baxter international

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<SEC-DOCUMENT>0000912057-96-004966.txt : 19960325
<SEC-HEADER>0000912057-96-004966.hdr.sgml : 19960325
ACCESSION NUMBER: 0000912057-96-004966
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 13
CONFORMED PERIOD OF REPORT: 19951231
FILED AS OF DATE: 19960322
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BAXTER INTERNATIONAL INC
CENTRAL INDEX KEY: 0000010456
STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS &
APPARATUS [3841]
IRS NUMBER: 360781620
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-04448
FILM NUMBER: 96537405
BUSINESS ADDRESS:
STREET 1: ONE BAXTER PKWY
CITY: DEERFIELD
STATE: IL
ZIP: 60015
BUSINESS PHONE: 7089482000
MAIL ADDRESS:
STREET 1: ONE BAXTER PARKWAY
CITY: DEERFIELD
STATE: IL
ZIP: 60015
FORMER COMPANY:
FORMER CONFORMED NAME: BAXTER TRAVENOL LABORATORIES INC
DATE OF NAME CHANGE: 19880522
FORMER COMPANY:
FORMER CONFORMED NAME: BAXTER LABORATORIES INC
DATE OF NAME CHANGE: 19760608
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<DESCRIPTION>BAXTER INTERNATIONAL 10-K
<TEXT>
<PAGE>

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO
_____________
COMMISSION FILE NUMBER 1-4448
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[LOGO]
Baxter International Inc.
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<S> <C>
DELAWARE 36-0781620
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State of Incorporation I.R.S. Employer Identification
No.
</TABLE>
ONE BAXTER PARKWAY, DEERFIELD, ILLINOIS 60015
(847) 948-2000
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Address, including zip code, and telephone number,
including area code, of principal executive offices
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Common stock, $1 par value New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
(currently traded with common Chicago Stock Exchange
stock) Pacific Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ____

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
/ /
The aggregate market value of the voting stock held by non-affiliates of the
registrant (based on the per share closing sale price of $43.88 on March 8,
1996, and for the purpose of this computation only, the assumption that all
registrant's directors and executive officers are affiliates) was approximately
$11.8 billion.
The number of shares of the registrant's common stock, $1 par value,
outstanding as of March 8, 1996, was 273,957,449.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections or portions of the registrant's 1995 annual report to
stockholders and of the registrant's proxy statement for use in connection with
its annual meeting of stockholders to be held on May 6, 1996, described in the
cross reference sheet and table of contents attached hereto are incorporated by
reference in this report.
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<PAGE>
CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
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<CAPTION>
PAGE NUMBER OR
(REFERENCE) (1)
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<C>
Item 1. Business
(a) General Development of
Business................................................. 3(2)
(b) Financial Information about Industry
Segments................................... 3(3)
(c) Narrative Description of
Business............................................... 3(4)
(d) Financial Information about Foreign and Domestic
Operations and Export Sales.... 8(5)
Item 2.
Properties......................................................................
........... 9
Item 3. Legal
Proceedings.....................................................................
..... 9(6)
Item 4. Submission of Matters to a Vote of Security
Holders........................................ 9
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.........................................................................
........... 10(7)
Item 6. Selected Financial

Data....................................................................
10(8)
Item 7. Management's Discussion and Analysis of Financial Condition and
Results
of
Operations......................................................................
........ 10(9)
Item 8. Financial Statements and Supplementary
Data................................................ 10(10)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial
Disclosure......................................................................
. 10
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of
Directors..................................................... 11(11)
(b) Identification of Executive
Officers............................................ 11
(c) Compliance with Section 16(a) of the Securities Exchange
Act of 1934............ 13(12)
Item 11. Executive
Compensation....................................................................
. 13(13)
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................. 13(14)
Item 13. Certain Relationships and Related
Transactions............................................. 13
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K............................ 14
(a) Financial
Statements............................................................
14
(b) Reports on Form 8-
K............................................................. 14
(c)
Exhibits........................................................................
14
</TABLE>
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(1) Information incorporated by reference to the Company's Annual Report to
Stockholders for the year ended December 31, 1995 ("Annual Report") and
the board of directors' proxy statement for use in connection with the
Registrant's annual meeting of stockholders to be held May 6, 1996 ("Proxy
Statement").
(2) Annual Report, pages 50-70, section entitled "Notes to Consolidated
Financial Statements" and pages 30-43, section entitled "Management's
Discussion and Analysis."
Financial Statements-- Industry and Geographic Information."
(4) Annual Report, pages 30-43, section entitled "Management's Discussion and
Analysis" and pages 68-69, section entitled "Notes to Consolidated
Financial Statements--Industry and Geographic Information."
Financial Statements-- Industry and Geographic Information."
(6) Annual Report, page 62-68, section entitled "Notes to Consolidated
Financial Statements-- Legal Proceedings."
(7) Annual Report, page 70, section entitled "Notes to Consolidated Financial
Statements--Quarterly Financial Results and Market for the Company's
Stock."
(8) Annual Report, inside back cover, section entitled "Five-Year Summary of
Selected Financial Data."
(9) Annual Report, pages 30-43, section entitled "Management's Discussion and
Analysis."

(10) Annual Report, pages 45-70, sections entitled "Report of Independent
Accountants," "Consolidated Balance Sheets," "Consolidated Statements of
Income," "Consolidated Statements of Cash Flows," "Consolidated Statements
of Stockholders' Equity" and "Notes to Consolidated Financial Statements."
(11) Proxy Statement, pages 2-5, sections entitled "Board of Directors" and
"Election of Directors."
(12) Proxy Statement, page 18, section entitled "Section 16 Reporting."
(13) Proxy Statement, pages 6-12, sections entitled "Compensation of Directors"
and "Compensation of Named Executive Officers," and page 17-18, section
entitled "Pension Plan, Excess Plans and Supplemental Plans."
(14) Proxy Statement, pages 18-20, section entitled "Ownership of Company
Securities."
<PAGE>
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[BAXTER LOGO]
Baxter International Inc., One Baxter Parkway, Deerfield. Illinois 60015.
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PART I
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ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS.
Baxter International Inc. was incorporated under Delaware law in 1931. As
used in this report, except as otherwise indicated in information incorporated
by reference, "Baxter" means Baxter International Inc. and the "Company" means
Baxter and its subsidiaries.
The Company is engaged in the worldwide development, distribution and
manufacture of a diversified line of products, systems and services used
primarily in the health-care field. Products are manufactured by the Company in
23 countries and sold in approximately 100 countries. Health-care is concerned
with the preservation of health and with the diagnosis, cure, mitigation and
treatment of disease and body defects and deficiencies. The Company's more than
200,000 products are used by hospitals, clinical and medical research
laboratories, blood and dialysis centers, rehabilitation centers, nursing homes,
doctors' offices and at home under physician supervision. See "Recent
Developments."
For information regarding acquisitions, investments in affiliates and
divestitures, see the Company's Annual Report to Stockholders for the year ended
December 31, 1995 (the "Annual Report"), page 53, section entitled "Notes to
Consolidated Financial Statements--Acquisitions, Investments in Affiliates and
Divestitures" which is incorporated by reference.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
Incorporated by reference from the Annual Report, pages 68-69, section
entitled "Notes to Consolidated Financial Statements--Industry and Geographic
Information."
(c) NARRATIVE DESCRIPTION OF BUSINESS.
Recent Developments
SPIN-OFF OF HEALTH CARE COST MANAGEMENT BUSINESS

On November 28, 1995, the board of directors of Baxter approved in principle
a plan to distribute to Baxter stockholders all of the outstanding stock of its
health-care cost management business in a spin-off transaction (the
"Distribution") which is expected to be tax-free. The creation of two
independent companies will enable Baxter and the new company to devote
management time, attention and investments directly to the core strategies of
each business. The new health-care cost management business will consist of the
Company's cost management services, United States distribution, surgical
products and respiratory-therapy operations and will operate as a medical
supplier focused on helping customers manage the total cost of providing patient
care. The Distribution is expected to occur in late 1996 and will result in the
health-care cost management business operating as an independent entity with
publicly-traded common stock.
OFFER TO ACQUIRE NATIONAL MEDICAL CARE; SUBSEQUENT WITHDRAWAL
On February 1, 1996, Baxter publicly announced its proposal to acquire the
National Medical Care ("NMC") subsidiary of W.R. Grace and Company ("Grace") in
a tax-free transaction for $3.8 billion, consisting of $1.8 billion of Baxter
common stock and a payment to Grace of $2.0 billion comprised of cash, notes and
assumed debt. Grace had previously announced its intention to spin-off or divest
NMC. Completion of this transaction in 1996 would have resulted in a dilution of
Baxter's net earnings, but
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would have been accretive after approximately six quarters of combined results.
The Company's net-debt-to-net-capital ratio would have risen to approximately
42% (compared to 36.3% at December 31, 1995) but was expected to decline to
approximately 40% within two years of the acquisition, all else remaining
constant.
On February 5, 1996, Grace announced that it had agreed to combine its NMC
subsidiary with the worldwide dialysis business of Fresenius A.G. (a German
company) to form a new company called Fresenius Medical Care in a transaction
designed to be tax-free. Fresenius A.G. is a major competitor of the Company's
renal division and NMC is a large United States customer of the renal division.
Under the proposed transaction with Fresenius A.G., Grace shareholders would
receive a 44.8% equity interest in Fresenius Medical Care and Grace would
receive $2.3 billion in cash provided by proceeds of debt financing by Fresenius
Medical Care. This transaction is subject to the approval of the shareholders of
Grace, Fresenius U.S.A. and Fresenius A.G. If the transaction with Grace is
consummated with Fresenius A.G., there will be an increased competitive threat
to the Company's renal division. However, management believes that this would
not have a material adverse effect on Baxter's financial condition or results of
operations in 1996.
Since the management of Grace refused to discuss the Company's proposed
transaction, Baxter withdrew its offer on February 22, 1996.
RESTRUCTURING PROGRAMS
The Company currently has two restructuring programs in process. In November
1993, the Company initiated a restructuring program designed to accelerate
growth and reduce costs in the Company's businesses worldwide, including
reorganizations and consolidations in the United States, Europe, Japan and
Canada. In the third quarter of 1995, the Company initiated a second
restructuring program to consolidate manufacturing operations in Puerto Rico in
order to eliminate excess capacity and reduce manufacturing costs.
Since the announcement of the 1993 restructuring program, the Company has
implemented, or is in the process of implementing, all of the major strategic
actions associated therewith and is satisfied that the program is progressing on
schedule and will meet previously established financial targets. During 1995,

the Company utilized $60 million of restructuring reserves related to its
continuing operations, including $36 million in cash payments. Cash outflows
pertain primarily to employee-related costs for severance, outplacement
assistance, relocation and retention. The Company has eliminated from continuing
operations approximately 1,250 positions of the approximately 1,640 positions
affected by the program. The majority of the remaining reductions will occur in
1996 and 1997, as facility closures and consolidations are completed as planned.
During 1995, the Company realized approximately $90 million in continuing
operations savings which represents a shortfall of approximately $20 million
from its estimated savings target. This shortfall is primarily due to timing
delays in the implementation of a number of projects. Management has forecasted
continuing operations savings of approximately $110 million in 1996, $130
million in 1997 and exceeding $140 million in 1998. Management anticipates that
these savings will be partially invested in increased research and development
and expansion into growing international markets. Management further believes
that its remaining restructuring reserves are adequate to complete the actions
contemplated by the 1993 restructuring program.
Management is at the very early stages of implementing the 1995
restructuring program, which is expected to be completed by the end of 1998. The
pretax restructuring charge of $93 million includes approximately $67 million
for valuation adjustments as a result of the Company's decision to close
facilities.
The Company expects to spend approximately $26 million in cash over the next
two years, including severance related to the approximately 1,450 positions that
will be eliminated in connection with the 1995 plan. The plant closures and
consolidations in Puerto Rico will lower the Company's manufacturing costs.
Management believes these actions will help mitigate the Company's exposure to
future gross
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margin erosion arising from pricing pressure, primarily in the United States. In
addition to the consolidation of the Company's manufacturing operations in
Puerto Rico, the Company has initiated plans for other organizational structure
changes which have resulted in a $10 million provision for cash payments related
to employee severance.
Management anticipates that future cash expenditures related to both the
1993 and 1995 restructuring programs will be funded from cash generated from
operations.
Industry Overview
The Company operates in a single industry segment as a world leader in
providing health-care products for use in hospitals and other health-care
settings. On a global basis, the Company develops, manufactures and markets
intravenous solutions and related administration equipment, and highly
specialized medical products for treating kidney and heart disease, blood
disorders, and for collecting and processing blood. These products include
intravenous solutions and pumps; dialysis equipment and supplies; prosthetic
heart valves and cardiac catheters; blood-clotting therapies; and machines and
supplies for collecting, separating and storing blood. These products require
extensive research and development and investment in worldwide manufacturing,
marketing and administrative infrastructure.
Information about segment operating results is incorporated by reference
from the Annual Report, pages 30-43, section entitled "Management's Discussion
and Analysis" and pages 68-69, section entitled "Notes to Consolidated Financial
Statements--Industry and Geographic Information."
UNITED STATES MARKETS

Though the federal government failed to enact health-care reform,
fundamental change continued to be a part of the United States health-care
system in 1995. Competition for patients among health-care providers continues
to intensify. Increasingly, providers are looking for ways to better manage
costs in areas such as materials handling, supply utilization, product
standardization for specific procedures and capital expenditures. The new
health-care cost management business is being distributed to stockholders to
more optimally meet these emerging market needs, remove limitations, and improve
the competitiveness of both Baxter and the new company. There has also been
consolidation in the Company's customer base and by its competitors. These
trends are expected to continue. In recent years, the Company's overall price
increases have been below the Consumer Price Index, and industry trends and
competition may inhibit the Company's ability to increase prices in the future.
INTERNATIONAL MARKETS
Throughout the world, as developing countries create more wealth, improving
the health and well-being of their citizens becomes a much higher social
priority and usually leads to increased per-capita spending on health care. The
world's largest developing markets in the Pacific Rim countries and Latin
America are all poised for significant economic growth. Based on these factors,
management believes there will be improved expansion opportunities for the
Company with its broad portfolio of proven cost-effective products, services and
therapies to meet the demands of these markets. In the developed
world--especially in Western Europe and Japan--there continues to be strong
demand for more technologically advanced and cost-effective therapies, products
and services, and the Company has long been a leader in these markets. In view
of these conditions, management believes the Company's best opportunities for
growth are outside the United States. Consequently, the Company's strategies
emphasize international expansion to capitalize on the Company's strong global
positions in intravenous products, renal therapy, biotechnology and
cardiovascular therapies.
HEALTH-CARE COST ENVIRONMENT
Accelerating cost pressures on United States hospitals are resulting in
increased out-patient and alternate-site health-care service delivery and a
focus on cost-effectiveness and quality. In addition, technological advances in
health-care product and service offerings are increasingly evaluated on their
ability to both improve the quality of care and provide more cost-effective
outcomes. These forces increasingly shape the demand for, and supply of, medical
care.
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Many private health-care payers are providing incentives for consumers to
seek lower cost care outside the hospital. Many corporations' employee health
plans have been restructured to provide financial incentives for patients to
utilize the most cost-effective forms of treatment (managed care programs, such
as health maintenance organizations, have become more common), and physicians
have been encouraged to provide more cost-effective treatments.
The future financial success of health-care product and service companies,
such as the Company, will depend on their ability to work with health-care
customers to help them enhance their competitiveness. The Company believes it
can help its customers achieve savings in the total health-care system by
automating supply-ordering procedures, optimizing distribution networks,
improving materials management and achieving economies of scale associated with
aggregating purchases. The Company continues to believe that its strategy of
providing unmatched service to its health-care customers and achieving the best
overall cost in its delivery of health-care products and services is compatible
with any realignment of the United States health-care system which may
ultimately occur.

