and to whom the Committee makes an award of an option ("Option") under this Plan.
- 34. 3. Awards ------ Each Optionshall consist of a Stock Option as defined in the Program and is granted under the terms and conditions contained in the Program and this Plan. To the extent that any of the terms and conditions contained in this Plan are inconsistent with the Program, the terms of the Program shall control. Terms defined in the Program shall have the same meaning in these terms and conditions. The Option is not intended to qualify as an Incentive Stock Option within the meaning of section 422 of the United States Internal Revenue Code. Residents of the United Kingdom may also be subject to additional terms and conditions in the form contained in the Baxter International Inc. Rules of the Baxter International United Kingdom Stock Option, to the extent deemed necessary by the Committee. 4. Vesting, Exercise and Expiration -------------------------------- 4.1 The Option becomes vested three years after the date on which the Option was granted, or, if such date is not a Business Day, then the next Business Day following such date. The Option shall continue to vest for one year after the date on which employment of the Optionee by the Company is terminated, if on the employment termination date the Optionee is age 50 or older and has completed 15 years of employment with the Company. 4.2 When vested and until it expires, the Option may be exercised in whole or in part in the manner specified by the Stockholder Services Department of Baxter International Inc. If exercised in part, the Option must be exercised in installments consisting of at least 100 shares or, if options for less than 100 shares are then exercisable, for the number of shares then exercisable. Shares of Common Stock may be used to pay the exercise price of the Option in accordance with the requirements specified by the Stockholder Services Department. Residents of the United Kingdom may not use shares of Common Stock to pay the exercise price of the Option in any circumstances. <PAGE> 4.3 If the Optionee's employment by the Company is terminated by death or disability more than one year after the date on which the Option is granted, the Optionee or the Optionee's legal representative or the person or persons to whom the Optionee's rights under the Option are transferred by will or the laws of descent and distribution shall have the right to exercise the Option until it expires in accordance with its terms with respect to all or any part of the shares remaining subject to the Option (whether or not the Option was vested under section 4.1 on the Optionee's employment termination date.) 4.4 The Option shall expire at the close of business on the earlier of a date determined as follows or, if such date is not a Business Day, then the last Business Day preceding such date: (i) one year after the date on which employment of the Optionee by the Company is terminated by his or her death or disability; (ii) five years after the date on which employment of the Optionee by the Company is terminated, if on the employment termination date the Optionee is age 50 or older and has completed 15 or more years of employment with the Company; (iii) three months after the date on which employment of the Optionee by the Company is terminated except as provided in subsection 4.4(i) and (ii), unless the Optionee dies or becomes disabled during the three-month period, in which case the relevant date shall be one year after the termination; or (iv) ten years from the date on which the Option is granted. "Business Day" shall mean any day, other than Saturday or Sunday, when the corporate headquarters of the Company is open for the transaction of business and when the Common Stock is traded on the New York Stock Exchange. A transfer of an Optionee from employment by one corporation to another among Baxter International Inc. and its subsidiaries, or a transfer of an Optionee to employment by another corporation which assumes the Option or issues a substitute option in a transaction to which
- 35. section 424 ofthe Internal Revenue Code applies, shall not be considered a termination of employment for the purpose of the Option. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>4 <DESCRIPTION>COMPUTATION OF RATIO OF EARNINGS <TEXT> <PAGE> EXHIBIT 12 - -------------------------------------------------------------------------------- Computation of Ratio of Earnings to Fixed Charges <TABLE> <CAPTION> (in millions, except ratios) Year ended December 31 - -------------------------------------------------------------------------------- -- 1998 1998 1997 1997 1996 1995 1995 1994 - -------------------------------------------------------------------------------- -- <S> <C> <C> <C> <C> <C> <C> <C> <C> (B) (B) (B) Income from continuing operations before income tax expense $549 $ 974 $523 $ 875 $793 $524 $741 $559 - -------------------------------------------------------------------------------- -- Fixed charges Interest costs 198 198 206 206 133 117 117 120 Estimated interest in rentals (A) 29 29 29 29 27 29 29 31 - -------------------------------------------------------------------------------- -- Fixed charges as defined 227 227 235 235 160 146 146 151 - -------------------------------------------------------------------------------- -- Adjustments to income Interest costs capitalized (5) (5) (8) (8) (3) (3) (3) (2) Losses of less than majority-owned affiliates, net of dividends 0 0 0 0 8 10 10 18 - -------------------------------------------------------------------------------- -- Income as adjusted $771 $1,196 $750 $1,102 $958 $677 $894
- 36. $726 - -------------------------------------------------------------------------------- -- Ratio of earningsto fixed charges 3.40 5.27 3.19 4.69 5.99 4.64 6.12 4.80 - -------------------------------------------------------------------------------- -- </TABLE> (A) Represents the estimated interest portion of rents. (B) Included in this exhibit are supplemental presentations of the ratio of earnings to fixed charges which exclude the following significant unusual charges: 1998: $116 million in-process research and development charge, $178 million net litigation charge, $131 million exit and reorganization costs charge. 1997: $352 million in-process research and development charge. 1995: $103 million exit and other reorganization costs charge, $96 million net litigation charge and $18 million in-process research and development charge. 23 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-13 <SEQUENCE>5 <DESCRIPTION>EXERPTS FROM ANNUAL REPORT <TEXT> <PAGE> <TABLE> <CAPTION> Financial Information <S> <C> Management's Discussion & Analysis 21 Management's Responsibilities for Financial Reporting 31 Report of Independent Accountants 31 Consolidated Balance Sheets 32 Consolidated Statements of Income 33 Consolidated Statements of Cash Flows 34 Consolidated Statements of Stockholders' Equity 35 Notes to Consolidated Financial Statements 36 Directors & Officers 51 Company Information 52 </TABLE> Management's Discussion & Analysis This discussion and analysis presents the factors that had a material effect on Baxter International Inc.'s (Baxter or the company) cash flows and results of operations during the three years ended December 31, 1998, and the company's financial position at that date. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements of the company and
- 37. related notes. Key FinancialObjectives and Results <TABLE> <CAPTION> 1998 OBJECTIVES RESULTS <S> <C> . Increase net sales approximately . Net sales in 1998 increased 8% before 10%, before 1998 acquisitions and 1998 acquisitions and before the effect the impact of foreign exchange. of the strengthening U.S. dollar, and increased 11% including acquisitions and before the effect of the strengthening U.S. dollar. - -------------------------------------------------------------------------------- . Grow earnings in the mid-teens, . Excluding the charges for in-process before the impact of foreign research and development, net exchange, and in the low double litigation and exit and other digits after absorbing the impact reorganization costs, net income of foreign exchange. increased 17% before the impact of foreign currency translation, and increased 12% after absorbing the impact of foreign currency translation. - -------------------------------------------------------------------------------- . Generate at least $500 million in . The company generated operational cash operational cash flow, after flow of $515 million during 1998. The investing approximately $1 billion total of capital expenditures and in capital expenditures and research research and development expenses, and development. excluding the in-process research and development charge, was $975 million. - -------------------------------------------------------------------------------- </TABLE> Company and Industry Overview Baxter is a global leader in providing critical therapies for life-threatening conditions. The company operates in four segments, which are described in Note 13 to the Consolidated Financial Statements. The company generates more than 50% of its revenues outside the United States. While health-care cost containment continues to be a focus around the world, demand for health-care products and services continues to be strong worldwide, particularly in developing markets. The company's strategies emphasize global expansion and technological innovation to advance medical care worldwide. The health-care marketplace continues to be competitive. There has been consolidation in the company's customer base and by its competitors, which has resulted in pricing and market share pressures. The company has experienced increases in its labor and material costs, which are primarily influenced by general inflationary trends. Competitive market conditions have minimized inflation's impact on the selling prices of the company's products and services. Management expects these trends to continue. In addition, as further discussed below, regulatory and production issues have recently had a negative impact on the company's Blood Therapies segment. The company will continue to manage these factors by capitalizing on its market-leading positions, developing new products and services, investing in capital and human resources to upgrade and expand facilities, leveraging its cost structure and making acquisitions. 21 <PAGE>
- 38. MANAGEMENT'S DISCUSSION &ANALYSIS Results of Operations <TABLE> <CAPTION> NET SALES TRENDS Percent increase years ended December 31 (in millions) 1998 1997 1996 1998 1997 - -------------------------------------------------------------------------------- -- <S> <C> <C> <C> <C> <C> Segments I.V. Systems/Medical Products $2,314 $2,110 $1,956 10% 8% Blood Therapies 1,861 1,765 1,284 5% 37% Renal 1,530 1,384 1,343 11% 3% CardioVascular 894 879 855 2% 3% - -------------------------------------------------------------------------------- -- Total net sales $6,599 $6,138 $5,438 8% 13% - -------------------------------------------------------------------------------- -- Percent increase years ended December 31 (in millions) 1998 1997 1996 1998 1997 - -------------------------------------------------------------------------------- -- United States $3,145 $2,887 $2,665 9% 8% International 3,454 3,251 2,773 6% 17% - -------------------------------------------------------------------------------- -- Total net sales $6,599 $6,138 $5,438 8% 13% - -------------------------------------------------------------------------------- -- </TABLE> Excluding the effect of a stronger U.S. dollar, which impacted sales growth for all segments, international sales growth would have been 12% and 24% in 1998 and 1997, respectively. I.V. Systems/Medical Products Contributing to 1998 sales growth were increased sales due to the acquisitions of Bieffe Medital S.p.A. (Bieffe), a European manufacturer of dialysis and intravenous solutions and containers, and the Pharmaceutical Products Division of The BOC Group's Ohmeda health-care business (Ohmeda), a manufacturer of inhalants and drugs used for general and local anesthesia. Contributing to 1997 sales growth were increased sales due to the acquisition of the Clintec parenteral-nutrition business (Clintec). Refer to Note 3 to the Consolidated Financial Statements for further information regarding the company's significant acquisitions. Sales growth in 1998 and 1997 in the United States and Western Europe has been unfavorably affected by competitive pricing pressures and cost pressures from health-care providers. These factors were more than offset by increased penetration and new product introductions in Latin America, as well as
- 39. increased sales froma multiyear agreement entered into in late 1996 with Premier, Inc., a major U.S. customer. In addition, the 1997 introduction of the Colleague(R) single-channel volumetric infusion pump in the United States and the 1998 introduction of the Colleague triple-channel volumetric infusion pump in the United States and certain international markets have generated strong sales growth. These factors are expected to continue the sales growth trend in this business. Blood Therapies Sales growth in 1998 in the United States was unfavorably affected by regulatory and production issues impacting the supply of factor concentrates in the entire industry. These supply constraints eased late in 1998 and production of the segment's plasma-based products is expected to continue to increase significantly into 1999. Strong demand for the company's therapeutic proteins, especially Recombinate(TM) Antihemophilic Factor (recombinant), generated worldwide growth in the Blood Therapies business in 1998 and 1997, particularly in the United States. This trend is expected to continue as the company recently increased its manufacturing capacity for Recombinate to meet the strong demand for this product. The early 1997 acquisition of Immuno International AG (Immuno), a European manufacturer of biopharmaceutical products, was a strong contributor to sales growth in 1997. The Immuno acquisition strengthens the business' presence in Europe, enhances the company's position in several emerging markets and in several product lines, such as vaccines, and enhances the company's research and development pipeline. Sales growth in the automated and manual blood-collection businesses was also negatively impacted in both years by regulatory and production issues facing the plasma-fractionation industry, particularly in 1998. The effect of these supply issues, as well as competitive pricing pressures, was partially offset by continued penetration of basic blood-collection products into developing markets. 22 <PAGE> Renal Strong 1998 sales growth in the Renal segment was driven principally by the acquisition of Bieffe, increased revenues from the Renal Therapy Services (RTS) business, which operates dialysis clinics in partnership with local physicians and hospitals in international markets, and improved performance in the base business across various geographic regions. Geographically, pricing and competitive pressures in the United States, Europe and Japan in 1998 eased from the prior year, and the Latin America region continues to generate strong sales growth. The Renal Management Strategies Inc. (RMS) business, which is a renal- disease management organization dedicated to creating partnerships with nephrologists to lead renal-care networks throughout the United States, contributed to 1998 sales growth as well. The RTS and RMS businesses also contributed to 1997 sales growth. As noted above, sales in 1997 in certain geographic markets were unfavorably affected by strong pricing pressures along with the effects of market consolidation. The 1998 growth trend is expected to continue as sales increase in the RTS and RMS units as well as in the base business. CardioVascular Sales growth in 1998 and 1997 was led by strong growth in the tissue heart valve and valve-repair product lines, both in international and domestic markets. Significant growth in these product lines was partially offset by the effects of strong pricing pressures in various product lines and a reduction in overall open-heart surgical procedures. The 1997 acquisition of Research Medical, Inc. (RMI), a manufacturer of specialty cannulae and other products used in late- stage cardiovascular disease that focuses on products that lend themselves to less invasive surgical techniques, contributed to 1997 sales growth. While pricing pressures are expected to continue, overall growth trends are expected
- 40. to continue into1999, with strong performances expected in the heart valve and valve-repair product lines, as well as increased revenues from new and recently introduced products and services in the cardiopulmonary and minimally invasive product areas. <TABLE> <CAPTION> GROSS MARGIN AND EXPENSE RATIOS years ended December 31 (as a percent of sales) 1998 1997 1996 - ----------------------------------------------------------------------- <S> <C> <C> <C> Gross margin 45.1% 45.6% 44.7% Marketing and administrative expenses 21.6% 22.1% 21.0% - ----------------------------------------------------------------------- </TABLE> The gross margin decreased in 1998 primarily as a result of increased investments in the Blood Therapies segment's safety and quality systems in response to the recent increased FDA regulatory activity. Such investments will continue to impact the gross margin in 1999. Changes in currency exchange rates also unfavorably impacted the gross margin in 1998. The gross margin increased in 1997 primarily as a result of acquisitions and a more favorable product mix. Marketing and administrative expenses decreased as a percent of sales in 1998 as the company has more than offset the incremental costs of expanding into developing markets and new business initiatives with a continued focus on cost control across all businesses, coupled with realizing the benefits of integrating recent acquisitions and implementing the reorganization programs discussed below. The expense ratio increased in 1997 primarily due to the acquisition of Immuno and expansion into developing markets and new business initiatives. Management expects to further leverage costs in 1999. The gross margin and expense ratios were affected in 1997 by favorable experience and related assumptions with respect to certain employee retirement plans. <TABLE> <CAPTION> RESEARCH AND DEVELOPMENT Percent increase (decrease) years ended December 31 (in millions) 1998 1997 1996 1998 1997 - -------------------------------------------------------------------------------- ----- <S> <C> <C> <C> <C> <C> Research and development expenses $ 379 $ 392 $ 340 (3%) 15% - -------------------------------------------------------------------------------- ----- as a percent of sales 6% 6% 6% - ---------------------------------------------------------------- </TABLE> 23 <PAGE> Management's Discussion & Analysis Research and development (R&D) expenses in the table exclude the in-process R&D charges relating to the acquisitions of Somatogen, Inc., a development-stage company, in 1998 (which is included in the Blood Therapies segment), and Immuno and RMI in 1997, which are further discussed in Note 3 to the Consolidated