Joint Ventures
The Company conducts a portion of its business through joint ventures,
including a joint venture with Nestle, S.A. to develop, market and distribute
clinical nutrition products worldwide. This joint venture is accounted for under
the equity method of accounting and therefore, is excluded from the Company's
segment results.
Methods of Distribution
The Company conducts its selling efforts through its subsidiaries and
divisions. Many subsidiaries and divisions have their own sales forces and
direct their own sales efforts. In addition, sales are made to independent
distributors, dealers and sales agents. Distribution centers, which may serve
more than one division, are stocked with adequate inventories to facilitate
prompt customer service. Sales and distribution methods include frequent contact
by sales representatives, automated communications via various electronic
purchasing systems, circulation of catalogs and merchandising bulletins, direct
mail campaigns, trade publications and advertising.
International sales and distribution are made in approximately 100 countries
either on a direct basis or through independent local distributors.
International subsidiaries employ their own field sales forces in Argentina,
Australia, Austria, Belgium, Brazil, Brunei, Canada, China, Colombia, Ecuador,
Denmark, Finland, France, Germany, Hong Kong, India, Indonesia, Italy, Japan,
Malaysia, Mexico, the Netherlands, New Zealand, Norway, Pakistan, the
Philippines, Singapore, Spain, Sweden, Switzerland, Taiwan, Thailand and the
United Kingdom. In other countries, sales are made through independent
distributors or sales agents.
Raw Materials
Raw materials essential to the Company's business are purchased worldwide in
the ordinary course of business from numerous suppliers. The vast majority of
these materials are generally available, and no serious shortages or delays have
been encountered. Certain raw materials used in producing some of the Company's
products, including its latex products, are available only from a small number
of suppliers. In addition, certain biomaterials for medical implant applications
(primarily polymers) are becoming more difficult to obtain due to market
withdrawals by biomaterial suppliers, primarily as a result of perceived
exposures to liability in the United States.
In some of these situations, the Company has long-term supply contracts with
its suppliers, although it does not consider its obligations under such
contracts to be material. The Company does not always recover cost increases
through customer pricing due to contractual limits and market pressure on such
price increases. See "Contractual Arrangements."
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Patents and Trademarks
The Company owns a number of patents and trademarks throughout the world and
is licensed under patents owned by others. While it seeks patents on new
developments whenever feasible, the Company does not consider any one or more of
its patents, or the licenses granted to or by it, to be essential to its
business.
Products manufactured by the Company are sold primarily under its own
trademarks and trade names. Some products purchased and resold by the Company
are sold under the Company's trade names while others are sold under trade names
owned by its suppliers.
Competition

Historically, competition in the health-care industry has been characterized
by the search for technological and therapeutic innovations in the prevention,
diagnosis and treatment of disease. The Company believes that it has benefited
from the technological advantages of certain of its products. While others will
continue to introduce new products which compete with those sold by the Company,
the Company believes that its research and development effort will permit it to
remain competitive in all presently material product areas. Although no single
company competes with the Company in all of its businesses, the Company is faced
with substantial competition in all of its markets.
The changing health-care environment in recent years has led to increasingly
intense competition among health-care suppliers. Competition is focused on
price, service and product performance. Pressure in these areas is expected to
continue. See "Health-Care Cost Environment" and "United States Markets."
In part through its restructuring programs, the Company continues to
increase its efforts to minimize costs and better meet accelerating price
competition. The Company believes that its cost position will continue to
benefit from improvements in manufacturing technology and increased economies of
scale. The Company continues to emphasize its investments in innovative and
cost-effective technologies and the quality of its product and services.
Credit and Working Capital Practices
The Company's debt ratings of A3 on senior debt by Moody's, A- by Standard &
Poor's and A by Duff & Phelps were reaffirmed by each rating agency in 1995.
However, the rating agencies have placed the Company on credit watch pending
clarification of the Company's capital structure in conjunction with the
Distribution of the health-care cost management business.
The Company's credit practices and related working capital needs are
comparable to those of other market participants. Collection periods tend to be
longer for sales outside the United States.
Customers may return defective merchandise for credit or replacement. In
recent years, such returns have been insignificant.
Quality Control
The Company places great emphasis on providing quality products and services
to its customers. An integrated network of quality systems, including control
procedures that are developed and implemented by technically trained
professionals, result in rigid specifications for raw materials, packaging
materials, labels, sterilization procedures and overall manufacturing process
control. The quality systems integrate the efforts of raw material and finished
goods suppliers to provide the highest value to customers. On a statistical
sampling basis, a quality assurance organization tests components and finished
goods at different stages in the manufacturing process to assure that exacting
standards are met.
Research and Development
The Company is actively engaged in research and development programs to
develop and improve products, systems and manufacturing methods. These
activities are performed at 21 research and development centers located around
the world and include facilities in Australia, Belgium, Germany,
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Italy, Japan, Malta, the Netherlands, Sweden, the United Kingdom and the United
States. Expenditures for Company-sponsored research and development activities
related to continuing operations were $345 million in 1995, $303 million in 1994
and $280 million in 1993.

The Company's research efforts emphasize self-manufactured product
development, and portions of that research relate to multiple product lines. For
example, many product categories benefit from the Company's research effort as
applied to the human body's circulatory systems. In addition, research relating
to the performance and purity of plastic materials has resulted in advances that
are applicable to a large number of the Company's products. Principal areas of
strategic focus for research are biotechnology, renal therapy and
transplantation, blood disorders and cardiovascular disease.
Government Regulation
Most products manufactured or sold by the Company in the United States are
subject to regulation by the Food and Drug Administration ("FDA"), as well as by
other federal and state agencies. The FDA regulates the introduction and
advertising of new drugs and devices as well as manufacturing procedures,
labeling and record keeping with respect to drugs and devices. The FDA has the
power to seize adulterated or misbranded drugs and devices or to require the
manufacturer to remove them from the market and the power to publicize relevant
facts. From time to time, the Company has removed products from the market that
were found not to meet acceptable standards. This may occur in the future.
Product regulatory laws exist in most other countries where the Company does
business.
Environmental policies of the Company mandate compliance with all applicable
regulatory requirements concerning environmental quality and contemplate, among
other things, appropriate capital expenditures for environmental protection.
Various non-material capital expenditures for environmental protection were made
by the Company during 1995 and similar expenditures are planned for 1996. See
Item 3.--"Legal Proceedings."
Employees
As of December 31, 1995, the Company employed approximately 56,580 people,
including approximately 31,430 in the United States and Puerto Rico.
Contractual Arrangements
A substantial portion of the Company's products are sold through contracts
with purchasers, both international and domestic. Some of these contracts are
for terms of more than one year and include limits on price increases. In the
case of hospitals, clinical laboratories and other facilities, these contracts
may specify minimum quantities of a particular product or categories of products
to be purchased by the customer.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES.
International operations are subject to certain additional risks inherent in
conducting business outside the United States, such as changes in currency
exchange rates, price and currency exchange controls, import restrictions,
nationalization, expropriation and other governmental action.
Financial information is incorporated by reference from the Annual Report,
pages 68-69, section entitled "Notes to Consolidated Financial
Statements--Industry and Geographic Information."
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ITEM 2. PROPERTIES.

The Company owns or has long-term leases on substantially all of its major
manufacturing facilities. The Company maintains 33 manufacturing facilities in
the United States, including seven in Puerto Rico, and also manufactures in
Australia, Belgium, Brazil, Canada, the Czech Republic, Chile, China, Colombia,
Costa Rica, the Dominican Republic, France, Ireland, Italy, Japan, Malaysia,
Malta, Mexico, the Netherlands, Singapore, Spain, Russia, Turkey and the United
Kingdom.
The Company owns or operates 83 distribution centers in the United States
and Puerto Rico and 66 located in 22 foreign countries.
The Company maintains a continuing program for improving its properties,
including the retirement or improvement of older facilities and the construction
of new facilities. This program includes improvement of manufacturing facilities
to enable production and quality control programs to conform with the current
state of technology and government regulations. Capital expenditures related to
continuing operations were $309 million in 1995, $308 million in 1994 and $276
million in 1993. In addition, the Company added to the continuing operations
pool of equipment leased or rented to customers, spending $90 million in 1995,
$72 million in 1994 and $56 million in 1993.
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ITEM 3. LEGAL PROCEEDINGS.
entitled "Notes to Consolidated Financial Statements--Legal Proceedings."
Additionally, in March 1996, and after the Annual Report was printed, the courts
in Osaka and Tokyo issued second settlement plans and second interim opinions in
the Japanese Factor Concentrate cases. Those plans and opinions supplement the
courts' original plans for resolution of the litigation by confirming the
approximate $450,000 up-front payment to each plaintiff, which is to be funded
60% by the corporate defendants and 40% by the Japanese government. The courts'
plans and opinions also establish on-going payments to AIDS-manifested
hemophiliacs at $1,500 per month and set attorneys' fees at $35,000 per current
plaintiff and $15,000 per future plaintiff. The courts' plans provide that the
Japanese government will fund 40% of those amounts, and that the corporate
defendants will fund 60% with the corporate defendants funding their amounts in
proportion to their 1983 market shares, resulting in the Company paying 12.5% of
the overall corporate defendants' share. The courts' plans also provide for the
continuation of the Yuai Zaidan for non-plaintiffs through March 2001, for the
Japanese government to fund 40% of the aggregate amount required for the Yuai
Zaidan, for 100% credit of future Yuai Zaidan payments to individuals against
settlement amounts paid after the settlement is approved, and for the entry of
future plaintiffs into the fund. On March 13, 1996, the Company accepted the
basic terms of the courts' imposed settlement. Negotiations on the details of
the settlement are continuing.
-
--------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
9
<PAGE>
PART II
-
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Incorporated by reference from the Annual Report, page 70, section entitled

"Notes to Consolidated Financial Statements--Quarterly Financial Results and
Market for the Company's Stock."
-
--------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA.
Incorporated by reference from the Annual Report, inside back cover, section
entitled "Five Year Summary of Selected Financial Data."
-
--------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
entitled "Management's Discussion and Analysis."
-
--------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Incorporated by reference from the Annual Report, pages 45-70, sections
entitled "Report of Independent Accountants," "Consolidated Balance Sheets,"
"Consolidated Statements of Income," "Consolidated Statements of Cash Flows,"
"Consolidated Statements of Stockholders' Equity," and "Notes to Consolidated
Financial Statements."
-
--------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
10
<PAGE>
PART III
-
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) IDENTIFICATION OF DIRECTORS
Incorporated by reference from the board of directors' proxy statement for
use in connection with Baxter's annual meeting of stockholders to be held on May
6, 1996 (the "Proxy Statement"), pages x-x, sections entitled "Board of
Directors" and "Election of Directors."
(b) IDENTIFICATION OF EXECUTIVE OFFICERS
Following are the names and ages, as of March 1, 1996, of the executive
officers of Baxter International Inc. ("Baxter"), and one or both of its two
principal direct subsidiaries, Baxter Healthcare Corporation ("Healthcare") and
Baxter World Trade Corporation ("World Trade"), their positions and summaries of
their backgrounds and business experience. All executive officers of Baxter are
elected or appointed by the board of directors and hold office until the next
annual meeting of directors and until their respective successors are elected
and qualified. The annual meeting of directors is held after the annual meeting
of stockholders. All executive officers of Healthcare and World Trade are
elected or appointed by the boards of directors of the applicable subsidiary and
hold office until their respective successors are elected and qualified. As
permitted by applicable law, actions by these boards (and their sole

stockholder, Baxter) may be taken by written consent in lieu of a meeting.
(1) BAXTER INTERNATIONAL INC. EXECUTIVE OFFICERS
VERNON R. LOUCKS JR., age 61, has been chairman of the board of directors
since 1987 and chief executive officer of Baxter since 1980. Mr. Loucks was
first elected an officer of Baxter in 1971.
MANUEL A. BAEZ, age 54, has been an executive vice president of Baxter since
1995, and a group vice president of World Trade since 1994. Between 1990 and
1994, Mr. Baez was a group vice president of Baxter. Mr. Baez was first elected
an officer of Baxter in 1989.
LESTER B. KNIGHT, age 37, has been an executive vice president of Baxter
since 1992, and a corporate vice president since 1990, when he was first elected
an officer.
HARRY M. JANSEN KRAEMER, Jr., age 41, has been a senior vice president and
chief financial officer of Baxter since 1993. Mr. Kraemer previously was the
vice president of finance and operations for a subsidiary of Baxter. Prior to
that he was employed as controller, group controller, and president of various
divisions of subsidiaries of Baxter.
ARTHUR F. STAUBITZ, age 56, has been senior vice president and general
counsel of Baxter since 1993. From 1993 to 1994, he was also secretary of
Baxter. Mr. Staubitz previously was vice president/general manager of the
ventures group of a subsidiary of Baxter. Prior to that he was senior vice
president, secretary and general counsel of Amgen, Inc. Prior to that he was a
vice president of a Baxter subsidiary, and prior to that he was a vice president
and deputy general counsel of Baxter.
MICHAEL J. TUCKER, age 43, has been senior vice president of Baxter since
1995. From 1994 to 1995, he was a corporate vice president of World Trade. Mr.
Tucker previously was a vice president of a division of World Trade, and prior
to that, was a vice president of another division of a subsidiary of Baxter.
HERBERT E. WALKER, age 61, has been senior vice president of Baxter since
1993. Mr. Walker previously was vice president of human resources of a division
of Healthcare.
FABRIZIO BONANNI, age 49, has been a vice president of Baxter since 1995.
From 1994 to 1995, he was a corporate vice president of World Trade. Mr. Bonanni
previously was a vice president of a division of World Trade.
11
<PAGE>
JOHN F. GAITHER, Jr., age 46, has been a vice president of Baxter since
1994. Between 1991 and 1994, Mr. Gaither was vice president of law and strategic
planning for a subsidiary of Baxter, and prior to that, was secretary and deputy
general counsel of Baxter.
DAVID C. MCKEE, age 48, has been a vice president of Baxter since 1996.
Between 1994 and 1996, Mr. McKee was Baxter's deputy general counsel, and prior
to that, was associate general counsel of a subsidiary of Baxter.
KSHITIJ MOHAN, age 51, has been a vice president of Baxter since 1995. In
1995, Mr. Mohan also was a corporate vice president of World Trade. Mr. Mohan
previously was a vice president of a division of Healthcare.
JOHN L. QUICK, age 51, has been a vice president of Baxter since 1995. From
1994 to 1995, he was a corporate vice president of Healthcare. Mr. Quick
previously was a vice president of a division of Healthcare, and prior to that,
was a vice president of another division of that subsidiary.