- 41. Financial Statements. Thecompany has been rationalizing R&D spending since the acquisition of Immuno in early 1997. In addition, as discussed in Note 4 to the Consolidated Financial Statements, in September 1998, the company decided to end the clinical development of its first-generation oxygen-carrying therapeutic called HemAssist(R) (DCLHb). Management anticipates that the company's total R&D expenses will increase in 1999 as the company focuses on the next-generation oxygen-carrying therapeutics program within its Blood Therapies segment as well as on other R&D initiatives across the four segments. EXIT AND OTHER REORGANIZATION COSTS Refer to Note 4 to the Consolidated Financial Statements for a discussion of the charges, utilization of the reserves and headcount reductions to date. Management believes remaining reserves for exit and other reorganization programs are adequate to complete the actions contemplated by the programs. Future cash expenditures related to the exit and reorganization programs will be funded with cash generated from operations. Management anticipates savings from the programs will be partially invested in R&D, new business initiatives, and expansion into growing international markets. The company recorded a $131 million charge in 1998 that related principally to the decision to end the clinical development of HemAssist (DCLHb), as discussed above, as well as the decision to exit certain non-strategic investments, primarily in Asia, and reorganize certain other activities. Management expects that the 1995 program will be completed in early 1999. This program, which eliminates excess plant capacity and reduces manufacturing costs, will help mitigate future exposure to gross margin erosion arising from pricing pressures, primarily in the United States. LITIGATION AND OTHER INCOME AND EXPENSE As further discussed in Note 12 to the Consolidated Financial Statements, the company recorded a $178 million net litigation charge in 1998 relating to mammary implants, plasma-based therapies (relating to the Blood Therapies segment) and other litigation. Net interest expense was relatively flat from 1997 to 1998, as the effect of higher debt levels due to acquisitions was offset by the impact of a higher level of foreign currency denominated debt, which bears a lower average interest rate. Net interest expense increased in 1997 as compared to 1996 primarily due to increased debt related to the acquisition of Immuno. Net interest expense, excluding the impact of potential acquisitions, is not expected to change significantly in 1999. Goodwill amortization increased in 1998 primarily as a result of the acquisition of Bieffe, and increased in 1997 primarily due to the acquisitions of Immuno and Clintec. Included in other income in 1998 and 1997 are pretax gains of $20 million and $17 million, respectively, relating to the disposal of certain nonstrategic investments. Other income in 1997 also includes a pretax gain of $32 million relating to the divestiture by the Blood Therapies segment of certain assets of its Immunotherapy division, as further discussed in Note 3 to the Consolidated Financial Statements. PRETAX INCOME FROM CONTINUING OPERATIONS <TABLE> <CAPTION> Percent increase (decrease) years ended December 31 (in millions) 1998 1997 1996 1998 1997 -
- 42. -------------------------------------------------------------------------------- <S> <C> <C><C> <C> <C> Pretax income from continuing operations $549 $523 $793 5% (34%) - -------------------------------------------------------------------------------- </TABLE> 24 <PAGE> Excluding the divestiture gains and the charges for in-process R&D, net litigation, and exit and other reorganization costs, as applicable in 1998 and 1997, the 1998 and 1997 growth in pretax income from continuing operations would have been 16% and 4%, respectively. Refer to Note 13 to the Consolidated Financial Statements for a summary of financial results by segment. I.V. Systems/Medical Products Increases in pretax income of 18% in both 1998 and 1997 were due principally to acquisitions, introduction of the Colleague single-channel pump in 1997 and the triple-channel pump in 1998, improved sales mix, and leveraging of distribution, manufacturing and administrative costs. Partially offsetting these items were the effects of unfavorable currency fluctuations. Blood Therapies Pretax income increased 6% and 50% in 1998 and 1997, respectively. As discussed above, increased regulatory activity in the factor concentrates industry in 1998 unfavorably impacted the sales growth and gross profit margin in this segment. Partially offsetting the impact of this activity were decreased R&D spending and other synergies as management integrated Immuno, which was acquired in early 1997. Pretax profits are expected to increase in 1999 as supply constraints in the plasma-based products industry ease and as production of Recombinate increases as a result of the company's recent capacity expansion. The significant increase in pretax income in 1997 was primarily due to the acquisition of Immuno and the divestiture gains discussed above. Partially offsetting growth in both periods was reduced profitability in the blood- collection businesses due primarily to a less favorable mix of sales, pricing pressures due to competition, increased expenses relating to the introduction of a new platelet-collection product, and the above-mentioned regulatory activity, which has affected certain of the segment's customers. Renal Pretax income grew 3% and 2% in 1998 and 1997, respectively. Such growth is driven by growth in the base peritoneal dialysis and hemodialysis businesses, manufacturing efficiencies, and acquisitions, partially offset by increased investments in the RTS and RMS businesses and unfavorable currency fluctuations. CardioVascular The growth in pretax income was 7% in 1998 and flat in 1997. The profitability of this segment primarily reflects growth in the higher-margin tissue heart valve and valve-repair product lines, and the acquisition of RMI, offset by reduced profits in certain other product and service lines due to pricing and competitive pressures, and unfavorable currency fluctuations. Pretax income growth is higher in 1998 than 1997 primarily due to an improved mix of sales. INCOME TAXES Excluding the charges for in-process R&D, net litigation and exit and other reorganization costs, and a provision for U.S. taxes on previously unremitted
- 43. foreign earnings whichthe company intends to utilize for the cash requirements for certain of the charges, the effective income tax rate for continuing operations was approximately 25%, 25% and 27% in 1998, 1997 and 1996, respectively. Management does not expect a significant change in the effective tax rate in 1999. DISCONTINUED OPERATIONS In September 1996, Baxter stockholders received all of the outstanding stock of Allegiance Corporation, its health-care cost management and distribution businesses, in a tax-free spin-off. Income and cash flow from discontinued operations in 1996 related to Allegiance Corporation. EARNINGS PER SHARE Excluding the divestiture gains and the charges for in-process R&D, net litigation and exit and other reorganization costs, as applicable in 1998 and 1997, earnings per diluted share in 1998 and 1997 would have been $2.49 and $2.21, respectively, and the 1998 and 1997 growth would have been 13% and 6%, respectively. 25 <PAGE> Management's Discussion & Analysis 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. Management uses an internal performance measure called operational cash flow that evaluates each operating business and geographic region on all aspects of cash flow under their direct control. Operational cash flow, as defined, reflects all litigation payments and related insurance recoveries except for those payments and recoveries relating to mammary implants, which the company never manufactured or sold. If all the company's net litigation payments were excluded from operational cash flow (including those relating to plasma-based therapies), the amount generated from continuing operations would be $501 million, $432 million and $587 million in 1998, 1997 and 1996, respectively. Operational cash flow in 1998 includes approximately $172 million in proceeds for the sale of certain receivables. The company expects to generate $500 million in operational cash flow in 1999. Certain amounts on the Consolidated Balance Sheet, including accounts receivable and inventory, as well as total assets by segment, as summarized in Note 13 to the Consolidated Financial Statements, have increased due to the acquisitions discussed above. Also contributing to the increase in inventory are the regulatory and production issues in the Blood Therapies business which are affecting all companies in this industry. In addition, accounts receivable have increased due to higher sales volume outside the United States, which have longer collection periods. Notes and other current receivables decreased significantly due principally to collections from insurance companies related to the company's mammary implant and plasma-based therapies litigation. The following table reconciles cash flow provided by continuing operations, as determined by generally accepted accounting principles, to operational cash flow: <TABLE> <CAPTION> Brackets denote cash outflows years ended December 31 (in millions) 1998 1997 1996 - ------------------------------------------------------------------------ <S> <C> <C> <C> Cash flow provided by continuing operations $ 991 $ 616 $ 700
- 44. Capital expenditures (596)(496) (398) Net interest after tax 96 97 62 Other 24 57 126 - ------------------------------------------------------------------------ Operational cash flow -- continuing operations 515 274 490 - ------------------------------------------------------------------------ Operational cash flow -- discontinued operations -- -- 192 - ------------------------------------------------------------------------ Total operational cash flow $ 515 $ 274 $ 682 - ------------------------------------------------------------------------ </TABLE> Capital expenditures are made at a sufficient level to support the strategic and operating needs of the businesses. Significant expenditures have included implementation of a new integrated operational system, construction and continuing expansion of facilities for the production of genetically engineered proteins, and construction of a new European distribution center in Belgium. Management expects to invest approximately $600 million in capital expenditures in 1999. Approximately $140 million and $94 million of the net cash flows used for acquisitions and investments in affiliates in 1998 related to the acquisitions of Bieffe and Ohmeda, respectively, with the remainder primarily related to acquisitions of dialysis centers in international markets. Approximately $498 million and $48 million of the net cash flows used for acquisitions and investments in affiliates in 1997 related to the acquisitions of Immuno and Bieffe, respectively. Net cash flows used for acquisitions and investments in affiliates in 1996 related primarily to purchases of cardiovascular-services businesses and the acquisition of Clintec. The company's net-debt-to-capital ratio was 48.4% and 46.9% at December 31, 1998 and 1997, respectively. Management expects the ratio to decline to the low-40- percent range over time as a result of ongoing operations. Refer to Note 5 to the Consolidated Financial Statements for further information regarding the company's credit facilities and long-term debt and lease obligations. 26 <PAGE> As authorized by the board of directors, the company repurchases its stock to optimize its capital structure depending upon its operational cash flows, net debt level and current market conditions. In November 1995, the board of directors authorized the repurchase of up to $500 million over a period of several years, of which $267 million has been repurchased to date. No repurchases have been made since 1996. Management intends to reduce the company's net-debt-to-capital ratio to the low-40-percent range, at which time it will consider repurchasing additional shares of Baxter common stock. As of December 31, 1998, the company can issue up to $550 million in aggregate principal amount of additional senior unsecured debt securities under effective registration statements filed with the U.S. Securities and Exchange Commission. The company's debt ratings on senior debt are A3 by Moody's, A by Standard & Poor's and A- by Duff & Phelps. The company intends to fund its short-term and long-term obligations as they mature by issuing additional debt or through cash flow from operations. The company believes it has lines of credit adequate to support ongoing operational requirements. Beyond that, the company believes it has sufficient financial flexibility to attract long-term capital on acceptable terms as may be needed to support its growth objectives. In February 1999, the board of directors declared a quarterly dividend on the company's common stock of 29.10 cents per share (annualized rate of $1.164 per share).The company presently anticipates that the dividend payout ratio will decrease over time in order to optimize the company's capital structure and become more consistent with the payout ratios of peer companies.
- 45. Euro Conversion On January1, 1999, 11 of the 15 countries that are members of the European Union introduced a new currency called the "Euro." The conversion rates between the Euro and the participating nations' currencies were fixed irrevocably as of January 1, 1999. Prior to full implementation of the new currency on January 1, 2002, there will be a transition period during which parties may use either the existing currencies or the Euro for financial transactions. Action plans are currently being implemented which are expected to result in compliance with all laws and regulations relating to the Euro conversion. Such plans include the adaptation of information technology and other systems to accommodate Euro-denominated transactions as well as the requirements of the transition period. The company is also addressing the impact of the Euro on currency exchange-rate risk, taxation, contracts, competition and pricing. While it is not possible to accurately predict the impact the Euro will have on the company's business or on the economy in general, management currently does not anticipate that the Euro conversion will have a material adverse impact on the company's results of operations or financial condition. Financial Instrument Market Risk The company's business and financial results are affected by fluctuations in world financial markets, including currency exchange rates and interest rates. The company's hedging policy attempts to manage these risks to an acceptable level based on management's judgment of the appropriate trade-off between risk, opportunity and costs. In hedging its currency and interest rate risks, the company primarily utilizes forward contracts, options and swaps. Refer to Note 6 to the Consolidated Financial Statements for further information regarding these instruments. The company does not hold financial instruments for trading or speculative purposes. CURRENCY RISK The company is primarily exposed to currency exchange-rate risk with respect to its transactions and net assets denominated in Japanese Yen, U.K. Pound Sterling, Canadian Dollar, French Francs, German Marks, Austrian Schillings and Belgian Francs. As discussed above, the latter four currencies have been converted to the Euro effective January 1, 1999. During the transition period, contracts that hedge currency exchange-rate risk can be denominated in the participating nations' currencies or the Euro. Business activities in various currencies expose the company to the risk that the eventual net dollar cash flows resulting from transactions with foreign customers and suppliers denominated in foreign currencies may be adversely affected by changes in currency exchange rates. The company manages these risks utilizing various types of foreign exchange contracts. The company also enters into foreign exchange contracts to hedge anticipated, but not yet committed, sales expected to be denominated in foreign currencies. 27 <PAGE> Management's Discussion & Analysis In addition, the company hedges certain of its net investments in international affiliates. Such contracts hedge the U.S. dollar value of foreign currency denominated net assets from the effects of volatility in currency exchange rates by creating debt denominated in the respective currencies of the underlying net assets. Any changes in the carrying value of these net investments that are a result of fluctuations in currency exchange rates are offset by changes in the carrying value of the foreign currency denominated debt that are a result of the same fluctuations in currency exchange rates.
- 46. As part ofits risk-management process, the company uses a value-at-risk model related to its foreign currency financial instruments to measure a potential loss in earnings as a result of adverse movements in currency exchange rates. The company utilizes a Monte Carlo simulation, with a 95% confidence level, using implied volatilities and correlations (as of the measurement date) to estimate this potential earnings loss. The company's calculated value-at-risk (VAR) as of fiscal year-end 1998 and 1997, assuming a one-year holding period, is $42 million and $15 million, respectively; these amounts exclude the potential effects of any changes in the value of the underlying transactions or balances. The VAR increased in 1998 primarily due to a larger portfolio of instruments as a result of an increase in the amount of underlying transactions and balances denominated in foreign currencies, a higher implied volatility with respect to the Japanese Yen, and a higher volume of sold call options. As part of the strategy to manage risk while minimizing hedging costs, the company utilizes sold call options in conjunction with purchased put options to create collars. Actual future gains or losses may differ from this calculated VAR based upon actual fluctuations in market rates, operating exposures and the timing thereof, and changes in the company's portfolio of derivatives during the measured period. In addition, the assumption within the VAR model is that changes in all currency exchange rates are adverse, which may not be the case. Any loss incurred on the financial instruments is expected to be offset by the effects of currency movements on the respective underlying hedged transactions and balances. However, since the company's risk-management program does not require the hedging of all exposures, there may be currency exchange-rate gains or losses in the future. The company's actual experience in 1998 was favorable as compared to the VAR calculated as of fiscal year-end 1997. INTEREST RATE RISK As part of its risk-management program, the company performs sensitivity analyses to assess potential gains and losses in earnings and changes in fair value relating to hypothetical movements in interest rates. A 60 basis-point increase in interest rates (approximately 10% of the company's weighted average interest rate) affecting the company's financial instruments, including debt obligations and related derivatives, and investments, would have an immaterial effect on the company's 1998 and 1997 pretax earnings and on the fair value of the company's fixed-rate financial instruments as of the end of such fiscal years. As discussed in Note 6 to the Consolidated Financial Statements, the fair values of the company's long-term litigation liabilities and related insurance receivables were computed by discounting the expected cash flows based on currently available information. A 10% movement in the assumed discount rate would have an immaterial effect on the fair values of those assets and liabilities. OTHER RISKS With respect to the company's unconsolidated investments, based on current market information, management believes any reasonably possible near-term losses in earnings, cash flows and fair values would not be material. Year 2000 The company has developed, and is implementing, a comprehensive program to address Year 2000 issues pertaining to both information technology (IT) and non- IT systems. The program is monitored by a steering committee comprised of senior management in key functional areas, which periodically reports on the program's status to the audit committee of the board of directors. The program consists of identification, compliance and post-implementation phases and considers the effect of the Year 2000 on the company's internal systems, customers, products and services, and manufacturing systems, as well as on its suppliers and other critical business partners. The current status of these areas of scope vary, with the compliance and post-implementation phases proceeding in parallel.
- 47. 28 <PAGE> The company hasbeen upgrading, replacing or modifying non-compliant internal systems. All major systems are expected to be Year 2000 compliant, based on a phased implementation plan, by the end of the third quarter of 1999. To date, the company has achieved all major milestones relating to this initiative. Compliance checking of products has been completed and there are fewer than 20 products identified with Year 2000 issues. Product modifications and replacements are expected to be complete by mid-1999. The company has launched a Year 2000 website for its customers that includes a complete list of the company's electronic medical products, detailed and frequently updated information regarding Year 2000-affected products, and other information regarding the company's Year 2000 program. The company is actively addressing systems in its manufacturing plants and other facilities. All remediation decisions for critical items were complete at the end of 1998 and implementation of required changes for all date-dependent items is expected to be completed by mid-1999. In addition, the company has initiated communications, which include solicitation of written responses to questionnaires and follow-up meetings, with critical suppliers and other business partners to determine the extent to which any Year 2000 issues affecting such third parties will affect the company. Such communications are ongoing and are expected to continue through the end of 1999, with action plans developed and implemented as necessary. The total cost to upgrade or replace IT systems that would not have been Year 2000 ready is estimated to be approximately $135 million. This amount will be capitalized and amortized over the systems' estimated useful lives. Over half of this total has been expended to date, with the remainder to be substantially expended by the end of 1999. None of the company's systems are being upgraded or replaced solely to address Year 2000 issues, although in some cases the timing of the system upgrades and replacements is being accelerated. Based upon the company's current estimates, and information available at this time, incremental out-of-pocket costs of the Year 2000 program, which are required to be expensed as incurred, have been and are expected to be immaterial to the company's financial results. A large part of the Year 2000 effort has been accomplished through the redeployment of existing resources. The cost of such redeployment or of internal management time has not been specifically quantified. However, no critical projects of the company have been deferred due to the Year 2000 program. Management does not believe there has been or will be a significant disruption to the company's business due to the Year 2000 remediation effort. Management of the company believes that its program will be effective to resolve the Year 2000 issue in a timely manner. The company has, however, begun contingency planning to address any situations that may arise in which the readiness of the company's internal technology or that of third parties is not reasonably expected to be adequate, and where practical alternatives are available. There can be no assurance that the company's Year 2000 program or the programs of critical business partners will be successful. Any failure to adequately address the Year 2000 issue could significantly disrupt the company's operations and possibly lead to litigation against the company. The costs and expenses associated with any such failure or litigation, or with any disruptions in the economy in general as a result of the Year 2000, are not presently estimable, but could have a material adverse effect on the company's business and results of operations. Legal Proceedings See Note 12 to the Consolidated Financial Statements for a discussion of the
- 48. company's legal contingenciesand related insurance coverage with respect to cases and claims relating to the company's plasma-based therapies and mammary implants, as well as other matters. Upon resolution of any of these uncertainties, the company may incur charges in excess of presently established reserves. While such a future charge could have a material adverse effect on the company's net income or cash flows in the period in which it is recorded or paid, based on the advice of counsel, management believes that any outcome of these actions, individually or in the aggregate, will not have a material adverse effect on the company's consolidated financial position. Based on the company's assessment of the costs associated with its environmental responsibilities, including recurring administrative costs, capital expenditures and other compliance costs, such costs have not had, and in management's opinion, will not have in the foreseeable future, a material effect on the company's financial position, results of operations, cash flows or competitive position. 29 <PAGE> Management's Discussion & Analysis Forward-Looking Information The matters discussed in this section include forward-looking statements that involve risks and uncertainties, including, but not limited to, currency exchange rates, technological advances in the medical field, unforeseen information technology issues related to the company or third parties, economic conditions, demand and market acceptance risks for new and existing products, technologies and health-care services, the impact of competitive products and pricing, manufacturing capacity, new plant start-ups, global regulatory, trade and tax policies, continued price competition, product development risks, including technological difficulties, ability to enforce patents, unforeseen commercialization and regulatory factors, and other risks more completely reflected in the company's filings with the U.S. Securities and Exchange Commission. In particular, the company, as well as other companies in its industry, is experiencing increased regulatory activity by the U.S. Food and Drug Administration with respect to its plasma-based biologicals and its complaint-handling systems. New Accounting and Disclosures Standards In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. This Statement requires that all derivatives be recorded in the balance sheet as either assets or liabilities and be measured at fair value. If certain conditions are met, a derivative may be specifically designated as (i) a hedge of a recognized asset or liability or an unrecognized firm commitment, (ii) a hedge of the exposure to variable cash flows of a forecasted transaction, or (iii) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Management is in the process of evaluating this standard and has not yet determined the future impact on the company's consolidated financial statements. In April 1998, the AICPA issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities," which is effective for fiscal years beginning after December 15, 1998. This SOP provides guidance on the financial reporting of start-up costs and organization costs and requires such costs, as defined, to be expensed as incurred. Initial application of the SOP is required to be reported as the cumulative effect of a change in accounting principle, as
- 49. described in APBOpinion No. 20, "Accounting Changes." Management currently estimates that the after-tax cumulative effect adjustment that will be recognized upon adoption of the SOP will be between $30 million and $35 million. Excluding this initial effect of adopting the standard, management does not anticipate that the new SOP will have a material impact on future results of operations. 30 <PAGE> Management's Responsibility for Financial Reporting The accompanying financial statements and other financial data have been prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with accounting principles generally accepted in the United States and include amounts that are based upon management's best estimates and judgments. Management is responsible for establishing and maintaining a system of internal control over financial reporting and safeguarding assets against unauthorized acquisition, use or disposition. This system is designed to provide reasonable assurance as to the integrity and reliability of financial reporting and asset safeguarding. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal control, and that the cost of such systems should not exceed the benefits to be derived from them. Management believes that the foundation of an appropriate system of internal control is a strong ethical company culture and climate. The Corporate Responsibility Office, which reports to the Public Policy Committee of the board of directors, is responsible for developing and communicating appropriate business practices, policies and initiatives; maintaining independent channels of communication for providing guidance and reporting potential business practice violations; and monitoring compliance with the company's business practices, including annual compliance certifications by senior managers worldwide. Additionally, a professional staff of corporate auditors reviews the design of the related internal control system and the accounting policies and procedures supporting this system and compliance with them. The results of these reviews are reported at least annually to the Public Policy and/or Audit Committees of the board of directors. PricewaterhouseCoopers LLP performs audits, in accordance with generally accepted auditing standards, which include a review of the system of internal controls and result in assurance that the financial statements are, in all material respects, fairly presented. The board of directors, through its Audit Committee comprised solely of non- employee directors, is responsible for overseeing the integrity and reliability of the company's accounting and financial reporting practices and the effectiveness of its system of internal controls. PricewaterhouseCoopers LLP and the corporate auditors meet regularly with, and have access to, this committee, with and without management present, to discuss the results of the audit work. <TABLE> <CAPTION> <S> <C> <C> /s/ Vernon R. Loucks Jr. /s/ Harry M. Jansen Kraemer, Jr. /s/ Brian P. Anderson Vernon R. Loucks Jr. Harry M. Jansen Kraemer, Jr. Brian P. Anderson Chairman of the Board President and Chief Executive Officer Senior Vice President and Chief Financial Officer </TABLE> -
- 50. -------------------------------------------------------------------------------- Report of IndependentAccountants Board of Directors and Stockholders of Baxter International Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, cash flows and stockholders' equity present fairly, in all material respects, the financial position of Baxter International Inc. (the company) and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, 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 misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Chicago, Illinois February 5, 1999 31 <PAGE> Consolidated Balance Sheets <TABLE> <CAPTION> as of December 31 (in millions, except share information) 1998 1997 - -------------------------------------------------------------------------------- -------------------------------------- <S> <C> <C> <C> CURRENT ASSETS Cash and equivalents $ 709 $ 465 Accounts receivable 1,588 1,372 Notes and other current receivables 329 367 Inventories 1,324 1,208 Short-term deferred income taxes 467 253 Prepaid expenses 234 205 -------------------------------------------------------------------------------- --------- Total current assets 4,651 3,870 - --------------------------------------------------------------------------------
- 51. -------------------------------------- PROPERTY, PLANT ANDEQUIPMENT, NET 2,673 2,360 - -------------------------------------------------------------------------------- -------------------------------------- OTHER ASSETS Goodwill and other intangibles 1,817 1,622 Insurance receivables 378 409 Other 566 446 -------------------------------------------------------------------------------- --------- Total other assets 2,761 2,477 -------------------------------------------------------------------------------- --------- Total assets $10,085 $8,707 - -------------------------------------------------------------------------------- -------------------------------------- CURRENT LIABILITIES Notes payable to banks $ 156 $ 102 Current maturities of long-term debt and lease obligations 115 42 Accounts payable and accrued liabilities 2,181 1,963 Income taxes payable 536 450 -------------------------------------------------------------------------------- --------- Total current liabilities 2,988 2,557 - -------------------------------------------------------------------------------- -------------------------------------- LONG-TERM DEBT AND LEASE OBLIGATIONS 3,096 2,635 - -------------------------------------------------------------------------------- -------------------------------------- LONG-TERM DEFERRED INCOME TAXES 505 316 - -------------------------------------------------------------------------------- -------------------------------------- LONG-TERM LITIGATION LIABILITIES 246 210 - -------------------------------------------------------------------------------- -------------------------------------- OTHER LONG-TERM LIABILITIES 411 370 - -------------------------------------------------------------------------------- -------------------------------------- STOCKHOLDERS' EQUITY Common stock, $1 par value, authorized 350,000,000 shares, issued 291,248,251 shares
- 52. in 1998 and287,701,247 shares in 1997 291 288 Additional contributed capital 2,064 1,876 Retained earnings 990 1,006 Common stock in treasury, at cost, 4,919,141 shares in 1998 and 7,662,187 shares in 1997 (210) (329) Accumulated other comprehensive income (296) (222) -------------------------------------------------------------------------------- --------- Total stockholders' equity 2,839 2,619 -------------------------------------------------------------------------------- --------- Total liabilities and stockholders' equity $10,085 $8,707 ================================================================================ ====================================== The accompanying notes are an integral part of these consolidated financial statements. </TABLE> 32 <PAGE> Consolidated Statements of Income <TABLE> <CAPTION> years ended December 31 (in millions, except per share data) 1998 1997 1996 - -------------------------------------------------------------------------------- ------------------------------------------------- <S> <C> <C> <C> <C> OPERATIONS Net sales $6,599 $6,138 $5,438 Costs and expenses Cost of goods sold 3,623 3,340 3,009 Marketing and administrative expenses 1,426 1,356 1,142 Research and development expenses 379 392 340 In-process research and development 116 352 -- Exit and other reorganization costs 131 -- -- Net litigation charge 178 -- -- Interest, net 161 163 103 Goodwill amortization 52 45 36 Other (income) expense (16) (33) 15
- 53. -------------------------------------------------------------------------------- -------------------- Total costs andexpenses 6,050 5,615 4,645 -------------------------------------------------------------------------------- -------------------- Income from continuing operations before income taxes 549 523 793 Income tax expense 234 223 218 -------------------------------------------------------------------------------- -------------------- Income from continuing operations 315 300 575 -------------------------------------------------------------------------------- -------------------- Discontinued operations -- -- 94 -------------------------------------------------------------------------------- -------------------- Net income $ 315 $ 300 $ 669 - -------------------------------------------------------------------------------- ------------------------------------------------- PER SHARE DATA Earnings per basic common share Continuing operations $ 1.11 $ 1.08 $ 2.11 Net income $ 1.11 $ 1.08 $ 2.46 -------------------------------------------------------------------------------- -------------------- Earnings per diluted common share Continuing operations $ 1.09 $ 1.06 $ 2.07 Net income $ 1.09 $ 1.06 $ 2.41 -------------------------------------------------------------------------------- -------------------- Weighted average number of common shares outstanding Basic 284 278 272 Diluted 289 282 277 - -------------------------------------------------------------------------------- ------------------------------------------------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 33 <PAGE>
- 54. Consolidated Statements ofCash Flows <TABLE> <CAPTION> years ended December 31 (in millions) (brackets denote cash outflows) 1998 1997 1996 - -------------------------------------------------------------------------------- ----------------------------------------------- <S> <C> <C> <C> <C> CASH FLOWS FROM Income from continuing operations $ 315 $ 300 $ 575 CONTINUING OPERATIONS Adjustments Depreciation and amortization 426 398 348 Deferred income taxes (56) (1) 74 Gain on asset dispositions (23) (48) (9) Acquired research and development 116 352 -- Net litigation charge 178 -- -- Exit and other reorganization costs 131 -- -- Other 7 9 17 Changes in balance sheet items Accounts receivable (144) (56) (258) Inventories (80) (102) 59 Accounts payable and accrued liabilities 188 106 85 Net litigation payments (11) (215) (219) Restructuring program payments (17) (19) (37) Other (39) (108) 65 -------------------------------------------------------------------------------- ------------------ Cash flows from continuing operations 991 616 700 - -------------------------------------------------------------------------------- ----------------------------------------------- CASH FLOWS FROM DISCONTINUED OPERATIONS -- -- 93 - -------------------------------------------------------------------------------- ----------------------------------------------- CASH FLOWS FROM Capital expenditures (492) (403) (318) INVESTING ACTIVITIES Installed base of equipment leased to customers (104) (93) (80) Acquisitions (net of cash received) and investments in affiliates (331) (622) (294) Divestitures and other asset dispositions 3 (23) (15)
- 55. -------------------------------------------------------------------------------- ------------------ Cash flows frominvesting activities (924) (1,141) (707) - -------------------------------------------------------------------------------- ----------------------------------------------- CASH FLOWS FROM Issuances of debt and lease obligations 1,143 855 1,855 FINANCING ACTIVITIES Redemption of debt and lease obligations (598) (465) (1,674) Change in debt with maturities of three months or less, net (159) 81 429 Common stock cash dividends (331) (316) (320) Stock issued under employee benefit plans 118 110 193 Purchase of treasury stock -- -- (267) -------------------------------------------------------------------------------- ------------------ Cash flows from financing activities 173 265 216 - -------------------------------------------------------------------------------- ----------------------------------------------- EFFECT OF CURRENCY EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS 4 (36) (17) - -------------------------------------------------------------------------------- ----------------------------------------------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS 244 (296) 285 - -------------------------------------------------------------------------------- ----------------------------------------------- CASH AND EQUIVALENTS AT BEGINNING OF YEAR 465 761 476 - -------------------------------------------------------------------------------- ----------------------------------------------- CASH AND EQUIVALENTS AT END OF YEAR $ 709 $ 465 $ 761 - -------------------------------------------------------------------------------- ----------------------------------------------- Supplemental information Interest paid, net of portion capitalized $ 210 $ 155 $ 215 Income taxes paid $ 145 $ 174 $ 114 - -------------------------------------------------------------------------------- ----------------------------------------------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 34