KATHY B. WHITE, age 46, has been vice president and chief information
officer of Baxter since 1995. Ms. White previously was vice president of
information systems of Allied Signal Corporation, and prior to that, was a
corporate officer responsible for human resources and information systems with
Guilford Mills, Inc.
BRIAN P. ANDERSON, age 45, has been controller of Baxter since 1993. Mr.
Anderson previously was the vice president of corporate audit of a subsidiary of
Baxter, and prior to that was a partner in the international accounting firm of
Deloitte & Touche.
LAWRENCE D. DAMRON, age 49, has been treasurer of Baxter since 1992. Mr.
Damron previously was a vice president and controller of a division of a
subsidiary of Baxter, and prior to that was the corporate auditor of another
subsidiary. Prior to that, he was vice president and controller of a division of
that subsidiary.
A. GERARD SIECK, age 39, has been secretary of Baxter since 1994. Between
1992 and 1994, Mr. Sieck was assistant secretary of Baxter, and prior to that,
was corporate counsel in the law department of Healthcare.
(2) HEALTHCARE AND WORLD TRADE EXECUTIVE OFFICERS
TIMOTHY B. ANDERSON, age 49, has been a group vice president of Healthcare
and World Trade since 1994. Between 1992 and 1994, Mr. Anderson was a vice
president of Baxter. Mr. Anderson previously was president of several divisions
of a subsidiary of Baxter.
JOSEPH F. DAMICO, age 42, has been a group vice president of Healthcare
since 1994. Between 1992 and 1994, Mr. Damico was a vice president of Baxter.
Mr. Damico previously was president of a division of Healthcare, and prior to
that was a vice president - general manager of that division.
DONALD W. JOSEPH, age 58, has been a group vice president of Healthcare and
World Trade since 1994. Between 1990 and 1994, Mr. Joseph was a vice president
of Baxter.
JACK L. MCGINLEY, age 49, has been a group vice president of Healthcare
since 1994. Between 1992 and 1994, Mr. McGinley was a vice president of Baxter.
Mr. McGinley previously was president of a division of Healthcare, and prior to
that was president of the Japanese subsidiary of World Trade.
TERRENCE J. MULLIGAN, age 50, has been a group vice president of Healthcare
since 1994. Between 1990 and 1994, Mr. Mulligan was a senior vice president of
Baxter. Mr. Mulligan was first elected an officer of Baxter in 1985.
MICHAEL A. MUSSALLEM, age 43, has been a group vice president of Healthcare
since 1994. From 1993 to 1994, Mr. Mussallem was president of a division of
Healthcare, and from 1990 to 1993, was president of another division of that
subsidiary.
12
<PAGE>
CARLOS DEL SALTO, age 53, has been a corporate vice president of World Trade
since 1994. Between 1992 and 1994, Mr. del Salto was a vice president of Baxter.
Mr. del Salto previously was president-- Latin America/Switzerland/Austria of a
subsidiary of Baxter, and prior to that, he was vice president-- Latin America
of that subsidiary.
J. ROBERT HURLEY, age 46, has been a corporate vice president of World Trade
since 1993. Mr. Hurley previously was vice president of a division of World
Trade.
ROBERTO E. PEREZ, age 46, has been a corporate vice president of Healthcare

and World Trade since March 3, 1995. Between 1992 to 1995, Mr. Perez was
president of a division of a subsidiary of Baxter, and prior to that was a vice
president of that division.
(c) COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934.
Incorporated by reference from Proxy Statement, page 18, section entitled
"Section 16 Reporting."
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ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference from the Proxy Statement, pages 6-16, sections
entitled "Compensation of Directors" and "Compensation of Named Executive
Officers," and pages 17-18, section entitled "Pension Plan, Excess Plans and
Supplemental Plans."
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from the Proxy Statement, pages 18-20, section
entitled "Ownership of Company Securities."
-
--------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
13
<PAGE>
-
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PART IV
-
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The following documents are filed as a part of this report:
<TABLE>
<S> <C> <C>
(a) Financial Statements
Location
FINANCIAL STATEMENTS REQUIRED BY ITEM 8 OF THIS FORM
Consolidated Balance Sheets Annual
Report, page 46
Consolidated Statements of Income Annual
Report, page 47
Consolidated Statements of Cash Flows Annual
Report, page 48
Consolidated Statements of Stockholders' Equity Annual
Report, page 49
Annual
Report, pages
Notes to Consolidated Financial Statements 50-70
Report of Independent Accountants Annual
Report, page 45

SCHEDULES REQUIRED BY ARTICLE 12 OF REGULATION S-X
Report of Independent Accountants on Financial Statement
Schedule page 15
II Valuation and Qualifying Accounts page 16
All other schedules have been omitted because they are not applicable
or not required.
</TABLE>
<TABLE>
<S> <C>
(b) Reports on Form 8-K
A report on Form 8-K, dated November 14, 1995, was filed with the SEC
under Item 5,
Other Events, to file a press release which announced, among other
things, a $500
million stock repurchase program and participation in a revised
settlement of
mammary-implant litigation.
A report on Form 8-K, dated November 28, 1995, was filed with the
SEC under Item 5,
Other Events, to file a press release which announced a plan to
distribute to Baxter
shareholders publicly-traded stock for a new health-care cost
management company.
A report on Form 8-K, dated February 2, 1996, was filed with the SEC
under Item 5,
Other Events, to file a press release which announced an offer
to acquire the
National Medical Care, Inc. subsidiary of W. R. Grace & Co.
A report on Form 8-K, dated February 29, 1996, was filed with the SEC
under Item 5,
Other Events, to file a press release which announced the
withdrawal of a February
2, 1996 offer to acquire the National Medical Care, Inc. subsidiary
of W. R. Grace &
Co.
(c) Exhibits required by Item 601 of Regulation S-K are listed in the
Exhibit Index,
which is incorporated herein by reference.
</TABLE>
14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTS ON THE FINANCIAL STATEMENT SCHEDULE
-
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To the Board of Directors of
Baxter International Inc.
Our audits of the consolidated financial statements referred to in our
report dated February 14, 1996 appearing on page 45 of the 1995 Annual Report to
Stockholders of Baxter International Inc. (which report and consolidated
financial statements are incorporated by reference in the Annual Report on Form
10-K) also included an audit of the Financial Statement Schedule listed in Item
14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein

when read in conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Chicago, Illinois
February 14, 1996
15
<PAGE>
SCHEDULE II
-
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VALUATION AND QUALIFYING ACCOUNTS
(In millions of dollars)
<TABLE>
<CAPTION>
-
--------------------------------------------------------------------------------
---------------------------------------------
ADDITIONS
------------------------------
BALANCE AT CHARGED TO
CHARGED TO BALANCE AT
BEGINNING COSTS AND
OTHER DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES
ACCOUNTS(A) FROM RESERVES PERIOD
-
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---------------------------------------------
<S> <C> <C>
<C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Accounts receivable $ 21 $ 9
$ 1 $ (9) $ 22
--
--
---
--- --- ---
---
--- --- ---
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---------------------------------------------
$ 1 $ (6) $ 21
--
--
---
--- --- ---
---
--- --- ---
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---------------------------------------------
$ (1) $ (2) $ 19

--
--
---
--- --- ---
---
--- --- ---
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---------------------------------------------
</TABLE>
(A) Valuation accounts of acquired or divested companies and foreign currency
translation adjustments. Reserves are deducted from assets to which they
apply.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BAXTER INTERNATIONAL INC.
By: /s/ VERNON R. LOUCKS JR.
----------------------------------
Vernon R. Loucks Jr.
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Date: March 21, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<S> <C> <C> <C>
(i) Principal Executive Officer: (iv) A Majority of the
Board of Directors
Silas S. Cathcart
/S/ VERNON R. LOUCKS JR. Pei-yuan Chia
-----------------------
Vernon R. Loucks Jr. John W. Colloton
DIRECTOR, CHAIRMAN OF THE BOARD Susan Crown
AND CHIEF EXECUTIVE OFFICER Mary Johnston Evans
Frank R. Frame
David W. Grainger
Martha R. Ingram
Lester B. Knight
Harry M. Jansen
Kraemer, Jr.
(ii) Principal Financial Officer: Arnold J. Levine
Georges C. St.
Laurent, Jr.
Monroe E. Trout,
M.D.
/S/ HARRY M. JANSEN KRAEMER, JR. Fred L. Turner
--------------------------------
Harry M. Jansen Kraemer, Jr.
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER

(iii) Controller:
/s/ BRIAN P. ANDERSON By: /s/ VERNON R.
LOUCKS JR.
---------------------
----------------------------
Brian P. Anderson Vernon R. Loucks
Jr.
CONTROLLER DIRECTOR AND
ATTORNEY-IN-FACT
</TABLE>
17
<PAGE>
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APPENDICES
<TABLE>
<CAPTION>
DESCRIPTION
PAGE
-
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---------------------- ---------
<S>
<C>
Computation of Primary Earnings per Common Share (Exhibit 11.1)
22
Computation of Fully Diluted Earnings per Common Share (Exhibit 11.2)
23
Computation of Ratio of Earnings to Fixed Charges (Exhibit 12)
24
Subsidiaries of the Company (Exhibit 21)
25
</TABLE>
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EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
<TABLE>
<CAPTION>
NUMBER AND DESCRIPTION OF EXHIBIT
-
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------------------------------------
<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 Form 10-Q for the quarter ended
September 30, 1994, file number 1-4448.
4. Instruments defining the rights of security holders, including
indentures

4.1* Indenture for 4 3/4% Convertible Subordinated Debentures
due January 1, 2001, filed under the
Securities Act of 1933 as exhibit 2(d) to the Company's
registration statement on Form S-7
(No. 2-55622).
4.2* Indenture dated November 15, 1985 between the Company
and Bankers Trust Company, filed as
exhibit 4.8 to the Company's current report on Form 8-K
dated December 16, 1985, file no.
1-4448.
4.3* Amended and Restated Indenture dated November 15, 1985,
between the Company and Continental
Illinois National Bank and Trust Company of Chicago, filed
under the Securities Act of 1933 as
exhibit 4.1 to the Company's registration statement on
Form S-3 (No. 33-1665).
4.4* First Supplemental Indenture to Amended and Restated
Indenture dated November 15, 1985,
between the Company and Continental Illinois National Bank
and Trust Company of Chicago, filed
under the Securities Act of 1933 as exhibit 4.1(A) to the
Company's registration statement on
Form S-3 (No. 33-6746).
4.5* Indenture dated as of August 15, 1977, between the
Company and Midlantic National Bank, as
supplemented, filed as exhibit 4.7 to the Company's
annual report on Form 10-K for the year
ended December 31, 1985, file no. 1-4448 (the "1985 Form
10-K").
4.6* Fiscal and Paying Agency Agreement dated as of April 26,
1984, among American Hospital Supply
International Finance N.V., the Company and The Toronto-
Dominion Bank, as amended, filed as
exhibit 4.9 to the 1985 Form 10-K.
4.7* Fiscal and Paying Agency Agreement dated as of November
15, 1984, between the Company and
Citibank, N.A., as amended, filed as exhibit 4.16 to the
Company's annual report on Form 10-K
for the year ended December 31, 1987, file no. 1-4448 (the
"1987 Form 10-K").
4.8* Specimen Medium-Term Note, filed as exhibit 4.10 to the
1985 Form 10-K.
4.9* Specimen Extendible Note, filed as exhibit 4.11 to the
1985 Form 10-K.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
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------------------------------------
<C> <C> <S>
4.10* Specimen 13 1/8% Note, filed as exhibit 4.12 to the 1985
Form 10-K.
4.11* Specimen 9 5/8% Note, filed as exhibit 4.13 to the 1987
Form 10-K.
4.12* Specimen 8 7/8% Debenture, filed as exhibit 4.2(a) to the
Company's current report on Form 8-K
dated June 15, 1988, file no. 1-4448.
4.13* Specimen 9 1/2% Note, filed as exhibit 4.3(a) to the

dated June 23, 1988, file no. 1-4448.
dated September 13, 1989, file number 1-4448.
dated December 7, 1989, file number 1-4448.
10. Material Contracts
10.1* Employment Agreement between William B. Graham and the
Company, filed as exhibit 10.1 to the
1985 Form 10-K.
10.2* Form of Indemnification Agreement entered into with
directors and officers, filed as exhibit
19.4 to the Company's quarterly report on Form 10-Q for
the quarter ended September 30, 1986,
file no. 1-4448.
10.3* Stock Option Plan of 1977 (as amended and restated),
filed as exhibit 19.3 to the Company's
quarterly report on Form 10-Q for the quarter ended
September 30, 1984, file no. 1-4448.
10.4* 1988 Long-Term Incentive Plan, filed as exhibit 10.12 to
the 1987 Form 10-K.
10.5* 1987-1989 Long-Term Performance Incentive Plan, filed as
exhibit 10.15 to the Company's annual
report on Form 10-K for the year ended December 31,1986
(the "1986 Form 10-K").
10.6* 1989 Long-Term Incentive Plan, filed as exhibit 10.12 to
the Company's annual report on Form
10-K for the year ended December 31, 1988, file no. 1-4448
(the "1988 Form 10-K").
10.7* Stock Option Plan Adopted July 25, 1988, filed as exhibit
10.13 to the 1988 Form 10-K.
10.8* 1991 Officer Incentive Compensation Plan, filed as
report on Form 10-K for the year ended December 31, 1990,
file number 1-4448 (the "1990 Form
10-K").
10.9* Baxter International Inc. and Subsidiaries Incentive
Investment Excess Plan, filed as exhibit
10.17 to the 1988 Form 10-K.
10.10* Baxter International Inc. and Subsidiaries Supplemental
Pension Plan, filed as exhibit 10.18
to the 1988 Form 10-K.
10.11* Amendment to Stock Option Plan of 1977, filed as
exhibit 19.2 to the Company's quarterly
report on Form 10-Q for the quarter ended September 30,
1989, file no. 1-4448 (the "September,
1989 Form 10-Q").
10.12* Limited Rights Plan, filed as exhibit 19.6 to the
September, 1989 Form 10-Q.
10.13* Amendments to various plans regarding disability, filed as
exhibit 19.9 to the September, 1989
Form 10-Q.
10.14* Amendments to 1987-1989 Long-Term Performance Incentive
Plan and 1988 Long-Term Incentive
Plan, filed as exhibit 19.10 to the September, 1989 Form
10-Q.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>