- 56. <PAGE> Consolidated Statements ofStockholders' Equity <TABLE> <CAPTION> Accumulated Total Additional Other Stockholders' Common Contributed Retained Treasury Comprehensive Comprehensive years ended December 31 (in millions) Equity Stock Capital Earnings Stock Income Income (Loss) - -------------------------------------------------------------------------------- ---------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> BALANCE AT DECEMBER 31, 1995 $ 3,704 $ 288 $ 1,837 $ 2,105 $ (550) $ 24 - -------------------------------------------------------------------------------- -------------------- -------------- Comprehensive income--1996 Net income 669 669 $ 669 Other comprehensive income (loss) Currency translation adjustments (44) (44) (44) -------------- Comprehensive income $ 625 -------------- Common stock issued for acquisitions 1 1 Common stock issued under employee-benefit plans 193 (12) 205 Purchases of common stock (267) (267) Common stock cash dividends (320) (320) Distribution of Allegiance Corporation common stock to stockholders (1,432) (1,432) - -------------------------------------------------------------------------------- -------------------- -------------- BALANCE AT DECEMBER 31, 1996 2,504 288 1,825 1,022 (611) (20) - -------------------------------------------------------------------------------- -------------------- -------------- Comprehensive income--1997 Net income 300 300 $ 300 Other comprehensive income (loss) Currency translation adjustments (202) (202) (202) --------------
- 57. Comprehensive income $ 98 -------------- Commonstock issued for acquisitions 223 45 178 Common stock issued under employee-benefit plans 110 6 104 Common stock cash dividends (316) (316) - -------------------------------------------------------------------------------- -------------------- -------------- BALANCE AT DECEMBER 31, 1997 2,619 288 1,876 1,006 (329) (222) - -------------------------------------------------------------------------------- -------------------- -------------- Comprehensive income--1998 Net income 315 315 $ 315 Other comprehensive income (loss) Currency translation adjustments, net of tax benefit of $56 (75) (75) (75) Unrealized net gain on marketable securities, net of tax of $1 1 1 1 -------------- Comprehensive income $ 241 -------------- Common stock issued for acquisitions 192 3 189 Common stock issued under employee-benefit plans 118 (1) 119 Common stock cash dividends (331) (331) - -------------------------------------------------------------------------------- -------------------- -------------- BALANCE AT DECEMBER 31, 1998 $ 2,839 $ 291 $ 2,064 $ 990 $ (210) $ (296) - -------------------------------------------------------------------------------- -------------------- -------------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 35 <PAGE> Notes to Consolidated Financial Statements 1 Summary of Significant Accounting Policies Financial statement presentation
- 58. The preparation ofthe financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Basis of consolidation The consolidated financial statements include the accounts of Baxter International Inc. and its majority-owned, controlled subsidiaries (Baxter or the company). Operations outside the United States and its territories are included in the consolidated financial statements on the basis of fiscal years ending November 30 in order to facilitate timely consolidation. This one-month reporting lag will be eliminated in 1999 for certain of these international operations and the results of operations of December 1998 for these entities, which would have previously been reported in results of fiscal 1999, will be recorded as an adjustment to retained earnings for fiscal 1999. The one-month reporting lag for the remainder of the international operations will be eliminated in 2000. INVENTORIES <TABLE> <CAPTION> as of December 31 (in millions) 1998 1997 - ------------------------------------------------------------------------------- <S> <C> <C> Raw materials $ 315 $ 279 Work in process 262 243 Finished products 747 686 - ------------------------------------------------------------------------------- Total inventories $1,324 $1,208 =============================================================================== </TABLE> Inventories are stated at the lower of cost (first-in, first-out method) or market value. Market value for raw materials is based on replacement costs and, for other inventory classifications, on net realizable value. PROPERTY, PLANT AND EQUIPMENT <TABLE> <CAPTION> as of December 31 (in millions) 1998 1997 - ------------------------------------------------------------------------------- <S> <C> <C> Land $ 120 $ 106 Buildings and leasehold improvements 1,091 994 Machinery and equipment 2,801 2,515 Equipment leased to customers 525 449 Construction in progress 452 343 - ------------------------------------------------------------------------------- Total property, plant and equipment, at cost 4,989 4,407 Accumulated depreciation and amortization (2,316) (2,047) - ------------------------------------------------------------------------------- Net property, plant and equipment $ 2,673 $ 2,360 =============================================================================== </TABLE>
- 59. Depreciation and amortizationare principally calculated on the straight-line method over the estimated useful lives of the related assets, which range from 20 to 50 years for buildings and improvements and from three to 15 years for machinery and equipment. Leasehold improvements are amortized over the life of the related facility lease or the asset, whichever is shorter. Straight-line and accelerated methods of depreciation are used for income tax purposes. Depreciation expense was $304 million, $299 million and $258 million in 1998, 1997 and 1996, respectively. Repairs and maintenance expense was $103 million, $103 million and $93 million in 1998, 1997 and 1996, respectively. GOODWILL AND OTHER INTANGIBLE ASSETS <TABLE> <CAPTION> as of December 31 (in millions) 1998 1997 - ------------------------------------------------------------------------------- <S> <C> <C> Goodwill $1,800 $1,571 Accumulated amortization (431) (379) - ------------------------------------------------------------------------------- Net goodwill $1,369 $1,192 - ------------------------------------------------------------------------------- Other intangibles $ 872 $ 804 Accumulated amortization (424) (374) - ------------------------------------------------------------------------------- Net other intangibles $ 448 $ 430 =============================================================================== </TABLE> Intangible assets are amortized on a straight-line basis. Goodwill is amortized over estimated useful lives ranging from 15 to 40 years; other intangible assets, consisting of purchased patents, trademarks and other identified rights, are amortized over their legal or estimated useful lives, whichever is shorter (generally not exceeding 17 years). Based upon management's assessment of the future undiscounted operating cash flows of acquired businesses, the carrying value of goodwill at December 31, 1998, has not been impaired. Earnings per share (EPS) The numerator for both basic and diluted EPS is income from continuing operations or net income, as applicable. The denominator for basic EPS is the weighted-average number of common shares outstanding during the period. The following is a reconciliation of the shares (denominator) of the basic and diluted per-share computations: <TABLE> <CAPTION> years ended December 31 (in millions of shares) 1998 1997 1996 - ------------------------------------------------------------------------------- <S> <C> <C> <C> Basic EPS 284 278 272 - ------------------------------------------------------------------------------- Effect of dilutive securities Employee stock options 5 4 4 Employee stock subscriptions -- -- 1 -
- 60. ------------------------------------------------------------------------------- Diluted EPS 289282 277 =============================================================================== </TABLE> In 1996, basic and diluted EPS from discontinued operations (net of costs associated with effecting the business distribution) were $0.35 and $0.34, respectively. Comprehensive income The company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130) in 1998. This statement establishes standards for the reporting and presentation of comprehensive income and its components in a full set of financial statements, and requires restatement of prior year 36 <PAGE> information. Comprehensive income encompasses all changes in stockholders' equity other than those arising from stockholders. The adoption of SFAS No. 130 did not affect the company's results of operations or financial position but did affect the presentation of information. Segment information The company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131) in 1998. This statement establishes standards for the reporting of information about operating segments in annual and interim financial statements and requires restatement of prior year information. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker(s) in deciding how to allocate resources and in assessing performance. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position but did affect the disclosure of segment information, as presented in Note 13. Start-up costs Effective at the beginning of 1999, the company will adopt AICPA Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities." This SOP requires that costs of start-up and organization activities previously capitalized be expensed and reported as a cumulative effect of a change in accounting principle, and requires that such costs subsequent to adoption be expensed as incurred. Management currently estimates that the after-tax cumulative effect adjustment that will be recognized upon adoption of the SOP in the first quarter of 1999 will be between $30 million and $35 million. Excluding the initial effect of adopting the standard, management does not anticipate that the new SOP will have a material impact on future results of operations. Derivatives Realized gains and losses on hedges of existing assets or liabilities are included in the carrying amounts of those assets or liabilities and ultimately are recognized in other income. Gains and losses and option premiums relating to qualifying hedges of firm commitments or anticipated transactions are deferred and recognized in income as offsets of gains and losses resulting from the underlying hedged transactions. Gains and losses relating to terminations of qualifying hedges are included in the carrying amounts and amortized over the remaining expected lives of the underlying assets or liabilities. In
- 61. circumstances where theunderlying assets or liabilities are sold or no longer exist, any remaining carrying value adjustments are recognized in other income or expense. Gains and losses on hedges of net investments are reported as foreign currency adjustments in stockholders' equity. The interest rate differential relating to interest rate swaps used to hedge debt obligations and net investments in foreign affiliates is reflected as an adjustment to interest expense over the lives of the swaps. Cash flows from derivatives are classified in the same category as the cash flows from the related investment, borrowing or foreign exchange activity. Cash and equivalents Cash and equivalents include cash, certificates of deposit and marketable securities with a maturity of three months or less. Reclassifications Certain reclassifications have been made to conform the 1997 and 1996 financial statements and footnotes to the 1998 presentation. 2 Discontinued Operations On September 30, 1996, Baxter stockholders of record on September 26, 1996, received all of the outstanding stock of Allegiance Corporation (Allegiance), which was the company's health-care cost management and distribution business, in a tax-free spin-off. As of that date, Allegiance began operating as an independent publicly owned company. Through an issuance of new third-party debt, $1.15 billion of Baxter's existing debt was indirectly assumed by Allegiance upon spin-off. Approximately $1.4 billion of net assets were transferred to Allegiance upon spin-off. In 1996, the company recorded income from discontinued operations of $81 million, which was net of income tax expense of $14 million. In addition, the company recorded $13 million of income in 1996, which consisted of $36 million in benefit plan curtailment gains, net of costs of the distribution and income tax expense of $11 million. 3 Acquisitions and Divestitures All acquisitions during the three years ended December 31, 1998, were accounted for under the purchase method. Results of operations of acquired companies are included in the company's results of operations as of the respective acquisition dates. The purchase price of each acquisition was allocated to the net assets acquired based on estimates of their fair values at the date of the acquisition. The excess of the purchase price over the fair values of the net tangible assets and liabilities acquired was allocated to goodwill and other intangible assets, and is being amortized on a straight-line basis over periods ranging from 14 to 40 years. As further discussed below, a portion of the purchase price for certain of the acquisitions was allocated to in-process research and development (IPR&D) which, under GAAP, was immediately expensed. 37 <PAGE> Notes to Consolidated Financial Statements <TABLE> <CAPTION> Intangible assets Purchase ----------------- (in millions) Date price IPR&D Goodwill Other - --------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> May Somatogen, Inc. 1998 $206 $116 $ 2 $ 3
- 62. December Bieffe Medital S.p.A.1997 188 -- 124 15 March Research Medical, Inc. 1997 239 132 38 40 Immuno December International AG 1996 569 220 96 125 Clintec Nutrition October Company 1996 111 -- 199 -- - --------------------------------------------------------------------------- </TABLE> Somatogen, Inc. (Somatogen) is a developer of recombinant hemoglobin-based technology, which was acquired for 3.5 million shares of common stock. Somatogen shareholders are entitled to a contingent deferred cash payment of up to $2.00 per Somatogen share, or approximately $42 million, based on a percentage of sales of future products through the year 2007. Bieffe Medital S.p.A. (Bieffe) is a manufacturer of dialysis and intravenous solutions and containers. Research Medical, Inc. (RMI) is a provider of specialized products used in open-heart surgery, which was acquired for 4.8 million shares of common stock. Immuno International AG (Immuno) is a manufacturer of biopharmaceutical products and services for transfusion medicine. Clintec Nutrition Company (Clintec) was a joint venture that was dissolved. The company funded its share of previously guaranteed joint venture debt and received the net assets of Clintec's parenteral-nutrition business for the company's 50% share of Clintec's enternal business and a $50 million net cash payment. Based on plans formulated at date of acquisition, approximately $23 million, $22 million, $85 million and $92 million of reserves were established with respect to the acquisitions of Bieffe, RMI, Immuno and Clintec, respectively, principally to rationalize headcount, consolidate redundant facilities and terminate certain contracts relating to the acquired companies. Approximately $3 million, $19 million, $34 million and $47 million of such reserves relating to Bieffe, RMI, Immuno and Clintec, respectively, are remaining at December 31, 1998, and management believes they are adequate to complete the actions contemplated by the plans. Actions executed to date and anticipated in the future are substantially consistent with original plans. Had the 1998 and 1997 acquisitions taken place on January 1 of 1998 or 1997, net sales, net income and earnings per share would not have been materially different from the reported amounts. Had the acquisitions of Immuno, RMI and Clintec taken place on January 1 of 1996, the company's unaudited pro forma net sales in 1996 would have been approximately $6.2 billion. Unaudited pro forma net income, earnings per basic share and earnings per diluted share for the year ended December 31, 1996, would have been $701 million, $2.54 per share and $2.49 per share, respectively. This pro forma information, which excludes the IPR&D charges, is not necessarily indicative of what operating results would have been had the acquisitions occurred on the indicated dates, nor is it necessarily indicative of future operating results. Amounts allocated to IPR&D were determined on the basis of independent appraisals using the income approach, which measures the value of an asset by the present value of its future economic benefits. Estimated cash flows were discounted to their present values at rates of return that incorporate the risk- free rate, the expected rate of inflation, and risks associated with the particular projects, including their stages of completion. Projected revenue and cost assumptions were determined based upon the company's historical experience and industry trends and averages. The following is a summary of the amounts allocated to IPR&D by significant project category (in millions): <TABLE> <CAPTION> Somatogen RMI Immuno
- 63. - --------------------------------------------------------------------- <S> <C><C> <C> Oxygen-carrying therapeutics $116 Minimally invasive surgical procedures $ 76 Plasma-based therapies $142 Vaccines 78 Other 56 - --------------------------------------------------------------------- Total $116 $132 $220 - --------------------------------------------------------------------- </TABLE> Somatogen was a development-stage company focusing on recombinant hemoglobin- based technology. No revenue had ever been generated from commercial product sales. The development of oxygen-carrying therapeutics is a strategic priority to Baxter. At the time of the acquisition of Somatogen, Baxter was in final- stage (Phase III) clinical trials with its HemAssist(R) (DCLHb) product. Baxter acquired Somatogen to advance the development of new generations of recombinant oxygen-carrying technology-based products with enhanced attributes. Subsequent to the date of the acquisition, Baxter decided to end its HemAssist (DCLHb) program and focus on Somatogen's next-generation program. Material net cash inflows relating to Somatogen's IPR&D were forecasted in the valuation to begin in 2004. Estimated research and development costs to be incurred prior to 2004 total approximately $100 million. A discount rate of 22 percent was used in the valuation. The IPR&D charges for RMI and Immuno included 18 and six separate projects, respectively. The status of development, stage of completion, assumptions, nature and timing of remaining efforts for completion, risks and uncertainties, and other key factors varied by individual project. Discount rates used for RMI projects ranged from 14 percent to 20 percent. For Immuno, discount rates of 18 percent and 35 percent were used for plasma-based therapies and vaccines, respectively. Material net cash inflows for the most significant projects 38 <PAGE> were forecasted to commence between 1998 and 2000. The current status of these projects is substantially consistent with the assumptions used in the valuations. Assumed additional research and development expenditures prior to the various dates of product introductions totaled approximately $2 million and $77 million for RMI and Immuno, respectively. The products under development are at various stages of development, and substantial further research and development, per-clinical testing and clinical trials will be required to determine their technical feasibility and commercial viability. There can be no assurance such efforts will be successful. Any delay in the development, introduction or marketing of the products under development could result either in such products being marketed at a time when their cost and performance characteristics would not be competitive in the marketplace or in a shortening of their commercial lives. If the products are not completed on time, the expected return on the company's investments could be significantly and unfavorably impacted. In December 1997, the company and VIMRX Pharmaceuticals Inc. (VIMRX) formed a new cell-therapy company. The company transferred certain assets of its Immunotherapy division into the new company and holds a minority ownership position along with warrants to acquire an additional ownership interest in the future. VIMRX obtained a majority interest in the new company in exchange for 11 million shares of VIMRX common stock and convertible preferred shares with a nominal value of approximately $66 million. Baxter is restricted from selling the common stock or converting the convertible preferred stock for a period of time. The company recognized a pretax gain from the transaction of $32 million.