-
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------------------------------------
<C> <C> <S>
10.15* 1987 Incentive Compensation Program, filed as exhibit C
to the Company's proxy statement for
use in connection with its May 13, 1987, annual meeting of
stockholders, file no. 1-4448.
10.16* Rights Agreement between the Company and The First
National Bank of Chicago, filed as exhibit
1 to a registration statement on Form 8-A dated March 21,
1989, file no. 1-4448.
10.17* Amendment to 1987 Incentive Compensation Program, filed
as exhibit 19.1 to September, 1989
Form 10-Q.
10.18* Deferred Compensation Plan (1990), filed as exhibit 10.24
to the 1990 Form 10-K.
10.19* Restricted Stock Grant Terms and Conditions, filed as
report on Form 10-K for the year ended December 31,
1991, file number 1-4448 (the "1991 Form
10-K").
10.20* Vernon R. Loucks Restricted Stock Grant Terms and
Conditions, filed as exhibit 10.26 to the
1991 Form 10-K.
10.21* Deferred Compensation Plan (1990), as amended in 1992,
filed as exhibit 10.27 to the 1992 Form
10-K.
10.22* Restricted Stock Plan for Non-Employee Directors (as
amended and restated in 1992), filed as
exhibit 10.28 to the 1992 Form 10-K.
10.23* Restricted Stock Grant Terms and Conditions (as amended),
filed as exhibit 10.31 to the 1992
Form 10-K.
10.24* 1992 Officer Incentive Compensation Plan, filed as exhibit
10.29 to the 1992 Form 10-K.
10.25* 1993 Officer Incentive Compensation Plan, filed as exhibit
10.30 to the 1992 Form 10-K.
report on Form 10-K for the year ended December 31, 1993,
file number 1-4448 (the "1993 Form
10-K").
10.27* Corporate Aviation Policy, filed as exhibit 10.33 to the
1992 Form 10-K.
10.28* Plan and Agreement of Reorganization Between Baxter and
Caremark International Inc., filed as
exhibit 10.34 to the 1992 Form 10-K
10.29* 1994 Incentive Compensation Program, filed as exhibit A
to the Company's proxy statement for
use in connection with its April 29, 1994 annual meeting
of stockholders, file no. 1-4448.
10.30* 1994 Shared Investment Plan and Terms and Conditions,
filed as exhibit 10.1 to the Company's
quarterly report on Form 10-Q for the quarter ended June
30, 1994.
report on Form 10-K for the year ended December 31, 1994
(the "1994 Form 10-K").
10.32* Baxter International Inc. Restricted Stock Plan for
Non-Employee Directors, as amended and
restated effective May 8, 1995, filed as exhibit 10.32 to
the 1994 Form 10-K.

10.33 1996 Officer Incentive Compensation Plan.
10.34 1995 Stock Option Plan Terms and Conditions.
10.35 Separation Agreement: Tony L. White.
10.36 Separation Agreement: Manuel A. Baez
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
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------------------------------------
<C> <C> <S>
11. Statement re: computation of per share earnings.
11.1 Computation of primary earnings per common share.
11.2 Computation of fully diluted earnings per common share.
12. Statements re: computation of ratios.
13. 1995 Annual Report to Stockholders (such report, except to the
extent incorporated herein by reference,
is being furnished for the information of the Securities and
Exchange Commission only and is not deemed
to be filed as part of this annual report on Form 10-K).
21. Subsidiaries of the Company.
23. Consent of Price Waterhouse.
24. Powers of Attorney.
27. Financial Statement Schedule.
</TABLE>
- ------------------------
<TABLE>
<C> <C> <S>
* Incorporated herein by reference.
(All other exhibits are inapplicable.)
</TABLE>
21
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.33
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 10.33
<TEXT>
<PAGE>
1996 OFFICER INCENTIVE COMPENSATION PLAN
This 1996 Officer Incentive Compensation Plan ("Plan") of Baxter International
Inc. ("Baxter") and its subsidiaries (collectively, the "Company") is adopted
pursuant to the Baxter International Inc. 1987 Incentive Compensation Program
(the "Program") for the purposes stated in the Program. The Plan is intended to
comply with the requirements of Section 162(m)(4)(C) of the Internal Revenue
Code of 1986 ("IRC"), as amended, and the related income tax regulations issued
thereunder.

1. ELIGIBILITY
Officers of the Company are eligible to participate in the Plan during 1996
("Plan Year") if the officer's participation is approved by the Compensation
Committee of the Board of Directors of Baxter (the "Committee"). Officers so
approved by the Committee shall be referred to herein as "Participants".
2. BONUS AWARD
2.1 Each Participant shall be eligible to receive a "Bonus Award" in
accordance with the terms provided herein and any other terms established by the
Committee. To determine a Participant's Bonus Award, the Committee shall
establish a) Company performance goals for the Plan Year ("Company Performance
Criteria"), b) a "Bonus Range" for each Participant, and c) the amount within a
Participant's Bonus Range that will be payable to a Participant based upon the
achievement of the Company Performance Criteria. The terms described in the
preceding sentence must be established by April 1, 1996, and such terms shall
not thereafter be changed, except as permitted by paragraph 2.2.
2.2 By March 31, 1997, the Committee shall assess the extent to which the
Company has achieved the Company Performance Criteria based on the Company's
publicly reported results for the Plan Year. The Committee shall exclude the
effect of acquisitions, divestitures, changes in accounting principles, and
other extraordinary or non-recurring events occurring in 1996 when assessing the
extent to which the Company has achieved the Company Performance Criteria, but
only if such exclusion would enhance the Company's performance relative to the
Company Performance Criteria. The exclusion authorized by the preceding
sentence shall only apply to the extent it is consistent with IRC Section
162(m)(4)(C) and the related regulations described above. The Committee shall
then determine each Participant's Bonus Award based upon the terms described in
paragraph 2.1 above. The
<PAGE>
Committee, however, has the discretion to reduce the amount of a Participant's
Bonus Award determined under the preceding sentence. The Committee's
determination shall be consistent with IRC Section 162(m)(4)(C) and the related
regulations described above. In addition, the committee may exercise discretion
in the determination of the Bonus Awards earned under the Plan with respect to
participants who are not subject to IRC Section162(m).
2.3 If an officer becomes a Participant in the Plan during 1996, but after
January 1, 1996, the Committee shall establish a prorated Bonus Range for such
Participant based on the number of full months remaining in 1996 after he or she
becomes a Participant. To the extent applicable, the determination of a
prorated Bonus Range shall be consistent with IRC Section 162(m)(4)(C) and the
related regulations described above.
3. PAYMENT
3.1 Except as otherwise determined by the Committee and except with respect
to Participants who have filed deferral elections pursuant to paragraph 4, all
bonuses will be paid in cash as soon as possible following determination of
Bonus Awards by the Committee.
3.2 No Participant will be eligible to receive a Bonus Award unless he or she
continues to be employed by the Company through February 1, 1997, except as
otherwise determined by the Committee. The Committee's Bonus Award
determination with respect to such participant may be determined in the same
manner as provided in paragraphs 2.1 and 2.2 above.
4. DEFERRAL OF PAYMENT

Participants may elect to defer payment in accordance with the Baxter
International Inc. and Subsidiaries Deferred Compensation Plan.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.34
<SEQUENCE>3
<TEXT>
<PAGE>
STOCK OPTION PLAN ADOPTED JULY 31, 1995
TERMS AND CONDITIONS
1. PURPOSE
This Stock Option Plan ("Plan") is adopted pursuant to the Baxter International
Inc. 1994 Incentive Compensation Program ("Program") for the purposes stated in
the Program.
2. PARTICIPANTS
Participants in this Plan ("Optionee") shall be valued employees of Baxter
International Inc. or its subsidiaries ("Company") who have been selected by the
Committee, as defined in the Program ("Committee"), and to whom the Committee
makes an award of an option ("Option") under this Plan.
3. AWARDS
Each Option shall consist of a Stock Option as defined in the Program and is
granted under the terms and conditions contained in the Program and this Plan.
To the extent that any of the terms and conditions contained in this Plan are
inconsistent with the Program, the terms of the Program shall control. Terms
defined in the Program shall have the same meaning in these terms and
conditions. The Option is not intended to qualify as an Incentive Stock Option
within the meaning of section 422 of the United States Internal Revenue Code.
Residents of the United Kingdom may also be subject to additional terms and
conditions in the form contained in the Baxter International Inc. Rules of the
Baxter International United Kingdom Stock Option, to the extent deemed necessary
by the Committee.
4. VESTING, EXERCISE AND EXPIRATION
4.1 The Option becomes vested five years from the date of grant, subject to
acceleration in accordance with the following. One hundred percent of the
Option shall become vested on the first Business Day (as defined in section 4.4)
after the ninetieth consecutive calendar day during which the average Fair
Market Value (as defined in the Program) of the Common Stock (as defined in the
Program) equals or exceeds $50.00 per share. The Option shall not vest more
than three years after the
<PAGE>
Optionee's employment is terminated by retirement at or after age 55 but shall
otherwise continue to vest until the Option expires pursuant to section 4.4.
4.2 When vested and until it expires, the Option may be exercised in whole or
in part in the manner specified by the Stockholder Services Department of Baxter
International Inc. If exercised in part, the Option must be exercised in
installments consisting of at least 100 shares or, if options for less than 100

shares are then exercisable, for the number of shares then exercisable. Shares
of Common Stock may not be used to pay the exercise price of the Option unless
certificates representing such shares have been issued and are delivered by the
Optionee in accordance with the requirements specified by the Stockholder
Services Department. Residents of the United Kingdom may not use shares of
Common Stock to pay the exercise price of the Option in any circumstances.
4.3 If the Optionee's employment by the Company is terminated by death or
disability more than 12 months after the date on which the Option is granted,
the Optionee or the Optionee's legal representative or the person or persons to
whom the Optionee's rights under the Option are transferred by will or the laws
of descent and distribution shall have the right to exercise the Option until it
expires in accordance with its terms with respect to all or any part of the
shares remaining subject to the Option (whether or not such shares were
purchasable by the Optionee under section 4.1 at the time of death.)
4.4 The Option shall expire at the close of business on the earlier of a date
determined as follows or, if such date is not a Business Day, then the last
Business Day preceding such date: (i) one year after the date on which
employment of the Optionee by the Company shall have been terminated by his
death or disability; (ii) five years after the date on which employment of the
Optionee by the Company shall have been terminated by retirement at or after age
55; (iii) three months after the date on which employment of the Optionee by the
Company shall have terminated except as provided in subsection 4.4(i) and (ii),
unless the Optionee dies or becomes disabled during said three-month period, in
which case the relevant date shall be one year after the termination; or (iv)
ten years from the date on which the Option was granted. "Business Day" shall
mean any day, other than Saturday or Sunday, when the corporate headquarters of
the Company is open for the transaction of business and when the Common Stock is
traded on the New York Stock Exchange. A transfer of an Optionee from
employment by one corporation to another among Baxter International Inc. and its
subsidiaries, or a transfer of an Optionee to employment by another corporation
which assumes the Option or issues a substitute option in a transaction to which
section 424 of the Internal Revenue Code applies, shall not be considered a
termination of employment for purposes of the Option.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.35
<SEQUENCE>4
<TEXT>
<PAGE>
Exhibit 10-35
[BAXTER LETTERHEAD]
September 18, 1995
Mr. Tony L. White
575 Stable Lane
Lake Forest, IL 60045
Dear Tony:
This letter confirms our agreement concerning your termination of employment
with Baxter International Inc. and its affiliates ("Company"). You and the
Company acknowledge that your employment termination is by mutual agreement, and

that it is completely independent of the reduction in force the Company
announced in the fourth quarter of 1993.
You will cease to be a director and officer of the Company effective September
18, 1995 ("Transition Date"). You will continue to be an employee of the
Company through December 31, 1995 ("Termination Date"). Between your Transition
Date and your Termination Date, you will assist the Company in the smooth
transition of your responsibilities to your successors.
If you satisfy your obligation to assist the Company in the smooth transition of
your responsibilities to your successors, you will receive a cash bonus ("Cash
Bonus") of up to $300,000. The Cash Bonus is payable to you within thirty days
after your Termination Date. I will determine both whether you are eligible to
receive the Cash Bonus and the final amount at year end. If the Cash Bonus is
paid to you, it will be deemed eligible 1995 compensation for purposes of
calculating the Pension Supplement described on page 2 of the Agreement.
You will continue to receive your monthly car allowance, flexible spending
allowance, home security system and club reimbursements until your Termination
Date.
You will not receive any bonus under the 1995 Officer Incentive Compensation
Plan. You are not eligible to participate in any Company bonus plans which are
adopted after the date of this Agreement. You will not earn any restricted
shares for 1995 performance under the Company's 1989 Long-Term Incentive Plan
(LTI-3).
Before your Termination Date, you will receive a total of $35,288, in a single
sum, for all of your accrued but unused vacation time, in accordance with the
Company's policy. You will not accrue any vacation time after your Termination
Date.
<PAGE>
You are eligible to receive medical coverage through the Company's retiree
medical plan, in accordance with the plan's provisions. You may postpone
retiree medical coverage and elect, in accordance with a federal statute
(COBRA), to continue your medical and dental benefits under the Company's
Flexible Benefits Program for up to 18 months after your Termination Date. You
may not obtain medical coverage through the retiree medical plan and COBRA
simultaneously.
You are eligible to continue your active participation in the Company's
Incentive Investment Plan until your Termination Date, in accordance with the
Plan's provisions. Your vested accrued benefits in the Incentive Investment
Plan will be distributed in accordance with its provisions.
Your active participation in the Baxter International Inc. and Subsidiaries
Pension Plan ("Pension Plan") will continue until your Termination Date, in
accordance with the Plan's provisions. Your vested accrued benefit in the
Pension Plan will be distributed in accordance with its provisions.
In addition, the Company will provide you with a non-qualified and unfunded
supplemental pension benefit ("Pension Supplement") equal to the difference
between a) your accrued benefit calculated under the provisions of the Pension
Plan and b) the accrued benefit which you would have under the Pension Plan if
you had ten additional years of participation in the Pension Plan. Your Pension
Supplement is payable at the same time and in the same form as your benefit
under the Pension Plan. In consideration of your receipt of the Pension

Supplement, you have agreed to postpone payment of the Pension Supplement and
your benefit under the Pension Plan until September 1, 1996 or later. The ten
additional years of Pension Plan participation provided in this paragraph will
not be counted when determining the amount you must pay for coverage through the
Company's retiree medical plan.
Your participation, if any, in the Company's Employee Stock Purchase Plan will
cease on your Termination Date. You will receive a cash refund of the balance,
if any, in your subscription account, in accordance with the Plan's provisions.
Your participation in the Company's split-dollar life insurance plan will cease
on your Termination Date. You may elect to continue your split-dollar life
insurance coverage in accordance with the Plan's provisions.
2
<PAGE>
Your options and restricted shares will be vested or forfeited as listed below:
<TABLE>
<CAPTION>
OPTIONS
# OF OPTIONS EXPIRATION
DATE GRANTED TYPE GRANTED OPTION PRICE DATE(2) VESTING
<S> <C> <C> <C> <C> <C>
-
--------------------------------------------------------------------------------
------------------
11/21/88 NQ 10,470(1) $15.89(1) 3/29/96 All are vested; may
exercise
before expiration
date
-
--------------------------------------------------------------------------------
------------------
11/19/89 NQ 10,993(1) $22.21(1) 3/29/96 all are vested; may
exercise
before expiration
date
-
--------------------------------------------------------------------------------
------------------
exercise
before expiration
date
-
--------------------------------------------------------------------------------
------------------
exercise
before expiration
date
-
--------------------------------------------------------------------------------
------------------
exercise
before expiration
date
-

--------------------------------------------------------------------------------
------------------
8/2/93 NQ 27,000 $26.00 3/29/96 18,000 are vested;
may
exercise before
expiration date;
remainder will be
forfeited on
your Termination
Date
-
--------------------------------------------------------------------------------
------------------
7/31/95 NQ 44,800 $37.25 3/29/96 None are vested; all
will be
forfeited on your
Termination
Date unless
accelerated
vesting occurs, in
accordance
with the option
grant terms
and conditions,
before the expiration
date
-
--------------------------------------------------------------------------------
------------------
</TABLE>
(1) As equitably adjusted in connection with the Caremark spin-off
(2) Option expiration dates consistent with option grant terms and conditions
relating to employment termination
3
<PAGE>
<TABLE>
<CAPTION>
RESTRICTED SHARES
# of Options
Date Granted Granted Vesting Date Disposition
<S> <C> <C> <C>
11/21/88 25,100 1 year after earned 24,262 shares have been
earned, vested and
distributed; 838 were
earned in 1994 and will be
allowed to vest on 12/31/95
8/9/91 10,040 1 year after earned All were earned in 1994;
6,787 will be allowed to
vest on 12/31/95; remaining
3,253 will be forfeited on
your Termination Date
12/7/92 19,400 1 year after earned 4,247 were earned in 1994;
all 19,400 will be
forfeited on your
Termination Date

11/14/94 8,580 1 year after earned none have ben earned or
vested; all will be
forfeited on your
Termination Date
</TABLE>
You will not receive any additional grants of options or restricted shares.
Your participation in the Shared Investment Plan will continue in accordance
with the Plan's provisions.
To preserve your rights to make various elections under the Company's Flexible
Benefits Program, Pension Plan and Incentive Investment Plan, you must contact
the Human Resources Department before your Termination Date.
You acknowledge that the compensation and benefits provided in this Agreement
exceed the compensation and benefits which you would normally receive in
connection with your employment termination. In exchange for the compensation
and benefits under this Agreement, you waive your right to file or participate
as a class member in any claims or lawsuits (whether or not you now know of the
basis for the claims or lawsuits) with federal or state agencies or courts
against the Company and its employee benefit plans, including their present and
former directors, officers, employees, agents and fiduciaries. This general
waiver and release includes, but is not limited to, all claims of unlawful
discrimination in regard to age, race, sex, color, religion, national origin and
handicap under Title VII of the Civil Rights Act, the Age Discrimination in
Employment Act or any other federal or state statutes, all claims for wrongful
employment termination or breach of contact and any other claims relating to
your employment or termination of
4
<PAGE>
employment with the Company. This waiver and release also apply to your heirs,
assigns, executors and administrators. This waiver and release do not waive
rights or claims which may arise after the date this Agreement is signed except
as stated in the next sentence. To be eligible to receive the Pension
Supplement described above, you agree that this waiver and general release will
be deemed to be signed by you again when your Pension Supplement begins to be
paid.
You agree: (a) not to intentionally disparage the Company, its employees or
products; (b) not to intentionally engage in actions contrary to the interest of
the Company; provided, however, that this subsection (b) shall not apply to
conduct otherwise permissible under your employment agreement with the Company;
(c) not to disclose or allow disclosure of any provisions of this Agreement,
except to your attorney or pursuant to subpoena or court order (although the
Company may be required to disclose this Agreement in its 1996 proxy statement
and as an exhibit to its Form 10-K for 1995); (d) to conduct the transition
period in a constructive and positive manner; (e) to remain bound by the non-
compete and confidentiality provisions of your employment agreement with the
Company (the Company acknowledges that your employment with The Perkin-Elmer
Corporation does not violate the non-compete provisions of your employment
agreement); (f) to refrain from soliciting any Company employees for employment
at The Perkin-Elmer Corporation, or any other future employer of you, until
January 1, 1997 and (g) to return to the Company, by September 30, 1995, all

Company property, including proprietary information.
All amounts payable to you or on your behalf under this Agreement will be
reported to appropriate governmental agencies as taxable income to the extent
required, and appropriate withholding will be made where necessary. In
addition, all amounts payable to you under this Agreement are expressed as
amounts prior to payment or withholding of any taxes, and the Company will not
gross-up the amounts or otherwise reimburse you for the taxes you pay relating
to such amounts.
The amounts payable to you under this Agreement are in lieu of all severance
compensation and other severance benefits from the Company to which you might
otherwise be entitled. The Company may terminate the Pension Supplement if you
fail to comply with any of your obligations under the Agreement.
You acknowledge that the Company has made no promises to you which are not
included in this Agreement, and that this Agreement contains the entire
understanding between you and the Company relating to your employment
termination. You acknowledge that the terms of this Agreement are contractually
binding. If any portion of this Agreement is declared invalid or unenforceable,
the remaining portions of this Agreement will continue in force.
5
<PAGE>
You acknowledge that you carefully read the terms of this Agreement, you know
and understand its content and meaning, you were given 21-day period to review
it, you were encouraged to consult with an attorney before accepting it, and you
accept it voluntarily.
If this letter accurately reflects our agreement, please sign two copies, and
return one of them to me by October 6, 1995.
The terms of this Agreement are subject to the approval of the Compensation
Committee of the Baxter International Inc. Board of Directors.
Sincerely.
/S/ Vernon R. Loucks Jr.
- ----------------------------
ACCEPTED AND AGREED:
/S/ Tony L. White
- ----------------------------
(Signature)
9/23/95
- ----------------------------

(Date)
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.36
<SEQUENCE>5
<TEXT>
<PAGE>
Exhibit 10-36
March 18, 1996
Mr. Manuel A. Baez
3502 Derby Lane
Ft. Lauderdale, FL 33331
Dear Manny:
This letter confirms our agreement concerning your termination of employment
with Baxter International Inc. and its affiliates ("Company"). You and the
Company acknowledge that your employment termination is by mutual agreement, and
that it is completely independent of the reduction in force the Company
announced in the fourth quarter of 1993.
You will cease to be an employee and an officer of the Company effective May 3,
1996 ("Termination Date"). Until your Termination Date, you will assist the
Company in the smooth transition of your responsibilities to your successors.
You will continue to receive your current salary, monthly car allowance, and
flexible spending allowance until your Termination Date.
You will be eligible to receive a pro-rated bonus, up to a maximum of $78,000,
under the 1996 Officer Incentive Compensation Plan. Your bonus will be
determined based on the extent to which the Company achieves the 1996
performance criteria under the Plan and based on the extent to which you satisfy
your obligation to assist the Company in the smooth transition of your
responsibilities to your successors. Your 1996 bonus will be determined and
paid at the same time and in the same manner applicable to all other
participants in the Plan.
You will not earn any restricted shares for 1996 performance under the Company's
1989 Long-Term Incentive Plan (LTI-3).
Before your Termination Date, you will receive a total of $42,560, in a single
sum, for all of your accrued but unused vacation time, in accordance with the
Company's policy. You will not accrue any vacation time after your Termination
Date.
<PAGE>
You are eligible to receive medical coverage through the Company's retiree
medical plan, in accordance with the plan's provisions. You may postpone
retiree medical coverage and elect, in accordance with a federal statute
(COBRA), to continue your medical and dental benefits under the Company's
Flexible Benefits Program for up to 18 months after your Termination Date. You
may not obtain medical coverage through the retiree medical plan and COBRA
simultaneously.

You are eligible to continue your active participation in the Company's
Incentive Investment Plan until your Termination Date, in accordance with the
Plan's provisions. Your vested accrued benefits in the Incentive Investment
Plan will be distributed in accordance with its provisions.
Your active participation in the Baxter International Inc. and Subsidiaries
Pension Plan ("Pension Plan") will continue until your Termination Date, in
accordance with the Plan's provisions. Your vested accrued benefit in the
Pension Plan will be distributed in accordance with its provisions.
In addition, the Company will provide you with a non-qualified and unfunded
supplemental pension benefit ("Pension Supplement") equal to the difference
between your accrued benefit under the qualified Pension Plan determined as of
your Termination Date and the accrued benefit you would have under the qualified
Pension Plan if on your Termination Date you were five years older, and had five
additional years of benefit service. Your non-qualified and unfunded
supplemental pension benefit will be paid to you at the same time and in the
same manner as your benefit under the qualified Pension Plan. In the event of
your death prior to your Termination Date, the provisions of this paragraph will
be applied as if your Termination Date were the day before your death and you
selected a pension payment option of 100% Joint and Survivor. The five
additional years of benefit service and the five additional years of age
provided in this paragraph will not be counted when determining the amount you
must pay for coverage through the Company's retiree medical plan.
Your participation, if any, in the Company's Employee Stock Purchase Plan will
cease on your Termination Date. You will receive a cash refund of the balance,
if any, in your subscription account, in accordance with the Plan's provisions.
You are eligible to continue your participation in the Company's split-dollar
life insurance plan. Your participation will continue in accordance with the
plan's provisions as they apply to participants whose employment terminates
after accumulating 65 age and years of participation points under the
Company's Pension Plan.
Your stock options and restricted shares will be vested or forfeited as listed
below:
- 2 -
<PAGE>
OPTIONS
<TABLE>
<CAPTION>
-
--------------------------------------------------------------------------------
------------------------------
# of
Date Options Option
Expiration
Granted Type Granted Price Date(2)
Vesting
-
--------------------------------------------------------------------------------
------------------------------
<S> <C> <C> <C> <C> <C>
7/30/90 NQ 11,517(1) $24.36(1) 8/2/96 all
are vested; may exercise
before

expiration date
-
--------------------------------------------------------------------------------
------------------------------
8/9/91 NQ 8,794(1) $34.15(1) 8/2/96 all
before
expiration date
-
--------------------------------------------------------------------------------
------------------------------
8/3/92 NQ 2,303(1) $36.66(1) 8/2/96 all
before
expiration date
-
--------------------------------------------------------------------------------
------------------------------
8/2/93 NQ 16,500 $26.00 8/2/96 11,000
before
expiration date; remainder
will
be vested on 8/2/96 and you
may
exercise them on 8/2/96 only
-
--------------------------------------------------------------------------------
------------------------------
7/31/95 NQ 23,700 $37.25 8/2/96 None
are vested; all will be
forfeited on the expiration date
unless
accelerated vesting
occurs, in accordance with the
option
grant terms and conditions,
before
the expiration date
-
--------------------------------------------------------------------------------
------------------------------
</TABLE>
(1)As equitably adjusted in connection with the Caremark spin-off
(2)Option expiration dates consistent with option grant terms and conditions
relating to employment termination.
RESTRICTED SHARES
<TABLE>
<CAPTION>
-
--------------------------------------------------------------------------------
-------------------------
Date # of Shares
Granted Granted Vesting Date Disposition
-
--------------------------------------------------------------------------------
-------------------------