- 64. The company andVIMRX loaned $30 million and $10 million, respectively, to the new company to provide initial operating funds. 4 Exit and Other Reorganization Costs In September 1998, the company decided to end the clinical development of the Blood Therapies segment's first-generation oxygen-carrying therapeutic called HemAssist (DCLHb) and focus on the next-generation program. While the first- generation program was based on human hemoglobin, the next-generation program is based on genetically engineered hemoglobin molecules. The company also decided to exit certain non-strategic investments, primarily in Asia, and reorganize certain other activities, principally in the Blood Therapies and I.V. Systems/Medical Products segments. As a result of these decisions, the company recorded a $131 million pretax charge primarily for asset writedowns and employee severance, of which approximately $38 million relates to employee severance resulting from the elimination of approximately 400 positions worldwide. Approximately 170 positions have been eliminated to date. The majority of the asset writedowns relate to assets located in a manufacturing facility in Neuchatel, Switzerland, that were used solely in the development and manufacture of HemAssist (DCLHb), and have no alternative future use. In 1999, the company plans to begin modifications to this manufacturing facility, which was designed to manufacture a human hemoglobin product, to produce certain other biopharmaceutical products. Such alternate production is expected to commence at the Neuchatel facility in the next two to four years. In September 1995, the company recorded a restructuring charge of $103 million primarily to eliminate excess plant capacity and reduce manufacturing costs. The charge primarily relates to the closure of a plant and warehouse in Puerto Rico and was comprised principally of asset writedowns and employee severance costs. Production and warehousing have been consolidated into other facilities. Approximately 1,200 positions have been eliminated. The original timetable for the program had been affected by delays in required governmental regulatory reviews relating to the transfer of equipment and production processes to other facilities in Puerto Rico and the United States. With respect to the asset writedowns, the book values of the respective assets were written down to their estimated fair values based on management's expectations of the proceeds upon sale or other disposition, given current market conditions. EXIT AND OTHER REORGANIZATION COSTS <TABLE> <CAPTION> Divestitures Employee- and asset Other (in millions) related costs write-downs costs Total - -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Reserves at December 31, 1995 $ 74 $ 41 $ 32 $147 1996 utilization Cash (26) -- (27) (53) Noncash -- (20) -- (20) Reallocation of reserves (18) 6 12 -- - -------------------------------------------------------------------------------- 1997 utilization Cash (10) -- (5) (15) Noncash and adjustments (3) (10) (2) (15) - -------------------------------------------------------------------------------- 1998 charge 38 79 14 131 1998 utilization
- 65. Cash (21) --(10) (31) Noncash and adjustments -- (78) -- (78) - -------------------------------------------------------------------------------- Reserves at December 31, 1998 $ 34 $ 18 $ 14 $ 66 - -------------------------------------------------------------------------------- </TABLE> Of the remaining reserves, approximately $26 million relates to the 1995 charge and approximately $40 million relates to the 1998 charge. Both of these programs are expected to be substantially completed in early 1999. 39 <PAGE> Notes to Consolidated Financial Statements 5 Long-Term Debt, Credit Facilities & Lease Obligations ----------------------------------------------------- <TABLE> <CAPTION> Effective as of December 31 (in millions) interest rate 1998 1997 - -------------------------------------------------------------------------- <S> <C> <C> <C> Commercial paper 5.6% $ 800 $1,053 - -------------------------------------------------------------------------- Short-term notes 2.5% 659 119 - -------------------------------------------------------------------------- 8.875% notes redeemable by company in 1998 8.9% -- 87 - -------------------------------------------------------------------------- 9.25% notes due 1999 9.9% 99 99 - -------------------------------------------------------------------------- Zero coupon notes due 2000 (unamortized original issue discounts of $24 and $36, respectively) 9.3% 123 112 - -------------------------------------------------------------------------- 8.125% notes due 2001 6.0% 158 160 - -------------------------------------------------------------------------- 7.625% notes due 2002 7.4% 151 151 - -------------------------------------------------------------------------- 7.125% notes due 2007 7.1% 251 252 - -------------------------------------------------------------------------- 7.25% notes due 2008 7.5% 198 198 - -------------------------------------------------------------------------- 9.5% notes due 2008 9.8% 75 100 - -------------------------------------------------------------------------- 7.65% debentures due 2027 7.6% 202 202 - -------------------------------------------------------------------------- 6.625% debentures due 2028 5.7% 249 -- - -------------------------------------------------------------------------- Other 246 144 - -------------------------------------------------------------------------- Total long-term debt and lease obligations 3,211 2,677 Current portion (115) (42) - --------------------------------------------------------------------------
- 66. Long-term portion $3,096$2,635 ========================================================================== </TABLE> The company leases certain facilities and equipment under capital and operating leases expiring at various dates. Most of the operating leases contain renewal options. Rent expense under operating leases was $87 million, $86 million and $81 million in 1998, 1997 and 1996, respectively. <TABLE> <CAPTION> FUTURE MINIMUM LEASE PAYMENTS AND DEBT MATURITIES Aggregate debt maturities as of and for the years ended December 31 Operating and capital (in millions) leases leases - ------------------------------------------------------------------------------ <S> <C> <C> 1999 $ 73 $ 120 2000 56 286 2001 36 161 2002 28 154 2003 23 1,461/1/ Thereafter 53 1,075 - ------------------------------------------------------------------------------ Total obligations and commitments $269 3,257 ============================================================== Amounts representing interest, discounts, premiums and deferred financing costs (46) - ------------------------------------------------------------------------------ Present value of long-term debt and lease obligations $ 3,211 ============================================================================== </TABLE> 1. Includes $1,459 million of commercial paper and short-term notes supported by long-term credit facilities expiring in 2003. During 1997, Baxter maintained a $1.5 billion revolving credit facility, which was scheduled to expire in 2001. During 1998, the company renegotiated this facility by entering into two separate facilities and reducing the total to $1.2 billion. Of this total, $400 million will expire in 1999 and another $800 million facility will expire in 2003. The facilities enable the company to borrow funds on an unsecured basis at variable interest rates and contain various covenants, including a maximum debt-to-capital ratio and a minimum interest coverage ratio. There were no borrowings outstanding under these facilities at December 31, 1998 or 1997. At December 31, 1998 and 1997, commercial paper and short-term notes together totaling $800 million and $1,172 million, respectively, have been classified with long-term debt as they are supported by the long-term credit facilities, which management intends to continue to refinance. During 1998, a wholly-owned subsidiary of the company entered into an $800 million revolving credit facility, which expires in 2003 and enables the subsidiary to borrow funds at variable interest rates. The agreement contains various covenants, including a minimum interest coverage ratio, a maximum debt- to-adjusted earnings ratio and a minimum adjusted net worth amount. There were $659 million in borrowings outstanding under this facility at December 31, 1998,
- 67. which were usedto replace commercial paper. These borrowings are secured and guaranteed by a pledge of the shares of the borrower and certain of its subsidiaries. Baxter also maintains other short-term credit arrangements which totaled approximately $819 million at December 31, 1998. Approximately $94 million and $221 million of borrowings were outstanding under these facilities at December 31, 1998 and 1997, respectively. 40 <PAGE> 6 Financial Instruments and Risk Management Concentrations of credit risk In the normal course of business, the company provides credit to customers in the health-care industry, performs credit evaluations of these customers and maintains reserves for potential credit losses which, when realized, have been within the range of management's allowance for doubtful accounts. The allowance for doubtful accounts was $41 million and $29 million at December 31, 1998 and 1997, respectively. The company invests the majority of its excess cash in certificates of deposit or money market accounts and, where appropriate, diversifies the concentration of cash among different financial institutions. With respect to financial instruments, where appropriate, the company has diversified its selection of counterparties, and has arranged collateralization and master-netting agreements to minimize the risk of loss. Interest rate risk management Baxter uses forward contracts, options and interest rate swaps generally from one to three years in duration to manage the company's exposure to adverse movements in interest rates. The book values of debt at December 31, 1998 and 1997 reflect deferred hedge gains of $16 million and $19 million, respectively, offset by $2 million and $3 million of deferred hedge losses, respectively. Foreign exchange risk management The company principally hedges the following currencies: Japanese Yen, U.K. Pound Sterling, Canadian Dollar, Belgian Francs, French Francs, German Marks and Austrian Schillings. The company enters into various types of foreign exchange contracts to protect the company from the risk that the eventual net dollar cash flows resulting from transactions with foreign customers and suppliers may be adversely affected by changes in currency exchange rates. The company also enters into foreign exchange contracts, with terms generally less than two years, to hedge anticipated but not yet committed sales expected to be denominated in foreign currencies. Deferred hedging gains on such hedges totaled $3 million and $15 million at December 31, 1998 and 1997, respectively. The company has entered into foreign exchange contracts, for up to 10 years, to hedge certain of its net investments in foreign affiliates. These contracts hedge the U.S. dollar value of foreign currency denominated net assets from the effects of volatility in currency exchange rates by creating debt denominated in the respective currencies of the underlying net assets. The market value of these contracts has decreased and the carrying amount of the foreign currency denominated debt has increased from 1997 to 1998 due to increased volatility and fluctuations in currency exchange rates. The increase in the debt balance is directly offset by an increase in the underlying net assets. INTEREST RATE AND FOREIGN EXCHANGE CONTRACTS
- 68. <TABLE> <CAPTION> as of December31 (in millions) 1998 1997 - -------------------------------------------------------------------------------- -------------------------------------------- Weighted- Weighted- average average Notional Market interest Notional Market interest amounts value rate amounts value rate - -------------------------------------------------------------------------------- -------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Interest rate contracts Floating to fixed rate hedges $ 400 $ (4) $ 400 $(1) Average pay rate 5.4% 5.4% Average receive rate 5.6% 5.8% Call option -- -- 25 6 Floating to fixed rate (4.65%) hedge commencing 1999 200 1 -- -- Foreign exchange contracts Forwards and options primarily used to hedge anticipated sales 797 3 n/a 397 8 n/a Forwards and swaps used to hedge certain receivables and payables 274 -- n/a 290 7 n/a Forwards and swaps used to hedge net investments in foreign affiliates 2,647 (154) n/a 1,546 10 n/a - -------------------------------------------------------------------------------- -------------------------------------------- </TABLE> 41 <PAGE> Notes to Consolidated Financial Statements FAIR VALUES OF FINANCIAL INSTRUMENTS <TABLE> <CAPTION> Approximate Carrying amounts fair values ---------------- ---------------- as of December 31 (in millions) 1998 1997 1998
- 69. 1997 - -------------------------------------------------------------------------------- -- <S> <C> <C><C> <C> Assets Long-term insurance and other receivables $ 408 $ 439 $ 351 $ 369 Investments in affiliates 120 180 116 192 Liabilities Notes payable to banks 156 102 156 102 Short-term borrowings classified as long term/2/ 1,459 1,172 1,462 1,173 Other long-term debt and lease obligations/1,2/ 1,752 1,505 1,854 1,625 Foreign exchange hedges -- asset (liability) (113) 23 (151) 25 Long-term litigation liabilities 246 210 217 191 - -------------------------------------------------------------------------------- -- </TABLE> 1. Based on quoted market prices. 2. Interest rate hedge carrying amounts are included in corresponding debt balances. Although the company's litigation remains unresolved by final orders or settlement agreements in some cases, the estimated fair values of insurance and other receivables and long-term litigation liabilities were computed by discounting the expected cash flows based on currently available information. The carrying values of all other financial instruments approximate their fair values due to the short-term maturities of these assets and liabilities. 7 Accounts Payable and Accrued Liabilities <TABLE> <CAPTION> as of December 31 (in millions) 1998 1997 - -------------------------------------------------------------- <S> <C> <C> Accounts payable, principally trade $ 560 $ 572 Employee compensation and withholdings 269 225 Litigation 476 400 Pension and other deferred benefits 20 38 Property, payroll and other taxes 95 74 Other 761 654 - -------------------------------------------------------------- Accounts payable and accrued liabilities $2,181 $1,963 - -------------------------------------------------------------- </TABLE> 8 Common Stock
- 70. Baxter has severalstock-based compensation plans, which are described below. The company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans and its stock purchase plans. The compensation expense recognized for continuing operations for performance-based and restricted plans was $18 million, $13 million and $20 million in 1998, 1997 and 1996, respectively. Had compensation cost for all of the company's stock-based compensation plans been determined based on the fair value at the grant dates consistent with the method of FASB Statement No. 123, "Accounting for Stock-Based Compensation," the company's income and earnings per share (EPS) would have been reduced to the pro forma amounts indicated below: PRO FORMA INCOME AND EPS FROM CONTINUING OPERATIONS <TABLE> <CAPTION> years ended December 31 (in millions, except per share data) 1998 1997 1996 - -------------------------------------------------------------------- <S> <C> <C> <C> Income from continuing operations As reported $ 315 $ 300 $ 575 Pro forma $ 282 $ 266 $ 557 - -------------------------------------------------------------------- EPS from continuing operations Basic, as reported $1.11 $1.08 $2.11 Basic, pro forma $ .99 $ .96 $2.05 Diluted, as reported $1.09 $1.06 $2.07 Diluted, pro forma $ .98 $ .94 $2.01 - -------------------------------------------------------------------- </TABLE> The pro forma amounts reflected above are not likely to be representative of the pro forma amounts in future years due to the FASB Statement No. 123 transition rules that require pro forma disclosures only for awards granted after 1994. Pro forma income and EPS from discontinued operations were $66 million and $0.24, respectively, in 1996. All outstanding options were modified as a result of the spin-off of Allegiance. Equitable adjustments were made to the number of shares and exercise price for each option and employee stock subscription outstanding. Pro forma compensation expense for stock options and employee-stock subscriptions was calculated using the Black-Scholes model. Fixed stock option plans Stock options have been granted at various dates. All grants have a 10-year initial term and most have an exercise price equal to 100% of market value on the date of grant. Vesting terms vary, with most outstanding options vesting ratably over three years, 100% in five years or 100% in three years. Some grants also vest on an accelerated basis upon the achievement of specified stock price levels. Employees transferring to Allegiance generally were required to exercise any vested options within 90 days from the date of spin-off, and all unexercised options were canceled after that date. All unvested options held by Allegiance employees were canceled 90 days after the date of spin-off. Under the rules of FASB Statement No. 123, the modified options held by employees remaining with the company were treated as an exchange of the original award for a new award.