<S> <C> <C> <C>
9/7/90 15,580 1 year after 12,453 shares have been
earned, vested and
earned distributed; 3,127 shares
were earned in 1995
and will be allowed to vest
on 12/31/96
-
--------------------------------------------------------------------------------
-------------------------
12/7/92 9,200 1 year after 5,189 shares were earned in
1995 and will be
earned allowed to vest on
12/31/96; remaining 4,011
will be forfeited on your
Termination Date
-
--------------------------------------------------------------------------------
-------------------------
2/17/92 19,115 12/31/98 12,743 shares will be
allowed to vest on
12/31/96; you may elect to
have shares
withheld to pay the taxes
due on 12/31/96, but
the 12,743 shares (less the
shares withheld to
pay taxes) will not be
distributed to you until
12/31/98, the original
vesting date. The
remaining 6,372 shares will
be forfeited on
your Termination Date.
-
--------------------------------------------------------------------------------
-------------------------
</TABLE>
You will not receive any additional grants of options or restricted shares.
- 3 -
<PAGE>
Your participation in the Shared Investment Plan will continue in accordance
with the Plan's provisions.
To preserve your rights to make various elections under the Company's Flexible
Benefits Program, Pension Plan and Incentive Investment Plan, you must contact
the Human Resources Department before your Termination Date. To exercise your
stock options, you must contact the Stockholder Services Department.
You acknowledge that the compensation and benefits provided in the Agreement
exceed the compensation and benefits which you would normally receive in
connection with your employment termination. In exchange for the compensation
and benefits under this Agreement, you waive your right to file or participate
as a class member in any claims or lawsuits (whether or not you now know of the
basis for the claims or lawsuits) with federal or state agencies or courts
against the Company and its employee benefit plans, including their present and
former directors, officers, employees, agents and fiduciaries. This general
waiver and release includes, but is not limited to, all claims of unlawful

discrimination in regard to age, race, sex, color, religion, national origin and
handicap under Title VII of the Civil Rights Act, the Age Discrimination in
Employment Act or any other federal or state statutes, all claims for wrongful
employment termination or breach of contract and any other claims relating to
your employment or termination of employment with the Company. This waiver and
release also apply to your heirs, assigns, executors and administrators. This
waiver and release do not waive rights or claims which may arise after the date
this Agreement is signed except as stated in the next three sentences.
To be eligible to receive the Pension Supplement described above, you agree that
this waiver and general release will be deemed to be signed by you again when
your Pension Supplement begins to be paid. To be eligible to receive the
restricted stock which was earned in 1995 and allowed to vest on December 31,
1996, you agree that this waiver and general release will be deemed to be signed
by you again when those shares are distributed to you. To be eligible to
receive the additional shares of restricted stock which are distributable to you
on December 31, 1998, you agree that this waiver and general release will be
deemed to be signed by you again when those shares are distributed to you.
You agree: (a) not to intentionally disparage the Company, its employees or
products; (b) not to intentionally engage in actions contrary to the interests
of the Company; (c) not to disclose or allow disclosure of any provisions of
this Agreement, except to your attorney or pursuant to subpoena or court order
(although the Company may be required to disclose this Agreement in its 1996
proxy statement and as an exhibit to its Form 10-K for 1995); (d) to conduct the
transition period in a constructive and positive manner; (e) to remain bound by
the non-compete and confidentiality provisions of your employment agreement with
the Company; and (f) to return to the company, by May 10, 1996, all Company
property, including proprietary information.
In addition to the obligations under your employment agreement with the Company,
you agree that, until one year from your Termination Date, you will not directly
or indirectly, as a consultant, employee or owner, engage in any activity which
is competitive with
- 4 -
<PAGE>
the businesses of the Company, on your Termination Date, without the Company's
prior approval. I assure you it is the Company's intention to be fair and
reasonable in considering this issue and to grant such approval whenever your
competition will not adversely affect one of the Company's major businesses.
All amounts payable to you or on your behalf under this Agreement will be
reported to appropriate governmental agencies as taxable income to the extent
required, and appropriate withholding will be made where necessary. In
addition, all amounts payable to you under this Agreement are expressed as
amounts prior to payment or withholding of any taxes, and the Company will not
gross-up the amounts or otherwise reimburse you for the taxes you pay relating
to such amounts.
The amounts payable to you under this Agreement are in lieu of all severance
compensation and other severance benefits from the Company to which you might
otherwise be entitled. The Company may terminate the Pension Supplement,
forfeit all of your outstanding restricted stock and eliminate your 1996 cash
bonus eligibility if you fail to comply with any of your obligations under this
Agreement.
You acknowledge that the compensation and benefits provided to you under this
Agreement assume your continued employment with the Company until your
Termination Date. If you die before your Termination Date, your employment,
salary and perquisite allowances will cease on the date of your death, and

the 1996 cash bonus which is payable to you as well as the restricted stock
which is allowed to vest in accordance with this agreement will be paid to
your surviving spouse, or to your estate if your spouse does not survive you.
Your Pension Supplement will be administered as specified on page 2 of this
Agreement. All other compensation and benefits for which you are eligible
under this Agreement will be determined based on the death benefit provisions
of the applicable plans.
You acknowledge that the Company has made no promises to you which are not
included in this Agreement, that this Agreement contains the entire
understanding between you and the Company relating to your employment
termination, and that it supersedes the pension supplement agreement between you
and the Company dated October 4, 1995. You acknowledge that the terms of this
Agreement are contractually binding. If any portion of this Agreement is
declared invalid or unenforceable, the remaining portions of this Agreement will
continue in force.
You acknowledge that you carefully read the terms of this Agreement, you know
and understand its content and meaning, you were given a 21-day period to review
it, you were encouraged to consult with an attorney before accepting it, and you
accept it voluntarily.
If this letter accurately reflects our agreement, please sign two copies, and
return one of them to me by April 8, 1996.
The terms of this Agreement have been approved by the Compensation Committee
of the Baxter International Inc. Board of Directors.
Sincerely,
- ------------------------- ACCEPTED AND AGREED:
------------------------
(Signature)
------------------------
(Date)
- 5 -
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11.1
<SEQUENCE>6
<DESCRIPTION>COMPUTATION OF PRIMARY EARNINGS
<TEXT>
<PAGE>
EXHIBIT 11.1
-
--------------------------------------------------------------------------------
COMPUTATION OF PRIMARY EARNINGS PER COMMON SHARE
(In millions, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,

-
--------------------------------------------------------------------------------
-----------------------------------
1995 1994 1993
-
--------------------------------------------------------------------------------
-----------------------------------
<S>
<C> <C> <C>
EARNINGS
Income (loss) from continuing operations before cumulative effect of
accounting
changes applicable to common stock
$ 371 $ 406 $ (193)
Total discontinued operations
278 190 (75)
Cumulative effect of accounting changes
-- -- 70
-
--------------------------------------------------------------------------------
-----------------------------------
Net income (loss) available for common stock
$ 649 $ 596 $ (198)
-
--------------------------------------------------------------------------------
-----------------------------------
SHARES
Average common shares outstanding
277 280 277
-
--------------------------------------------------------------------------------
-----------------------------------
PRIMARY EARNINGS PER COMMON SHARE
INCOME (LOSS) FROM CONTINUING OPERATIONS
$ 1.34 $ 1.45 $ (0.70)
TOTAL DISCONTINUED OPERATIONS
1.01 0.68 (0.27)
CUMULATIVE EFFECT OF ACCOUNTING CHANGES
-- -- 0.25
-
--------------------------------------------------------------------------------
-----------------------------------
NET INCOME (LOSS)
$ 2.35 $ 2.13 $ (0.72)
-
--------------------------------------------------------------------------------
-----------------------------------
</TABLE>
22
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11.2
<SEQUENCE>7
<DESCRIPTION>COMPUTATION OF FULLY DILUTED EARNINGS
<TEXT>
<PAGE>
EXHIBIT 11.2
-
--------------------------------------------------------------------------------

COMPUTATION OF FULLY DILUTED EARNINGS PER COMMON SHARE
(In millions, except per share data)
<TABLE>
<CAPTION>
-
--------------------------------------------------------------------------------
--------------------------------------
1995 1994 1993(A) 1993(A)
-
--------------------------------------------------------------------------------
--------------------------------------
<S> <C>
<C> <C> <C>
EARNINGS
Income (loss) from continuing operations before cumulative effect of
accounting changes applicable to common stock $
371 $ 406 $ (193) $ (193)
Total discontinued operations
278 190 (75) (75)
Cumulative effect of accounting changes
-- -- 70 70
-
--------------------------------------------------------------------------------
--------------------------------------
Net income (loss) available for common stock $
649 $ 596 $ (198) $ (198)
-
--------------------------------------------------------------------------------
--------------------------------------
SHARES
Weighted average number of common shares outstanding
277 280 277 277
Additional shares assuming conversion of exercise of stock options,
performance share awards and stock purchase plan subscriptions
5 2 -- 1
-
--------------------------------------------------------------------------------
--------------------------------------
Average common shares outstanding
282 282 277 278
-
--------------------------------------------------------------------------------
--------------------------------------
FULLY DILUTED EARNINGS (LOSS) PER COMMON SHARE
INCOME FROM CONTINUING OPERATIONS $
1.32 $ 1.44 $ (0.70) $ (0.69)
0.99 0.67 (0.27) (0.27)
CUMULATIVE EFFECT OF ACCOUNTING CHANGES
-- -- 0.25 0.25
-
--------------------------------------------------------------------------------
--------------------------------------
NET INCOME (LOSS) $
2.31 $ 2.11 $ (0.72) $ (0.71)
-
--------------------------------------------------------------------------------
--------------------------------------

</TABLE>
(a) For the year ended December 31, 1993, fully diluted earnings (loss) per
common share has been computed without and with anti-dilutive common stock
equivalents.
23
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>8
<DESCRIPTION>COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TEXT>
<PAGE>
EXHIBIT 12
-
--------------------------------------------------------------------------------
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratios)
<TABLE>
<CAPTION>
-
--------------------------------------------------------------------------------
------------------------------------------
1995
1994 1993 1992 1991
-
--------------------------------------------------------------------------------
------------------------------------------
<S> <C>
<C> <C> <C> <C>
Income (loss) from continuing operations before income tax expense
(benefit) $ 524
$ 559 $ (74) $ 510 $ 431
Add:
Interest costs 117
120 109 100 110
Estimated interest in rentals(1) 29
31 31 29 24
-
--------------------------------------------------------------------------------
------------------------------------------
Fixed charges as defined: 146
151 140 129 134
Interest costs capitalized (3)
(2) (5) (5) (4)
Losses of less than majority owned affiliates, net of dividends 10
18 27 34 32
-
--------------------------------------------------------------------------------
------------------------------------------
Income as adjusted $ 677
$ 726 $ 88 $ 668 $ 593
-
--------------------------------------------------------------------------------
------------------------------------------
Ratio of earnings to fixed charges 4.64

4.80 0.63 5.18 4.42
-
--------------------------------------------------------------------------------
------------------------------------------
</TABLE>
(1) Represents the estimated interest portion of rents.
24
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>9
<DESCRIPTION>EXHIBIT 13
<TEXT>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
-
--------------------------------------------------------------------------------
This discussion and analysis presents the factors that had a material effect on
Baxter International Inc.'s ("Baxter" or the "company") results of operations
during the three years ended December 31, 1995, and the company's financial
position at that date. Trends of a material nature are discussed to the extent
known and considered relevant.
COMPANY OBJECTIVES AND RESULTS
In the 1994 Annual Report to Stockholders, management outlined key financial
objectives for 1995. The objectives and the results achieved are summarized
below:
-
--------------------------------------------------------------------------------
OBJECTIVES RESULTS
-
--------------------------------------------------------------------------------
- Generate $500 million in - The company generated
"operational cash flow" in "operational cash flow"
1995. of $587 million in 1995.
-
--------------------------------------------------------------------------------
- Achieve net income growth in - The company's net income
the high single-digit percentage growth was 9% for the year
range. ended December 31, 1995.
-
--------------------------------------------------------------------------------
- Reduce marketing and - The company's marketing and
administrative expenses as a administrative expenses as a
percent of sales from 19.9% in percent of sales was 18.2% for
1994 to 18.0% in 1995. the year ended December 31,
1995.
-
--------------------------------------------------------------------------------
- Maintain a net-debt-to-net- - The company's net-debt-to-
capital ratio between 35% to net-capital ratio was 36.3%
40%. at December 31, 1995, and
net debt was reduced by
$286 million.
-

--------------------------------------------------------------------------------
- Repurchase $500 million of - The company completed its
Baxter stock over two years as $500 million stock repurchase
authorized by the company's program during the first nine
board of directors in February months of 1995.
1995.
-
--------------------------------------------------------------------------------
The above objectives were established based on total company results prior to
the November 1995 announcement of the plan to spin-off the health-care cost
management business as a distribution to stockholders. Accordingly, the results
presented above reflect the combined results of both continuing and discontinued
operations. See further discussion in Recent Events below.
RECENT EVENTS
SPIN-OFF OF HEALTH-CARE COST MANAGEMENT BUSINESS
On November 28, 1995, the board of directors of Baxter International Inc.
approved in principle a plan to distribute to Baxter stockholders all of the
outstanding stock of its health-care cost management business in a spin-off
transaction (the "Distribution") which is expected to be tax-free. The creation
of two independent companies will enable Baxter and the new company to devote
management time, attention and investments directly to the core strategies of
each business. The new health-care cost
30
<PAGE>
BAXTER INTERNATIONAL
-
--------------------------------------------------------------------------------
management business will consist of Baxter's cost-management services, U.S.
distribution, surgical products and respiratory-therapy operations and will
operate as a medical supplier focused on helping customers manage the total cost
of providing patient care. The Distribution is expected to occur in late 1996
and will result in the health-care cost management business operating as an
independent entity with publicly traded common stock.
As a result of the board's approval of the plan, the company's financial
statements have been adjusted and restated to reflect the results of operations
and net assets of the health-care cost management business as a discontinued
operation, in accordance with generally accepted accounting principles.
The following selected financial information for the new health-care cost
management business (including previously divested businesses) is presented for
informational purposes only and does not necessarily reflect what the results of
operations and financial position would have been had it operated as a stand-
alone entity.
INCOME STATEMENT DATA FOR HEALTH-CARE COST MANAGEMENT BUSINESS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (IN MILLIONS) 1995 1994 1993
-
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $4,682 $4,845 $4,763

Income before income taxes $ 392 $ 242 $ (256)
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
In 1995, income before income taxes includes a $268 million net pretax gain
resulting from the company's divestiture of its Industrial and Life Sciences
division to VWR Corporation.
NET ASSETS OF THE HEALTH-CARE COST MANAGEMENT BUSINESS
<TABLE>
<CAPTION>
AS OF DECEMBER 31 (IN MILLIONS) 1995 1994
-
--------------------------------------------------------------------------------
<S> <C> <C>
Net current assets $ 722 $1,071
Net non-current assets 1,897 2,014
-
--------------------------------------------------------------------------------
TOTAL NET ASSETS $2,619 $3,085
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
It is estimated that, through an issuance of new third-party debt, a
substantial portion of Baxter's existing debt will be indirectly assumed by the
health-care cost management business. The amount of the debt will be determined
when the capital structure for the new company is finalized.
Costs associated with effecting the Distribution represent management's
estimate of the transaction and other costs directly related to completing the
spin-off. These costs do not benefit the future operations of the health-care
cost management business.
The following management discussion and analysis pertains to continuing
operations, unless otherwise noted.
31
<PAGE>
-
--------------------------------------------------------------------------------
POTENTIAL ACQUISITION OF NATIONAL MEDICAL CARE
On February 1, 1996, Baxter publicly announced its proposal to acquire the
National Medical Care ("NMC") subsidiary of W.R. Grace and Company ("Grace") in
a tax-free transaction for $3.8 billion, consisting of $1.8 billion of Baxter
common stock and a payment to Grace of $2.0 billion comprised of cash, notes and
assumed debt. Grace had previously announced its intention to spin-off or divest
NMC. Completion of this transaction in 1996 would have resulted in a dilution of
Baxter's net earnings, but would have been accretive after approximately six

quarters of combined results. The company's net-debt-to-net-capital ratio would
have risen to approximately 42% (compared to 36.3% at December 31, 1995) but was
expected to decline to approximately 40% within two years of the acquisition,
all else remaining constant.
On February 5, 1996, Grace announced that it had agreed to combine its NMC
subsidiary with the worldwide dialysis business of Fresenius A.G. (a German
company) to form a new company called Fresenius Medical Care in a transaction
designed to be tax-free. Fresenius A.G. is a major competitor of the company's
renal division and NMC is a large U.S. customer of the renal division. Under the
proposed transaction with Fresenius A.G., Grace shareholders would receive a
44.8% equity interest in Fresenius Medical Care and Grace would receive $2.3
billion in cash provided by proceeds of debt financing by Fresenius Medical
Care. This transaction is subject to the approval of the shareholders of Grace
and Fresenius A.G. If the transaction with Grace is consummated with Fresenius
A.G., there would be an increased competitive threat to Baxter's renal division.
However, management believes that this would not have a material adverse effect
on Baxter's financial condition or results of operations in 1996.
Since the management of Grace refused to discuss the company's proposed
transaction, Baxter withdrew its offer on February 22, 1996.
INDUSTRY OVERVIEW
INTERNATIONAL MARKETS
Throughout the world, as developing countries create more wealth, improving the
health and well-being of their citizens becomes a much higher social priority
and usually leads to increased per-capita spending on health care. The world's
largest developing markets in the Pacific Rim countries and Latin America are
all poised for significant economic growth. Based on these factors, management
believes there will be improved expansion opportunities for Baxter with its
broad portfolio of proven cost-effective products, services and therapies to
meet the demands of these markets. In the developed world -- especially in
Western Europe and Japan -- there continues to be strong demand for more
technologically advanced and cost-effective therapies, products and services,
and Baxter has long been a leader in these markets. In view of these conditions,
management believes Baxter's best opportunities for growth are outside the
United States. Consequently, the company's strategies emphasize international
expansion to capitalize on the company's strong global positions in intravenous
products, renal therapy, biotechnology and cardiovascular therapies.
U.S. MARKET
Though the U.S. government failed to enact health-care reform, fundamental
change continued to be a part of the U.S. health-care system in 1995.
Competition for patients among health-care providers continues to intensify.
Increasingly, providers are looking for ways to better manage costs in areas
such as materials handling, supply utilization, product standardization for
specific procedures and capital
32
<PAGE>
-
--------------------------------------------------------------------------------
expenditures. The new health-care cost management business is being distributed
to stockholders to more optimally meet these emerging market needs, remove

limitations, and improve the competitiveness of both Baxter and the new company.
There has also been consolidation in the company's customer base and by its
competitors. These trends are expected to continue. In recent years, the
company's overall price increases have been below the Consumer Price Index, and
industry trends and competition may inhibit the company's ability to increase
prices in the future.
RESULTS OF CONTINUING OPERATIONS
The company operates in a single industry segment as a world leader in providing
health-care products for use in hospitals and other health-care settings. On a
global basis, Baxter develops, manufactures and markets intravenous solutions
and related administration equipment, and highly specialized medical products
for treating kidney and heart disease, blood disorders, and for collecting and
processing blood. These products include intravenous solutions and pumps;
dialysis equipment and supplies; prosthetic heart valves and cardiac catheters;
blood-clotting therapies; and machines and supplies for collecting, separating
and storing blood. These products require extensive research and development and
investment in worldwide manufacturing, marketing and administrative
infrastructure.
NET SALES TRENDS BY MAJOR PRODUCT LINE
<TABLE>
<CAPTION>
Percent increase
YEARS ENDED DECEMBER 31 (IN MILLIONS) 1995 1994
1993 1995 1994
-
--------------------------------------------------------------------------------
----------------------------------------
<S> <C> <C>
<C> <C> <C>
Major product lines
Renal $1,294 $1,160
$1,061 12% 9%
Biotech 1,131 949
849 19% 12%
Cardiovascular 730 632
562 16% 12%
I.V. Systems/International Hospital 1,893 1,738
1,644 9% 6%
-
--------------------------------------------------------------------------------
----------------------------------------
TOTAL SALES $5,048 $4,479
$4,116 13% 9%
-
--------------------------------------------------------------------------------
----------------------------------------
-
--------------------------------------------------------------------------------
----------------------------------------
</TABLE>
Worldwide sales of renal products and services maintained steady growth,
offsetting competitive and pricing pressures in the United States with
increasing penetration in Japan and Latin America. Additionally, investments in
Asia contributed slightly to growth in 1995 and are expected to be a source of
future growth for renal products and services. Sales penetration of peritoneal-
dialysis ("PD") therapy products continues to be especially strong in
international markets, where many national governments recognize the therapy's

low start-up and operating costs relative to traditional hemodialysis. The
demand for the company's HomeChoice-Registered Trademark- automated PD system in
North America, Japan and Europe continued to grow and helped offset competitive
pressures in U.S. markets. Increased acceptance of PD therapy, sales of the
HomeChoice-Registered Trademark- system and sales of the UltraBag-TM- system,
which is designed to reduce the incidence of infection and improve convenience
for the patient, all contributed to increased sales in 1994.
Strong demand for the company's therapeutic blood products, including
Recombinate -TM- Anti-hemophilic factor (Recombinant) and Gammagard-Registered
Trademark- S/D, generated worldwide growth in the biotech unit in 1995.
Gammagard-Registered Trademark- S/D, an immune globulin intravenous product
introduced in the second quarter of 1994, is treated with a solvent and two
detergents known to inactivate viruses such as hepatitis B, hepatitis C and HIV.
In 1994, strong sales growth for Recombinate was somewhat offset by the
33
<PAGE>
-
--------------------------------------------------------------------------------
adverse effect of a voluntary market withdrawal of
Gammagard-Registered Trademark- IGIV, due to reports
of possible transmission of the hepatitis C virus.
(See Note 14 to the Consolidated Financial Statements.) [GRAPH]
The demand for automated collection products showed
moderate growth in 1995 and 1994 with increased
penetration into new markets, partially offset by
pricing and competitive pressures. Demand for the
company's blood-collection products was relatively flat in 1995 and 1994, due
primarily to declining whole-blood collections in the U.S. and Europe.
Sales growth of the company's cardiovascular products was strong in 1995 and
1994. Market share gains in pericardial tissue valves and continuous cardiac
output monitoring catheters were important growth contributors in 1995. Growth
was also augmented slightly by the company's acquisition of SETA, Inc. (a
perfusion services business). In 1994, strong demand for tissue heart valves and
the acquisition of Macchi Engenharia Biomedica Ltda. (a Brazilian-based
manufacturer and marketer of oxygenators and other cardiovascular products used
in open-heart surgery) improved sales growth. In January 1996, the company
completed the acquisition of PSICOR, Inc. The acquisitions of SETA and PSICOR,
both providers of perfusion and autotransfusion services, supplies and equipment
to hospitals, position the company to offer a more fully capitated approach to
open-heart surgery that includes services as well as a broad array of products.
The company continues to explore strategies for expanding its perfusion services
operations.
Worldwide sales of the company's intravenous and other hospital products
increased moderately in 1995 and 1994. Domestic intravenous ("IV") systems sales
of pumps and administration sets increased in 1995 and 1994 as a result of the
Columbia/HCA Healthcare Corporation contract signed in September 1994, and
increases in sales into the homecare and alternate-care markets.
Internationally, in 1995, increased penetration in Latin America and the Pacific
Rim and stabilization of sales in Canada contributed to moderate sales growth.
In 1994, increased penetration in Latin America and the Pacific Rim was
partially offset by pricing pressures and sales mix issues in Europe and Canada.
NET SALES TRENDS BY GEOGRAPHIC REGION

<TABLE>
<CAPTION>
Percent increase
1993 1995 1994
-
--------------------------------------------------------------------------------
----------------------------------------
<S> <C> <C>
<C> <C> <C>
Geographic regions
United States $2,492 $2,292
$2,112 9% 9%
International 2,556 2,187
2,004 17% 9%
-
--------------------------------------------------------------------------------
----------------------------------------
TOTAL SALES $5,048 $4,479
$4,116 13% 9%
-
--------------------------------------------------------------------------------
----------------------------------------
-
--------------------------------------------------------------------------------
----------------------------------------
</TABLE>
The increase in U.S. sales in 1995 reflects growth in biotech and
cardiovascular products, offset by pricing pressures experienced domestically
for renal and IV products. In 1994, the increase in U.S. sales was due to growth
in biotech and IV products, offset by the effect of the voluntary market
withdrawal of Gammagard-Registered Trademark- IGIV. Sales in international
markets increased in 1995 and 1994 due to increased unit volume, penetration and
improved foreign currency rates. International sales growth in local currency
was approximately 12%, 9% and 8% in 1995, 1994 and 1993, respectively.
34
<PAGE>
-
--------------------------------------------------------------------------------
GROSS MARGIN AND EXPENSE RATIOS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (AS A PERCENT OF SALES) 1995 1994 1993
-
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross margin 45.0% 44.1% 45.5%
Marketing and administrative expenses 21.5% 21.3% 22.6%
-
--------------------------------------------------------------------------------
-

--------------------------------------------------------------------------------
</TABLE>
The increase in the gross margin rate in 1995 to a level more consistent with
1993 reflects a heavier mix of higher margin sales, including sales of
Gammagard-Registered Trademark- S/D discussed previously. The reduction in the
gross margin rate in 1994 was predominantly due to the loss of sales associated
with the voluntary market withdrawal of Gammagard-Registered Trademark- IGIV.
Management anticipates no significant declines in the gross margin rate in 1996.
Marketing and administrative expenses as a percent of sales remained
relatively stable in 1995. The slight increase is the result of higher expenses
associated with funding the company's expansion into developing markets. The
decline of 1.3 percentage points in 1994 is a result of initiatives taken in
connection with the 1993 restructuring program. The company expects to continue
its focus on leveraging its marketing and administrative expenses in 1996.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
Percent increase
YEARS ENDED DECEMBER 31 (IN MILLIONS) 1995 1994 1993 1995
1994
-
--------------------------------------------------------------------------------
----------
<S> <C> <C> <C> <C>
<C>
Total research and development expense $345 $303 $280 14%
8%
-
--------------------------------------------------------------------------------
----------
As a percent of sales 7% 7% 7%
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
</TABLE>
The increase in research and development ("R&D") expenses reflects the
company's continued emphasis on strategic initiatives such as blood substitutes,
renal therapy and transplantation, immunotherapy, gene therapy and the Novacor-
Registered Trademark- left-ventricular assist system. Included in R&D expense
for 1995 is an $18 million charge related to the company's September 1995
acquisition of the remaining 30% of the Nextran joint venture that it did not
previously own. The acquisition of in-process technology, related to transgenic
(genetically altered) organs, was accounted for as purchased research and
development. Significant R&D investments were made in 1994 and 1993 in these
same areas.
A pivotal protocol for blood substitutes began in
Europe in June 1995, and the FDA is reviewing two
phase III protocols in surgery and trauma for the U.S.
Other active protocols include treatment for multiple [GRAPH]
organ failure and stroke. Depending on the successful
outcome of these protocols, the company anticipates
being able to market the product in Europe in 1997,
and in the U.S. in 1998. In September 1995, the
company's board of directors approved capital expenditures of approximately $100
million for construction of a blood substitutes manufacturing facility in
Neuchatel, Switzerland, which is expected to be operational in 1998.

35
<PAGE>
-
--------------------------------------------------------------------------------
Baxter has submitted a premarket approval (PMA) application to the FDA for its
wearable Novacor-Registered Trademark- left-ventricular assist system and hopes
to attain final U.S. approval in 1997. The company received approval (CE mark)
in 1994 for its wearable device in Europe and has begun commercial sale of the
product.
RESTRUCTURING PROGRAMS
Baxter currently has two restructuring programs in process. In November 1993,
the company initiated a restructuring program designed to accelerate growth and
reduce costs in the company's businesses worldwide, including reorganizations
and consolidations in the United States, Europe, Japan and Canada. In the third
quarter of 1995, the company initiated a second restructuring program to
consolidate manufacturing operations in Puerto Rico in order to eliminate excess
capacity and reduce manufacturing costs. See Note 3 to the Consolidated
Financial Statements for discussions related to the initial charges for the
programs, components of the charges, cash and non-cash utilization, and
remaining reserve balances.
Since the announcement of the 1993 restructuring program, the company has
actions associated therewith and is satisfied that the program is progressing on
schedule and will meet previously established financial targets. During 1995,
the company utilized $60 million of restructuring reserves, including $36
million in cash payments. Cash outflows pertain primarily to employee-related
costs for severance, outplacement assistance, relocation and retention. The
company has eliminated approximately 1,250 positions of the approximately 1,640
positions affected by the program. The majority of the remaining reductions will
occur in 1996 and 1997, as facility closures and consolidations are completed as
planned. During 1995, the company realized approximately $90 million in savings
which represents a shortfall of approximately $20 million from its estimated
savings target. This shortfall is primarily due to timing delays in the
implementation of a number of projects. Management has forecasted savings of
approximately $110 million in 1996, $130 million in 1997 and exceeding $140
million in 1998. Management anticipates that these savings will be partially
invested in increased research and development and expansion into growing
international markets. Management further believes that its remaining
restructuring reserves are adequate to complete the actions contemplated by the
1993 restructuring program.
Management is at the very early stages of implementing the 1995 restructuring
program, which is expected to be completed by the end of 1998. The pretax
restructuring charge of $93 million includes approximately $67 million for
valuation adjustments as a result of the company's decision to close facilities.
The company expects to spend approximately $26 million in cash over the next two
years, including severance related to the approximately 1,450 positions that
will be eliminated in connection with the approved plan. The plant closures and
consolidations in Puerto Rico will lower the company's manufacturing costs.
Management believes these actions will help mitigate the company's exposure to
future gross margin erosion arising from pricing pressure, primarily in the U.S.
In addition to the consolidation of the company's manufacturing operations in
Puerto Rico, the company has initiated plans for other organizational structure
changes which have resulted in a $10 million provision for cash payments related

to employee severance.
Management anticipates that future cash expenditures related to both the 1993
and 1995 restructuring programs will be funded from cash generated from
operations.
36
<PAGE>
-
--------------------------------------------------------------------------------
LITIGATION CHARGES
<TABLE>
<CAPTION>
Patent
Mammary Plasma
settlement Total
YEARS ENDED DECEMBER 31 (IN MILLIONS) implants based therapies
and other litigation
-
--------------------------------------------------------------------------------
----------------------------------------
<S> <C> <C>
<C> <C>
1995:
Gross litigation charge $298 $247
- $545
Estimated insurance recoveries 258 191
- 449
-
--------------------------------------------------------------------------------
----------------------------------------
Net 1995 litigation charge $ 40 $ 56
- $ 96
-
--------------------------------------------------------------------------------
----------------------------------------
-
--------------------------------------------------------------------------------
----------------------------------------
1993:
Gross litigation charge $580 $131
$128 $839
Estimated insurance recoveries 426 83
- 509
-
--------------------------------------------------------------------------------
----------------------------------------
Net 1993 litigation charge $154 $ 48
$128 $330
-
--------------------------------------------------------------------------------
----------------------------------------
-
--------------------------------------------------------------------------------
----------------------------------------
</TABLE>