- 71. 42 <PAGE> <TABLE> <CAPTION> FIXED STOCK OPTIONSOUTSTANDING Options outstanding Options exercisable - -------------------------------------------------------------------------------- ---------------------------------------------------- Weighted-average Range of Outstanding remaining Weighted- average Exercisable Weighted-average exercise prices December 31, 1998 contractual life (years) exercise price per share December 31, 1998 exercise price per share - -------------------------------------------------------------------------------- ---------------------------------------------------- <S> <C> <C> <C> <C> <C> $14 - 26 1,754,835 4.44 $24.09 1,754,835 $24.09 27 - 40 2,809,893 5.58 34.13 2,809,893 34.13 41 - 51 7,036,843 8.19 47.67 -- -- 52 - 84 4,771,316 7.95 59.87 -- -- - -------------------------------------------------------------------------------- ---------------------------------------------------- $14 - 84 16,372,887 7.27 $46.37 4,564,728 $30.27 - -------------------------------------------------------------------------------- ---------------------------------------------------- </TABLE> <TABLE> <CAPTION> STOCK OPTION PLAN STATUS as of and for the years ended December 31 1998 1997 1996 - -------------------------------------------------------------------------------- ----------------------------------------------- Weighted- Weighted- Weighted- average average average exercise exercise exercise Shares price Shares price Shares price - -------------------------------------------------------------------------------- ----------------------------------------------- <S> <C> <C> <C>
- 72. <C> <C> <C> Outstandingat beginning of year 13,882,347 $39.64 12,501,329 $34.89 14,651,835 $31.35 Granted 4,805,535 59.83 4,208,302 47.59 3,538,300 48.12 Exercised (1,728,273) 28.69 (2,406,409) 29.04 (4,080,414) 27.88 Forfeited (586,722) 49.51 (420,875) 38.76 (2,404,225) 33.09 Equitable adjustment -- -- -- -- 795,833 29.98 - -------------------------------------------------------------------------------- ----------------------------------------------- Outstanding at end of year 16,372,887 $46.37 13,882,347 $39.64 12,501,329 $34.89 - -------------------------------------------------------------------------------- ----------------------------------------------- Options exercisable at end of year 4,564,728 6,314,423 $29.84 4,542,496 $26.65 Weighted-average fair value of option granted during the year $18.58 $15.95 $12.05 - -------------------------------------------------------------------------------- ----------------------------------------------- </TABLE> Included in the tables above are certain premium-priced options, all of which are outstanding at year-end 1998. During 1998, approximately 450,000 stock options were granted with a weighted average exercise price of $76.78 (which was higher than the market price of the stock on the grant date) and a weighted- average fair value of $12.70. During 1996, approximately 2.4 million stock options were granted with an exercise price of $51 (which was higher than the market price of the stock on grant date) and a weighted-average fair value of $11.01. Pro forma compensation expense was calculated with the following weighted- average assumptions for grants in 1998, 1997, and 1996, respectively: dividend yield of 1.5%, 2.1% and 2.7%; expected life of six, seven and eight years; expected volatility of 29%, 28% and 25%; and risk-free interest rates of 5.3%, 6.2% and 6.6%. Stock options have also been granted to The Baxter Allegiance Foundation (a philanthropic organization) as follows: an option to purchase 1,124,478 shares of common stock at $31.45 per share was granted on April 22, 1991, and expires in 2001; and an option to purchase 1,074,000 shares of common stock at $31.42 per share was granted on December 2, 1992, and expires in 2002. Options to purchase 878,253 and 1,074,000 shares of common stock are outstanding under the 1991 and 1992 grants, respectively. Employee stock purchase plans The company has employee stock purchase plans whereby it is authorized, as of December 31, 1998, to issue up to 12 million shares of common stock to its employees, nearly all of whom are eligible to participate. The purchase price is the lower of 85% of the closing market price on the date of subscription or 85% of the closing market price as defined by the plans. The total subscription amount for each participant cannot exceed 25% of current annual pay. Under the plans, the company sold 810,855, 760,490 and 1,121,907 shares to employees in 1998, 1997 and 1996, respectively. Pro forma compensation expense was estimated with the following weighted-average assumptions for 1998, 1997 and 1996, respectively: dividend yield of 1.5%, 2.1% and 2.7%; expected life of one year
- 73. for all periods;expected volatility of 33%, 33% and 26%, and risk-free interest rates of 4.4%, 5.7% and 5.7%. The weighted-average fair value of those purchase rights granted in 1998, 1997 and 1996 was $15.16, $13.27 and $10.93, respectively. 43 <PAGE> Notes to Consolidated Financial Statements Restricted stock and performance-share plans Under various plans, the company has made grants of restricted stock and performance shares in the form of the company's common stock to provide incentive compensation to key employees and non-employee directors. Under the long-term incentive plan, grants are generally made annually and are earned based on the achievement of financial performance targets, adjusted up or down by the company's stock performance against the change in the Standard & Poor's Medical Products and Supplies Index. The restricted shares vest one year after they are earned. At December 31, 1998, 240,510 shares were subject to restrictions, which lapse between 1999 and 2002, and 1,036,419 shares were subject to restrictions that lapse upon achievement of future performance objectives and related vesting periods. During 1998, 1997 and 1996, 242,740, 24,930 and 720,043 shares, respectively, of restricted stock and performance shares were granted at weighted-average grant-date fair values of $58.74, $51.29 and $41.89 per share, respectively. Other In connection with a voluntary Shared Investment Plan implemented during 1994, members of Baxter's senior-management team purchased shares of the company's common stock. Baxter managers used personal full-recourse loans to purchase the stock at the June 15, 1994, closing price. Baxter has agreed to guarantee repayment to the banks in the event of default by a participant. The participant loan amount outstanding at December 31, 1998, is $56 million. Approximately 100 million shares of no par value preferred stock are authorized for issuance in series with varying terms as determined by the board of directors. During 1989, common stockholders received a dividend of one preferred stock purchase right (collectively, the "Rights") for each share of common stock. Each Right, under specified circumstances, entitles the owner to purchase one- hundredth of a share of Series A Junior Participating Preferred Stock at a purchase price of $70. The Rights become exercisable at a price of $140 and at a specified time after (1) a person or group acquires 20% or more of the company's common stock or (2) a tender or exchange offer for 20% or more of the company's common stock. The Rights expire on March 20, 1999, unless earlier redeemed by the company under certain circumstances at a price of $0.01 per Right. In 1998, the board of directors approved the distribution of new rights (the "New Rights") to take effect upon the expiration of the Rights. The New Rights will be issued on substantially the same terms as the Rights, except the triggers for exercisability will each be 15%, the exercise price will be $275 and the New Rights will expire on March 23, 2009. 9 Retirement and Other Benefit Programs The company sponsors several qualified and nonqualified pension plans and other postretirement benefit plans for its employees. <TABLE> <CAPTION>
- 74. RECONCILIATION OF PLANS'BENEFIT OBLIGATIONS, ASSETS AND FUNDED STATUS as of and for the years Pension Other ended December 31 benefits benefits ------------------- ------------------ (in millions) 1998 1997 1998 1997 <S> <C> <C> <C> <C> Reconciliation of benefit obligation Beginning of year $1,301 $1,140 $ 202 $ 213 Service cost 41 36 3 3 Interest cost 96 90 14 14 Participant contributions 2 1 3 3 Actuarial (gain) loss 59 84 (12) (21) Acquisitions -- 28 -- -- Benefit payments (72) (68) (10) (10) Currency exchange-rate changes and other (4) (10) -- -- - --------------------------------------------------------------------------- End of year 1,423 1,301 200 202 - --------------------------------------------------------------------------- Reconciliation of fair value of plan assets Beginning of year 1,305 1,190 -- -- Actual return on plan assets 180 177 -- -- Employer contributions 53 12 7 7 Participant contributions 2 1 3 3 Benefit payments (72) (68) (10) (10) Currency exchange-rate changes and other 1 (7) -- -- - --------------------------------------------------------------------------- End of year 1,469 1,305 -- -- - --------------------------------------------------------------------------- Funded status Funded status at December 31 46 4 (200) (202) Unrecognized transition obligation 18 22 Unrecognized net gains (66) (55) (75) (70) Unrecognized prior-service cost 1 2 -- -- - --------------------------------------------------------------------------- Net amount recognized $ (1) $ (27) $(275) $(272) - --------------------------------------------------------------------------- Prepaid benefit cost $ 119 $ 87 $ -- $ -- Accrued benefit liability (120) (114) (275) (272) - --------------------------------------------------------------------------- Net amount recognized $ (1) $ (27) $(275) $(272) - --------------------------------------------------------------------------- </TABLE> The accumulated benefit obligation is in excess of plan assets for certain of the company's pension plans. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for these plans was $146 million, $123 million and $18 million, respectively, at December 31, 1998, and $132 million, $110 million and $15 million, respectively, at December 31, 1997. 44 <PAGE> NET PERIODIC BENEFIT COST <TABLE> <CAPTION> Pension
- 75. Other benefits benefits ----------------------- ---------------------- years ended December31 (in millions) 1998 1997 1996 1998 1997 1996 - -------------------------------------------------------------------------------- --------------- <S> <C> <C> <C> <C> <C> <C> Service cost $ 41 $ 36 $ 42 $ 3 $ 3 $ 5 Interest cost 96 90 76 14 14 15 Expected return on plan assets (117) (109) (83) -- -- -- Amortization of prior service cost 1 2 1 Amortization of transition obligation 6 6 7 Recognized actuarial (gain) loss -- -- 4 (6) (6) (2) - -------------------------------------------------------------------------------- --------------- Net periodic benefit cost $ 27 $ 25 $ 47 $ 11 $ 11 $ 18 - -------------------------------------------------------------------------------- --------------- </TABLE> ASSUMPTIONS USED IN DETERMINING BENEFIT OBLIGATIONS <TABLE> <CAPTION> Pension Other % benefits -------------- ------------- 1998 1997 1998 1997 - --------------------------------------------------------------------- <S> <C> <C> <C> <C> Discount rate U.S. and Puerto Rico plans 7.25% 7.5% 7.25% 7.5% International plans (average) 5.4% 6.0% n/a n/a Expected return on plan assets U.S. and Puerto Rico plans 10.5% 10.5% n/a n/a International plans (average) 7.0% 7.5% n/a n/a Rate of compensation increase U.S. and Puerto Rico plans 4.5% 4.5% n/a n/a International plans (average) 4.2% 4.5% n/a n/a Annual rate of increase in the per-capita cost n/a n/a 8.0% 9.0% Rate decreased to n/a n/a 5.0% 5.0% By the year ended n/a n/a 2002 2002 - --------------------------------------------------------------------- </TABLE> EFFECT OF A ONE PERCENT CHANGE IN ASSUMED HEALTH-CARE COST TREND RATE <TABLE> <CAPTION> One percent One percent increase decrease -------------- ---------------
- 76. (in millions) 19981997 1998 1997 - --------------------------------------------------------------------- <S> <C> <C> <C> <C> Effect on total of service and interest cost components $ 3 $ 3 $ 2 $ 2 Effect on postretirement benefit obligation 28 27 22 24 - --------------------------------------------------------------------- </TABLE> Most U.S. employees are eligible to participate in a qualified defined contribution plan. Company matching contributions were $17 million, $14 million and $14 million in 1998, 1997 and 1996, respectively. 10 Interest and Other (Income) Expense INTEREST EXPENSE <TABLE> <CAPTION> years ended December 31 (in millions) 1998 1997 1996 - --------------------------------------------------------------------- <S> <C> <C> <C> Interest, net Interest costs $ 198 $ 206 $ 219 Interest costs capitalized (5) (8) (5) - --------------------------------------------------------------------- Interest expense 193 198 214 Interest income (32) (35) (44) - --------------------------------------------------------------------- Total interest, net $ 161 $ 163 $ 170 - --------------------------------------------------------------------- Less interest allocated to discontinued operations/1/ -- -- (67) - --------------------------------------------------------------------- Interest allocated to continuing operations/1/ $ 161 $ 163 $ 103 - --------------------------------------------------------------------- </TABLE> 1. Allocation of interest to continuing and discontinued operations was based on relative net assets of these operations. OTHER (INCOME) EXPENSE <TABLE> <CAPTION> years ended December 31 (in millions) 1998 1997 1996 - --------------------------------------------------------------------- <S> <C> <C> <C> Equity in (income) losses of affiliates $ 3 $ (2) $ 13 Asset dispositions, net (23) (48) (9) Foreign exchange 1 (22) 1 Other 3 39 10 - --------------------------------------------------------------------- Total (income) expense $ (16) $ (33) $ 15 - --------------------------------------------------------------------- </TABLE> 11 Income Taxes
- 77. U.S. federal incometax returns filed by Baxter International Inc. through December 31, 1990, have been examined and closed by the Internal Revenue Service. The company has ongoing audits in U.S. and international jurisdictions. In the opinion of management, the company has made adequate provisions for tax expenses for all years subject to examination. 45 <PAGE> Notes to Consolidated Financial Statements INCOME BEFORE TAX EXPENSE BY CATEGORY <TABLE> <CAPTION> years ended December 31 (in millions) 1998 1997 1996 - ------------------------------------------------------------------ <S> <C> <C> <C> U.S. $ 108 $ 92 $ 188 International 441 431 605 - ------------------------------------------------------------------ Income from continuing operations before income tax expense $ 549 $ 523 $ 793 - ------------------------------------------------------------------ </TABLE> Income tax expense (benefit) related to continuing operations by category and by income statement classification is as follows: INCOME TAX EXPENSE <TABLE> <CAPTION> years ended December 31 (in millions) 1998 1997 1996 - ------------------------------------------------------------------ <S> <C> <C> <C> Current U.S. Federal $ 123 $ 98 $ (16) State and local 11 (6) 12 International 156 132 148 - ------------------------------------------------------------------ Current income tax expense 290 224 144 - ------------------------------------------------------------------ Deferred U.S. Federal (4) (50) 40 State and local 5 23 22 International (57) 26 12 - ------------------------------------------------------------------ Deferred income tax expense (benefit) (56) (1) 74 - ------------------------------------------------------------------ Income tax expense $ 234 $ 223 $ 218 - ------------------------------------------------------------------ </TABLE> The income tax for continuing operations was calculated as if Baxter were a stand-alone entity (without income from discontinued operations). DEFERRED TAX ASSETS AND LIABILITIES <TABLE> <CAPTION> years ended December 31 (in millions) 1998 1997 1996 - ------------------------------------------------------------------
- 78. <S> <C> <C><C> Deferred tax assets Accrued expenses $ 363 $ 271 $ 381 Accrued postretirement benefits 103 103 97 Merger and restructuring costs - 19 29 Alternative minimum tax credit 164 114 90 Tax credits and net operating losses 179 136 27 Valuation allowances (34) (45) (36) - ------------------------------------------------------------------ Total deferred tax assets 775 598 588 - ------------------------------------------------------------------ Deferred tax liabilities Asset basis differences 516 555 520 Subsidiaries' unremitted earnings 188 91 80 Other 14 5 25 - ------------------------------------------------------------------ Total deferred tax liabilities 718 651 625 - ------------------------------------------------------------------ Net deferred tax asset (liability) $ 57 $ (53) $ (37) - ------------------------------------------------------------------ </TABLE> There are $10 million and $45 million of loss carryforwards which expire in 2012 and 2013, respectively. There are $23 million, $12 million and $15 million of foreign tax credit carryforwards which expire in 2001, 2002 and 2003, respectively. INCOME TAX EXPENSE Income tax expense applicable to income from continuing operations differs from income tax expense calculated by using the U.S. federal income tax rate for the following reasons: <TABLE> <CAPTION> years ended December 31 (in millions) 1998 1997 1996 - ------------------------------------------------------------------ <S> <C> <C> <C> Income tax expense at statutory rate $ 192 $ 183 $ 278 Tax-exempt operations (132) (130) (130) Nondeductible goodwill 13 12 10 State and local taxes (2) (5) 3 Repatriation of foreign earnings 87 - 17 Foreign tax expense 41 40 33 IPR&D expense 41 123 - Other factors (6) - 7 - ------------------------------------------------------------------ Income tax expense $ 234 $ 223 $ 218 - ------------------------------------------------------------------ </TABLE> The company has received a tax-exemption grant from Puerto Rico, which provides that its manufacturing operations will be partially exempt from local taxes until the year 2002. Appropriate taxes have been provided for these operations assuming repatriation of all available earnings. In addition, the company has other manufacturing operations outside the United States, which benefit from reductions in local tax rates under tax incentives that will continue at least through 1999. U.S. federal income taxes, net of available foreign tax credits, on unremitted earnings deemed permanently reinvested would be approximately $291 million as of December 31, 1998.
- 79. 12 Legal Proceedings BaxterInternational Inc. and certain of its subsidiaries are named as defendants in a number of lawsuits, claims and proceedings, including product liability claims involving products now or formerly manufactured or sold by the company or by companies that were acquired by Baxter. These cases and claims raise difficult and complex factual and legal issues and are subject to many uncertainties and complexities, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is brought, and differences in applicable law. Accordingly, in many cases, the company is not able to estimate the amount of its liabilities with respect to such matters. Upon resolution of any pending legal matters, Baxter may incur charges in excess of presently established reserves. While such a future charge could have a material adverse impact on the company's net income and net cash flows in the period in which it is recorded or paid, management believes that no such charge would have a material adverse effect on Baxter's consolidated financial position. 46 <PAGE> Following is a summary of certain legal matters pending against the company. For a more extensive description of such matters and other lawsuits, claims and proceedings against the company, see Baxter's Annual Report on Form 10-K for the year ended December 31, 1998. Mammary implant litigation The company, together with certain of its subsidiaries, is currently a defendant in various courts in a number of lawsuits brought by individuals, all seeking damages for injuries of various types allegedly caused by silicone mammary implants formerly manufactured by the Heyer-Schulte division (Heyer-Schulte) of American Hospital Supply Corporation (AHSC). AHSC, which was acquired by the company in 1985, divested its Heyer-Schulte division in 1984. A class action on behalf of all women with silicone mammary implants was filed in March 1994. The class action was certified for settlement purposes only by the federal court in which it was filed in September 1994, and the settlement terms were subsequently revised and approved in December 1995. The monetary provisions of the settlement provide compensation for all present and future plaintiffs and claimants through a series of specific funds and a disease- compensation program involving certain specified medical conditions. All appeals directly challenging the settlement have been dismissed. In January 1996, Baxter, Bristol-Myers Squibb Company and Minnesota Mining and Manufacturing Company each paid $125 million into the court-established fund as an initial fund to pay claims under the settlement. In addition to the class action, there are a large number of individual suits currently pending against the company, primarily consisting of plaintiffs who have opted out of the class action. In 1993, Baxter accrued $556 million for its estimated liability resulting from the settlement of the mammary related class action and recorded a receivable for estimated insurance recoveries totaling $426 million, resulting in a net charge of $130 million. In 1995, based on a continuing evaluation of this litigation, the company accrued an additional $298 million for its estimated liability to litigate or settle cases and claims involving opt-outs and recorded an additional receivable for estimated insurance recoveries totaling $258 million, resulting in an additional net charge of $40 million. In the third quarter of 1998, the company accrued an additional $250 million for its estimated liability resulting from the class action settlement and remaining opt-out cases and claims, and recorded a receivable for related estimated insurance recoveries of $121 million, resulting in an additional net charge of $129 million.
- 80. In December 1998,a panel of independent medical experts appointed by a federal judge announced their findings that reported medical studies contained no clear evidence of a connection between silicone mammary implants and traditional or atypical systemic diseases. It is not yet clear what effect this report will have on the mammary implant litigation described above. The mammary implant litigation includes issues related to which of Baxter's insurers are responsible for covering each matter and the extent of the company's claims for contribution against third parties. Baxter believes that a substantial portion of its liability and defense costs for mammary implant litigation will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. Plasma-based therapies litigation Baxter currently is a defendant in a number of claims and lawsuits brought by individuals who have hemophilia, all seeking damages for injuries allegedly caused by antihemophilic factor concentrates VIII or IX derived from human blood plasma (factor concentrates) processed by the company from the late 1970s to the mid-1980s. The typical case or claim alleges that the individual was infected with the HIV virus by factor concentrates, which contained the HIV virus. None of these cases involves factor concentrates currently processed by the company. In addition, Immuno has unsettled claims for damages for injuries allegedly caused by its plasma-based therapies. A portion of the liability and defense costs related to these claims will be covered by insurance, subject to exclusions, conditions, policy limits and other factors. In addition, pursuant to the stock purchase agreement between the company and Immuno, approximately 84 million Swiss Francs (or approximately $61 million) of the purchase price was withheld to cover these contingent liabilities. Based on management's estimates, the company has recorded a liability and a related insurance receivable with regard to certain of the matters above. Baxter also is currently a defendant in a number of claims and lawsuits brought by individuals who infused the company's Gammagard(R) IVIG (intravenous immunoglobulin), all of whom are seeking damages for Hepatitis C infections allegedly caused by infusing Gammagard(R) IVIG. Baxter believes that a substantial portion of the liability and defense costs related to its plasma-based therapies litigation will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. 47 <PAGE> Notes to Consolidated Financial Statements In 1993, the company accrued $131 million for its estimated worldwide liability for litigation and settlement expenses involving factor concentrates cases and recorded a receivable for insurance coverage of $83 million, resulting in a net charge of $48 million. In 1995, significant developments occurred, primarily in the United States, Europe and Japan relative to claims and litigation pertaining to Baxter's plasma-based therapies. The company revised its estimated exposure from the $131 million previously recorded for factor concentrates litigation to $378 million for all litigation relating to plasma-based therapies, including the factor concentrates litigation and the Gammagard(R) IVIG litigation. Related estimated insurance recoveries were revised from $83 million for factor concentrates to $274 million for all plasma-based therapies. This resulted in a net charge of $56 million in 1995. The company further revised its estimate of liabilities and insurance recoveries in the third quarter of 1998, and accrued an additional $180 million for its estimated liability for plasma-based therapies litigation and other litigation
- 81. and recorded areceivable for related estimated insurance recoveries of $131 million, for a net charge of $49 million. Other litigation As of September 30, 1996, Allegiance assumed the defense of litigation involving claims related to Allegiance's businesses, including certain claims of alleged personal injuries as a result of exposure to natural rubber latex gloves. Allegiance has not been named in most of this litigation but will be defending and indemnifying Baxter pursuant to certain contractual obligations for all expenses and potential liabilities associated with claims pertaining to latex gloves. In addition to the cases discussed above, Baxter is a defendant in a number of other claims, investigations and lawsuits, including certain environmental proceedings. Based on the advice of counsel, management does not believe that, individually or in the aggregate, these other claims, investigations and lawsuits will have a material adverse effect on the company's results of operations, cash flows or consolidated financial position. 13 SEGMENT INFORMATION Baxter is a global leader in providing critical therapies for life-threatening conditions. The company operates in four segments, each of which are strategic businesses that are managed separately because each business develops, manufactures and sells distinct products and services. The segments and a description of their businesses are as follows: I.V. Systems/Medical Products, technologies and systems to provide intravenous fluid and drug delivery; Blood Therapies, biopharmaceutical and blood-collection and separation products and technologies; Renal, products and services to treat end-stage kidney disease; and CardioVascular, products and services to treat late-stage heart disease and vascular disorders. The company's products and services are used in more than 100 countries, with the principal markets being the United States, Europe, Japan and Latin America. The four segments' principal products include intravenous solutions and infusion pumps; blood-clotting therapies, vaccines, and machines for collecting, separating and storing blood; dialysis equipment, solutions and supplies; and prosthetic heart valves and cardiac catheters, respectively. Management utilizes more than one measurement and multiple views of data to measure segment performance and to allocate resources to the segments. However, the dominant measurements are consistent with the company's consolidated financial statements and, accordingly, are reported on the same basis herein. Management evaluates the performance of its segments and allocates resources to them primarily based on pretax income along with cash flows and overall economic returns. Intersegment sales are generally accounted for at amounts comparable to sales to unaffiliated customers, and are eliminated in consolidation. The accounting policies of the segments are substantially the same as those described in the summary of significant accounting policies, as discussed in Note 1. Certain items are maintained at the company's corporate headquarters (Corporate) and are not allocated to the segments. They primarily include most of the company's debt and cash and equivalents and related net interest expense, corporate headquarters costs, certain non-strategic investments and nonrecurring gains and losses, deferred income taxes, certain portions of goodwill, certain foreign currency fluctuations, hedging activities, and certain litigation liabilities and related insurance receivables. 48 <PAGE> <TABLE> <CAPTION> I.V. Systems/
- 82. as of andfor the years Medical Blood Cardio- ended December 31 (in millions) Products Therapies Renal Vascular Other Total - -------------------------------------------------------------------------------- --------------------- <S> <C> <C> <C> <C> <C> <C> 1998 Net sales $2,314 $1,861 $1,530 $894 - $ 6,599 Depreciation and amortization 137 101 81 64 $ 43 426 Pretax income 388 396 349 164 (748) 549 Assets 2,285 2,642 1,360 836 2,962 10,085 Expenditures for long-lived assets 146 212 129 49 60 596 - -------------------------------------------------------------------------------- --------------------- 1997 Net sales $2,110 $1,765 $1,384 $879 - $ 6,138 Depreciation and amortization 128 98 67 65 $ 40 398 Pretax income 329 375 339 153 (673) 523 Assets 1,937 2,305 1,055 856 2,554 8,707 Expenditures for long-lived assets 135 191 100 52 18 496 - -------------------------------------------------------------------------------- --------------------- 1996 Net sales $1,956 $1,284 $1,343 $855 - $ 5,438 Depreciation and amortization 118 49 65 63 $ 53 348 Pretax income 280 250 332 153 (222) 793 Assets 1,794 1,103 987 776 2,936 7,596 Expenditures for long-lived assets 130 92 106 49 21 398 - -------------------------------------------------------------------------------- --------------------- </TABLE> Included in 1997 pretax income for the Blood Therapies segment is a $17 million gain relating to the disposal of a non-strategic investment, and a $32 million gain relating to the divestiture of certain assets of the Immunotherapy division. <TABLE> <CAPTION> as of and for the years ended December 31 (in millions) 1998 1997 1996 - --------------------------------------------------------------------
- 83. <S> <C> <C><C> Pretax income Total pretax income from segments $ 1,297 $1,196 $1,015 Unallocated amounts In-process research and development charges (116) (352) - Charge for exit and other reorganization costs (131) - - Net litigation charge (178) - - Interest expense, net (161) (163) (103) Certain currency exchange rate activity (119) (48) (27) Gain on disposal of investment 20 - - Other Corporate items (63) (110) (92) - -------------------------------------------------------------------- Consolidated income before income taxes $ 549 $ 523 $ 793 - -------------------------------------------------------------------- Assets Total segment assets $ 7,123 $6,153 $4,660 Unallocated assets Cash and equivalents 709 465 761 Deferred income taxes 596 290 233 Insurance receivables 639 735 872 Certain portions of goodwill 635 659 682 Other Corporate assets 383 405 388 - -------------------------------------------------------------------- Consolidated total assets $10,085 $8,707 $7,596 - -------------------------------------------------------------------- </TABLE> With respect to depreciation and amortization, and expenditures for long-lived assets, the difference between the segment totals and the consolidated totals relates to assets maintained at Corporate. GEOGRAPHIC INFORMATION The following geographic area data include net sales based on product shipment destination and long-lived assets based on physical location. <TABLE> <CAPTION> as of and for the years ended December 31 (in millions) 1998 1997 1996 - ------------------------------------------------------------------- <S> <C> <C> <C> Net sales United States $3,145 $2,887 $2,665 Japan 543 570 602 Other countries 2,911 2,681 2,171 - ------------------------------------------------------------------- Consolidated totals $6,599 $6,138 $5,438 - ------------------------------------------------------------------- Long-lived assets United States $1,448 $1,267 $1,170 Other countries 1,225 1,093 673 - ------------------------------------------------------------------- Consolidated totals $2,673 $2,360 $1,843 - ------------------------------------------------------------------- </TABLE> 49 <PAGE> Notes to Consolidated Financial Statements -
- 84. -------------------------------------------------------------------------------- 14. Quarterly FinancialResults and Market for the Company's Stock (Unaudited) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> years ended December 31 First Second Third Fourth Total (in millions, except per share data) quarter quarter quarter quarter year - -------------------------------------------------------------------------------- ------------ <S> <C> <C> <C> <C> <C> 1998 Net sales $ 1,468 $ 1,646 $ 1,649 $ 1,836 $ 6,599 Gross profit 662 763 733 818 2,976 Income from continuing operations/1, 2/ 164 63 (124) 212 315 Net income/1, 2/ 164 63 (124) 212 315 Per common share Income from continuing operations/1, 2/ Basic .59 .22 (0.43) . 74 1.11 Diluted .58 .22 (0.43) . 73 1.09 Net income/1, 2/ Basic .59 .22 (0.43) . 74 1.11 Diluted .58 .22 (0.43) . 73 1.09 Dividends .2910 .2910 .2910 . 2910 1.164 Market price High 62.4375 59.5625 63.50 66.00 66.00 Low 48.50 51.50 52.375 56.375 48.50 - -------------------------------------------------------------------------------- ------------ 1997 Net sales $ 1,443 $ 1,569 $ 1,494 $ 1,632 $ 6,138 Gross profit 661 714 669 754 2,798 Income from continuing operations/3, 4/ (203) 162 159 182 300 Net income/3, 4/ (203) 162 159 182 300 Per common share Income from continuing operations/3, 4/ Basic (.74) .58 .57 . 65 1.08 Diluted (.74) .57 .56 . 64 1.06 Net income/3, 4/ Basic (.74) .58 .57 .
- 85. 65 1.08 Diluted (.74).57 .56 . 64 1.06 Dividends .2825 .2825 .2825 . 2910 1.139 Market price High 49.75 56.125 60.25 57.125 60.25 Low 39.875 41.563 51.375 43.625 39.875 - -------------------------------------------------------------------------------- ------------ </TABLE> 1. The second quarter includes a $116 million charge for in-process research and development relating to the acquisition of Somatogen. 2. The third quarter includes a $178 million net litigation charge and a $131 million charge for exit and other reorganization costs. 3. The first quarter includes a $352 million charge for in-process research and development relating to the acquisitions of Immuno and RMI. 4. The fourth quarter includes a gain of $32 million relating to the divestiture of certain assets of the company's immunotherapy division. Baxter common stock is listed on the New York, Chicago and Pacific Stock Exchanges, on the London Stock Exchange and on the Swiss stock exchanges of Zurich, Basel and Geneva. The New York Stock Exchange is the principal market on which the company's common stock is traded. At January 29, 1999, there were approximately 60,642 holders of record of the company's common stock. 50 <PAGE> Directors & Officers BOARD OF DIRECTORS Walter E. Boomer President and Chief Executive Officer Rogers Corporation Pei-yuan Chia Retired Vice Chairman Citicorp and Citibank, N.A. John W. Colloton Vice President for Statewide Health Services The University of Iowa Susan Crown Vice President Henry Crown and Company Mary Johnston Evans Former Director and Vice Chairman Amtrak Frank R. Frame Advisor to the Board HSBC Holdings plc
- 86. Retired Deputy Chairman TheHongkong and Shanghai Banking Corporation Limited Martha R. Ingram Chairman of the Board and Chief Executive Officer Ingram Industries Inc. Harry M. Jansen Kraemer, Jr. President and Chief Executive Officer Baxter International Inc. Arnold J. Levine, Ph.D. President The Rockefeller University Vernon R. Loucks Jr. Chairman of the Board Baxter International Inc. Georges C. St. Laurent, Jr. Retired Chief Executive Officer Western Bank Monroe E. Trout, M.D. Chairman Emeritus of the Board American Healthcare Systems Fred L. Turner Senior Chairman McDonald's Corporation HONORARY DIRECTORS William B. Graham Chairman Emeritus of the Board Baxter International Inc. Ralph Falk II Private Investments EXECUTIVE OFFICERS Baxter International Inc. Vernon R. Loucks Jr. Chairman of the Board Harry M. Jansen Kraemer, Jr./1,2/ President and Chief Executive Officer Brian P. Anderson/1,2/ Senior Vice President and Chief Financial Officer Michael J. Tucker Senior Vice President Human Resources Fabrizio Bonanni Corporate Vice President
- 87. Regulatory and ClinicalAffairs John F. Gaither, Jr./1,2/ Corporate Vice President Corporate Development David C. McKee/1,2/ Corporate Vice President and Deputy General Counsel Kshitij Mohan Corporate Vice President Research and Technical Services John L. Quick Corporate Vice President Quality Thomas J. Sabatino, Jr./1,2/ Corporate Vice President and General Counsel Jan Stern Reed/1,2/ Corporate Secretary and Assistant General Counsel Steven J. Meyer/1,2/ Treasurer Baxter World Trade Corporation Timothy B. Anderson/1/ Group Vice President Corporate Development and Strategy Donald W. Joseph/1/ Group Vice President Renal Carlos del Salto Senior Vice President Intercontinental and Asia Eric A. Beard Corporate Vice President and President Global Renal Dialysis Thomas H. Glanzmann/1/ Corporate Vice President and President Hyland Immuno J. Robert Hurley Corporate Vice President Japan and China Roberto E. Perez/1/ Corporate Vice President and President Fenwal
- 88. Baxter Healthcare Corporation Jack L.McGinley/2/ Group Vice President I.V. Systems/Medical Products and Fenwal Michael A. Mussallem/2/ Group Vice President CardioVascular and Biopharmaceuticals David F. Drohan Corporate Vice President and President I.V. Systems J. Michael Gatling Corporate Vice President Global Manufacturing Operations 1. Also an executive officer of Baxter Healthcare Corporation 2. Also an executive officer of Baxter World Trade Corporation 51 <PAGE> CORPORATE HEADQUARTERS Baxter International Inc. One Baxter Parkway Deerfield, IL 60015-4633 Telephone: (847) 948-2000 Internet: www.baxter.com STOCK EXCHANGE LISTINGS Ticker Symbol: BAX (NYSE) Baxter common stock is listed on the New York, Chicago and Pacific Stock Exchanges, on the London Stock Exchange and on the Swiss stock exchanges of Zurich, Basel and Geneva. The New York Stock Exchange is the principal market on which the company's common stock is traded. ANNUAL MEETING The 1999 Annual Meeting of Stockholders will be held on Tuesday, May 4 at 10:30 a.m. at the Drury Lane Theatre located in Oak Brook Terrace, Illinois. STOCK TRANSFER AGENT Correspondence concerning Baxter International stock holdings, lost or missing certificates or dividend checks, duplicate mailings or changes of address should be directed to: First Chicago Trust Company, a division of EquiServe P.O. Box 2500 Jersey City, NJ 07303-2500 Telephone: (800) 446-2617 or (201) 324-0498 Internet: www.fctc.com Correspondence concerning Baxter International Contingent Payment Rights related to the acquisition of Somatogen, Inc. should be directed to: U.S. Bank Trust National Association Telephone: (800) 934-6802 or (312) 228-9448
- 89. DIVIDEND REINVESTMENT The companyoffers an automatic dividend-reinvestment program to all holders of Baxter International Inc. common stock. A detailed brochure is available on request from: First Chicago Trust Company, a division of EquiServe P.O. Box 2598 Jersey City, NJ 07303-2598 Telephone: (800) 446-2617 or (201) 324-0498 Internet: www.fctc.com INFORMATION RESOURCES Internet Please visit our site at www.baxter.com for corporate news or earnings releases, the company's annual report, Form 10-K, Form 10-Q and the annual environmental report. You may elect to view future proxy materials and annual reports online via the Internet instead of receiving them by mail. Simply provide our transfer agent, First Chicago Trust Company, with your e-mail address. We then will discontinue mailing these materials to you and will notify you via e-mail how to access them. Available Reports Baxter's annual report, Form 10-K, proxy statement and other financial information are also available on request from: Baxter International Inc. Investor Relations One Baxter Parkway Deerfield, IL 60015-4633 Telephone: (847) 948-4550 INVESTOR RELATIONS Securities analysts, investment professionals and investors seeking additional investor information should contact: Baxter Investor Relations Telephone: (847) 948-4551 CUSTOMER INQUIRIES Customers who would like general information about Baxter's products and services may call the Center for One Baxter toll free in the United States at (800) 422-9837, or by dialing (847) 948-4770. (C) Baxter International Inc., 1999. All rights reserved. References in this report to Baxter are intended to refer collectively to Baxter International Inc. and its U.S. and international subsidiaries and their operating divisions. 52 <PAGE> Five-Year Summary of Selected Financial Data <TABLE> <CAPTION> as of and for the years ended December 31 1998/1/ 1997/2/ 1996/3/ 1995/4/ 1994 - -------------------------------------------------------------------------------- ----------------------------------------------- <C> <S> <C>
- 90. <C> <C> <C><C> OPERATIONS Net sales $ 6,599 6,138 5,438 5,048 4,479 (in millions) Income from continuing operations $ 315 300 575 371 406 Depreciation and amortization $ 426 398 348 336 302 Research and development expenses/5/ $ 379 392 340 327 303 - -------------------------------------------------------------------------------- ----------------------------------------------- CAPITAL EMPLOYED Capital expenditures $ 596 496 398 399 380 (in millions) Total assets $ 10,085 8,707 7,596 9,437 9,039 Long-term debt and lease obligations $ 3,096 2,635 1,695 2,372 2,341 "Operational cash flow" from continuing operations/6/ $ 515 274 490 316 618 - -------------------------------------------------------------------------------- ----------------------------------------------- PER COMMON SHARE Average number of common shares outstanding (in millions)/7/ 284 278 272 277 280 Income from continuing operations per common share Basic $ 1.11 1.08 2.11 1.34 1.45 Diluted $ 1.09 1.06 2.07 1.32 1.44 Cash dividends declared per common share $ 1.164 1.139 1.17 1.11 1.025 Year-ended market price per common share $64.3125 50.44 41.00 41.88 28.25 - -------------------------------------------------------------------------------- ----------------------------------------------- OTHER INFORMATION Net-debt-to-capital ratio 48.4% 46.9% 33.8% 36.3% 39.2% Total shareholder return 30.1% 25.9% 14.1% 52.6% 20.5% Common stockholders of record at year-end 61,000 62,900 65,400 74,400 78,400 - -------------------------------------------------------------------------------- ----------------------------------------------- </TABLE> 1. Income from continuing operations includes charges for in-process research and development, net litigation, and exit and other reorganization costs of $116 million, $178 million and $131 million, respectively. 2. Income from continuing operations includes a charge for in-process research and development of $352 million. 3. Certain balance sheet and other data are significantly affected by the spin-off of Allegiance Corporation, which occurred on September 30, 1996.
- 91. 4. Income fromcontinuing operations includes charges for in-process research and development, net litigation, and exit and other reorganization costs of $18 million, $96 million and $103 million, respectively. 5. Excludes charges for in-process research and development, as noted above. 6. The company's internal "operational cash flow" measurement is defined on page 26 and is not a measure defined by generally accepted accounting principles. 7. Excludes common stock equivalents. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-21 <SEQUENCE>6 <DESCRIPTION>SUBSIDIARIES <TEXT> <PAGE> EXHIBIT 21 - ------------------------------------------------------------------------------- Subsidiaries of the Company, as of March 19, 1999 <TABLE> <CAPTION> % owned by Organized under immediate Subsidiary laws of parent - ------------------------------------------------------------------------------- <S> <C> <C> Baxter International Inc............................ Delaware Baxter Healthcare Corporation...................... Delaware 100 Baxter Pharmaceutical Products Inc.............. Delaware 100 Nextran Inc..................................... Delaware 100 RMS Disease Management Inc...................... Delaware 97.39 Baxter World Trade Corporation..................... Delaware 100 Baxter Pharmacy Services Corporation............ Delaware 100(3) Baxter Caribe Inc............................. Delaware 100 Baxter Healthcare Corporation of Puerto Rico.. Alaska 100 Baxter Sales and Distribution Corp............ Delaware 100 Baxter Biotech Holding AG....................... Switzerland 75(2) Baxter Biotech Technology S.a.r.l............. Switzerland 100(1) Baxter Healthcare Pte. Ltd.................... Singapore 100 Baxter World Trade S.A...................... Belgium 46.21(2) Baxter Healthcare S.A......................... Panama 100 Baxter World Trade S.A...................... Belgium 53.78(2) Immuno International AG....................... Switzerland 100 Immuno--Canada Ltd.......................... Canada 100 Immuno Aktiengesellschaft................... Austria 100(1) Baxter Hemoglobin Therapeutics S.A............ France 100(1) Baxter Corporation.............................. Canada 100 Baxter Deutschland GmbH......................... Germany 100 Baxter Edwards AG............................... Switzerland 100 Baxter S.A.................................... Spain 99.99(2) Baxter Export Corporation....................... Nevada 100 Baxter Healthcare (Holdings) Limited............ United Kingdom 99.99(2) Baxter Healthcare Limited..................... United Kingdom 99.99(2) Baxter Healthcare Pty. Ltd...................... Australia 99.99(2) Baxter Limited.................................. Japan 100 Baxter Representacoes Ltda...................... Brazil 100(1) Baxter Hospitalar Ltda........................ Brazil 85.21(2)
- 92. Baxter, S.A..................................... Belgium98.43(2) Baxter S.A.................................... France 64.58(2) Baxter S.A. de C.V.............................. Mexico 99.9(2) Baxter SpA...................................... Italy 98.98(2) Bieffe Medital SpA............................ Italy 99 Laboratorios Baxter S.A. (Colombia)............. Delaware 100 Baxter Hemoglobin Therapeutics Inc................. Delaware 100 Baxter Biotech Worldwide Ltd....................... Delaware 100 Baxter Biotech Holding AG.......................... Switzerland 25(2) - ------------------------------------------------------------------------------- </TABLE> Subsidiaries omitted from this list, considered in aggregate as a single subsidiary, would not constitute a significant subsidiary. All subsidiaries set forth herein are reported in the Company's financial statements through consolidations or under the equity method of accounting. * * * * * (1) Including director's qualifying and other nominee shares. (2) Remaining shares owned by the Company, or other subsidiaries of the Company. (3) Of common stock, with preferred stock held by Baxter Healthcare Corporation. 24 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-24 <SEQUENCE>7 <DESCRIPTION>POWERS OF ATTORNEY <TEXT> <PAGE> 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 directors 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, 1998, pursuant to the Securities Exchange Act of 1934, as approved by the Company's principal executive and financial officers and controller, hereby appoints Harry M. Jansen Kraemer, 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. Dated: March 19, 1999 A Majority of the Board of Directors /S/ Walter E. Boomer
- 93. /S/ Pei-yuan Chia /S/John W. Colloton /S/ Susan Crown /S/ Mary Johnston Evans /S/ Frank R. Frame /S/ Martha R. Ingram /S/ Arnold J. Levine, Ph.D. /S/ Vernon R. Loucks Jr. /S/ Georges C. St. Laurent, Jr. /S/ Monroe E. Trout, M.D. /S/ Fred L. Turner </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>8 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE CONSOLIDATED INCOME STATEMENT FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000,000 <S> <C> <PERIOD-TYPE> YEAR <FISCAL-YEAR-END> DEC-31-1998 <PERIOD-START> JAN-01-1998 <PERIOD-END> DEC-31-1998 <CASH> 709 <SECURITIES> 0 <RECEIVABLES> 1,958 <ALLOWANCES> 41 <INVENTORY> 1,324 <CURRENT-ASSETS> 4,651 <PP&E> 4,989 <DEPRECIATION> 2,316 <TOTAL-ASSETS> 10,085 <CURRENT-LIABILITIES> 2,988 <BONDS> 3,096 <PREFERRED-MANDATORY> 0 <PREFERRED> 0 <COMMON> 291 <OTHER-SE> 2,548 <TOTAL-LIABILITY-AND-EQUITY> 10,085 <SALES> 6,599
- 94. <TOTAL-REVENUES> 6,599 <CGS> 3,623 <TOTAL-COSTS>3,623 <OTHER-EXPENSES> 856<F1> <LOSS-PROVISION> 10 <INTEREST-EXPENSE> 198 <INCOME-PRETAX> 549 <INCOME-TAX> 234 <INCOME-CONTINUING> 315 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 315 <EPS-PRIMARY> 1.11 <EPS-DILUTED> 1.09 <FN> <F1>INCLUDES RESEARCH AND DEVELOPMENT EXPENSES, GOODWILL AMORTIZATION, IN PROCESS RESEARCH AND DEVELOPMENT, NET LITIGATION CHARGE, AND EXIT AND OTHER REORGANIZATION COSTS. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----