The 1995 and 1993 provisions for mammary implant product liabilities pertain
to the company's estimated share of the revised settlement of class action
litigation and resolution of claims by claimants not participating in the
revised class action settlement ("opt-outs"). Provisions for HIV/hemophilia and
other plasma based therapy liabilities pertain to worldwide litigation and
anticipated settlement expenses involving anti-hemophilic Factor Concentrate
cases for HIV-positive hemophiliacs and resolution of other plasma based therapy
claims. The 1993 patent settlement pertains primarily to a $105 million
settlement with Scripps Clinic and Research Foundation and Rhone-Poulenc Rorer,
Inc., relating to certain anti-hemophilic Factor VIII products manufactured and
sold prior to January 1, 1993. See Note 14 to the Consolidated Financial
Statements for a more detailed description of these issues.
OTHER COSTS AND EXPENSES
Other costs and expenses in 1995 include approximately $65 million in net gains
associated with the disposal or discontinuance of minor, non-strategic
businesses and investments, which is primarily related to the disposal of the
company's remaining investment in MediSense, Inc. Net gains in 1994 and 1993
were $10 and $7 million, respectively. Foreign exchange losses were $22 million
in 1995, $12 million in 1994 and $28 million in 1993. The company realized $10
million in gains related to the termination of an interest rate hedging contract
due to the significant reduction in the debt during 1994.
PRETAX INCOME FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
Percent increase
(decrease)
1993 1995 1994
-
--------------------------------------------------------------------------------
----------------------------------------
<S> <C> <C>
<C> <C>
Pretax income from continuing operations $524 $559
$(74) (6)% N/A
-
--------------------------------------------------------------------------------
----------------------------------------
-
--------------------------------------------------------------------------------
----------------------------------------
</TABLE>
The decrease in pretax income for 1995 is attributable to the restructuring
and litigation charges discussed previously, offset by the net gain associated
with the disposal of the company's remaining investment of MediSense, Inc.
Excluding the restructuring and litigation charges, and the pretax gain
associated with the divestiture of MediSense, Inc., growth in pretax income from
continuing operations would have been 18%.
The increase in 1994 is primarily related to improved sales and expense
leveraging, offset by temporary gross margin erosion due to rework costs related
to the voluntary market withdrawal of Gammagard-Registered Trademark-
37

<PAGE>
-
--------------------------------------------------------------------------------
IGIV discussed above. Pretax income in 1993 was adversely affected by the
impact of the restructuring and litigation charges discussed above. Excluding
the adverse impact of restructuring and litigation charges in 1993, growth in
pretax income from continuing operations in 1994 would have been 18%.
The effective tax rate for continuing operations was 29% in 1995 compared to
27% in 1994. After adjusting for the tax benefits associated with the 1995
restructuring and litigation charges, the 1995 increase was primarily
attributable to a larger proportion of earnings generated in higher tax
jurisdictions. In 1993, the effective tax rate was affected by a number of
unusual items, including tax benefits associated with restructuring and
litigation charges, offset by a $151 million provision for U.S. taxes on
previously unremitted foreign earnings. Excluding these items, the net effective
tax rate in 1994 decreased slightly compared to 1993, due primarily to a larger
portion of earnings generated in lower tax jurisdictions.
Net earnings from continuing operations was $371 million in 1995 compared with
$406 million in 1994, and a loss of $193 million in 1993. Earnings per common
share from continuing operations was $1.34 in 1995 compared with $1.45 in 1994,
and a loss of 70 cents in 1993. The decrease in 1995 primarily reflects
provisions for restructuring and litigation charges, offset by the net gain
related to the disposal of the company's remaining investment in MediSense, Inc.
The company estimates that earnings per share from continuing operations in
1995, excluding these charges and the net gain related to MediSense, Inc., would
have increased 21% to approximately $1.75. Excluding the impact of restructuring
and litigation charges in 1993, earnings per share from continuing operations in
1994 would have increased 25% from an estimated 1993 per share amount of $1.16.
Net income and earnings per share increased 9% and 10%, respectively, for the
year ended December 31, 1995. Gains from the company's divestitures of the
Industrial and Life Sciences division (included in discontinued operations) and
its remaining investment in MediSense, Inc. substantially offset the special
charges incurred for restructuring and litigation. Consequently, the increase in
net income and earnings per share was primarily the result of increased sales
volume, improved expense leveraging and the favorable effect of foreign currency
rates.
ADOPTION OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which is effective for fiscal years
beginning after December 31, 1995. Adoption of FASB No. 121 in fiscal year 1996
is not expected to have a material impact on the company.
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-
Based Compensation," which is effective for fiscal years beginning after
December 15, 1995. The statement provides management with a choice of accounting
methods for stock-based transactions with employees. Management is currently
evaluating the fair value and disclosure alternatives in the statement and plans
to adopt it in fiscal year 1996.
38
<PAGE>

-
--------------------------------------------------------------------------------
IMPACT OF INFLATION AND FOREIGN EXCHANGE
In recent years, the company has experienced increases in its labor and material
cost base influenced, in part, by general inflationary trends. While not
directly related to inflationary trends, the company's revenue base, on average,
over recent years has been adversely affected by lower average selling prices on
certain products as a result of changes in Medicare reimbursement regulations,
economic pressures in the U.S. hospital marketplace and increased competition in
certain product lines. There is little correlation between general inflation
rates directly affecting costs and expenses and the company's pricing levels for
products sold to health-care customers. Management expects that these trends
will continue.
Approximately 50% of Baxter's sales are denominated in currencies other than
the U.S. dollar, which exposes the company to risks associated with fluctuations
in foreign currency rates. To help manage the risks associated with its foreign
exchange exposures, the company routinely assesses the costs and benefits of
various hedging strategies and implements those strategies that are considered
appropriate and cost effective. Several of the markets in which the company
operates are considered hyper-inflationary for accounting purposes. The company
does not hedge its foreign currency exposures in these hyper-inflationary
markets because of their relative immateriality and the costs associated with
implementing such a strategy. The devaluations of the Mexican peso and
Venezuelan bolivar are not expected to have a material impact on Baxter's
results of operations in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Management assesses the company's liquidity in terms of its overall ability to
mobilize cash to support ongoing business levels and to fund its growth.
In 1995, the company continued its emphasis on cash flow from operations. To
facilitate this emphasis, management monitors an internal performance measure
called "operational cash flow." This measure evaluates each operating business
on all aspects of cash flow under its direct control. Management's objective was
to generate "operational cash flow" of at least $500 million in 1995 and $450
million in 1994 (for combined continuing and discontinued operations). In
addition, the incentive compensation programs for the company's senior
management in each business include significant emphasis on the attainment of
both "operational cash flow" as well as earnings objectives.
Total "operational cash flow" for continuing and discontinued operations
was $587, $954 and $292 million in 1995, 1994 and 1993, respectively. These
levels of "operational cash flow" enabled the company to reduce net debt of
continuing and discontinued operations by $286 million in 1995 and $742
million in 1994. The 1995 and 1994 increases in "operational cash flow"
primarily reflect increases in income and improved balance sheet management.
"Operational cash flow" includes approximately $50 million in proceeds for
the sale of certain lease receivables in 1995 and approximately $110 million
in such proceeds in 1994. The following table reconciles cash flow provided
by continuing operations, as determined by generally accepted accounting
principles, to the company's internal measure of "operational cash flow."
39
<PAGE>
-

--------------------------------------------------------------------------------
CASH FLOW PROVIDED BY CONTINUING OPERATIONS
<TABLE>
<CAPTION>
BRACKETS DENOTE CASH OUTFLOWS
-
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow provided by continuing operations
per the company's consolidated
statements of cash flows $573 $919 $437
Capital expenditures (399) (380) (332)
Net interest after tax 56 58 53
Other 86 21 2
-
--------------------------------------------------------------------------------
"Operational cash flow" - continuing operations 316 618 160
-
--------------------------------------------------------------------------------
"Operational cash flow" - discontinued operations 271 336 132
-
--------------------------------------------------------------------------------
TOTAL "OPERATIONAL CASH FLOW" $587 $954 $292
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
The company's current assets exceeded current liabilities by $757 million at
December 31, 1995 versus an excess of $502 million at December 31, 1994. Current
assets at December 31, 1995, included receivables of $1,209 million and
inventories of $906 million. These sources of liquidity are convertible into
cash over a relatively short period of time and thus, will help the company
satisfy normal operating cash requirements.
INVESTMENT TRANSACTIONS
<TABLE>
<CAPTION>
Percent increase
(decrease)
YEARS ENDED DECEMBER 31 (IN MILLIONS) 1995 1994 1993 1995 1994
-
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital expenditures $399 $380 $332 5% 14%
Acquisitions 44 60 107 (27)% (44)%
Proceeds from asset dispositions (91) (72) (5) 26% N/A
-
--------------------------------------------------------------------------------
Total investment transactions, net $352 $368 $434
- --------------------------------------------------------------
- --------------------------------------------------------------
</TABLE>
Capital expenditures in 1995 included construction of a manufacturing facility
for pericardial tissue valves in California, expansion of manufacturing capacity
for renal products in Ireland, renal HomeChoice-Registered Trademark- leased

equipment and manufacturing capacity expansion, and ground-breaking on a
manufacturing facility for blood substitutes in Switzerland. Major capital
projects in 1994 included expenditures in Singapore for a renal facility, renal
HomeChoice-Registered Trademark- leased equipment, the completion of a plant in
Puerto Rico to manufacture disposable products used in the automated collection
of blood and a new manufacturing plant for renal products in China. The company
expects to invest between $400 and $450 million in capital expenditures in 1996.
The acquisitions summarized in the above table involved no significant change
to the company's strategic direction, and were made for the purpose of acquiring
technologies, broadening product lines and service offerings, or expanding
market coverage. The proceeds received from asset dispositions are the result of
the company's decision to divest or dispose of several minor non-strategic or
unprofitable product lines or investments. The majority of these transactions
resulted in the disposition of the company's entire interest in such product
lines or investments.
40
<PAGE>
-
--------------------------------------------------------------------------------
Long-term insurance receivables and litigation liabilities increased due to
the special charges for litigation discussed above. These increases were offset
by reclassifications to notes and other current receivables and current
liabilities for those insurance proceeds expected to be received and payments
expected to be made within one year. Baxter made a payment of $125 million in
connection with the mammary implant revised global settlement in January 1996.
There are agreements or on-going negotiations with some insurance carriers for
timely reimbursement of litigation settlements. Other reimbursements may lag the
settlement payments. Such lags in insurance reimbursement are not expected to
have a material impact on the company's cash flow.
DEBT AND FINANCIAL INSTRUMENTS
To meet its net financing requirements during the two years ended December 31,
1995, the company used short-term borrowings as required. For purposes of
covenant compliance, the company's credit arrangements permit it to reduce its
debt to capital ratio by a percentage of cash and equivalents.
(See Note 6 to the Consolidated Financial Statements.)
CAPITAL STRUCTURE
<TABLE>
<CAPTION>
AS OF DECEMBER 31 (IN MILLIONS) 1995 1994 1993
-
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Long-term obligations $2,372 $2,341 $2,800
Stockholders' equity 3,704 3,720 3,185
-
--------------------------------------------------------------------------------
Long-term debt as a percent of total capital 39.0% 38.6% 46.8%
-
--------------------------------------------------------------------------------
-

--------------------------------------------------------------------------------
</TABLE>
Net debt (after consideration of cash equivalents) of continuing and
discontinued operations declined to $2,115 million since the beginning of the
year after paying $306 million in dividends. In line with its stated objective
to maintain a net-debt-to-net-capital ratio between 35% and 40%, the company's
ratio was 36.3% in 1995 and 39.2% in 1994. The company will continue to review
its capital structure and may make changes to its targeted ratios should the
need arise.
The company's debt ratings of A3 on senior debt by Moody's, A- by Standard &
Poor's and A by Duff & Phelps were reaffirmed by each rating agency this year.
However, the rating agencies have placed Baxter on credit watch pending
clarification of the company's capital structure in conjunction with the
Distribution of the health-care cost management business.
At December 31, 1995, the company could issue up to $300 million in aggregate
principal amount of additional senior unsecured debt securities under an
effective registration statement filed with the Securities and Exchange
Commission.
The company intends to fund its short-term and long-term obligations as they
mature by issuing additional debt or through cash flow from operations. The
company believes it has lines of credit adequate to support ongoing operational,
restructuring and litigation requirements. Beyond that, the company believes it
has sufficient financial flexibility to attract long-term capital on acceptable
terms as may be needed to support its growth objectives.
The company uses financial instruments (derivatives) as an essential tool to
manage risk and reduce its cost of capital. It is the company's policy to manage
debt securities and derivatives in an integrated manner to (i) lower funding
risk by diversifying access to debt markets at an appropriate cost, (ii) reduce
41
<PAGE>
-
--------------------------------------------------------------------------------
the cost of funding without increasing the overall
interest rate risk of the debt portfolio, and
(iii) manage interest rate risk by lowering the
company's exposure to adverse movements in interest
rates at a cost deemed appropriate for the benefit [GRAPH]
received. With respect to foreign exchange, the
policy is to use derivatives to reduce the overall
risk of the company to an acceptable level. The
company does not hold or issue financial instruments
for trading purposes.
Beginning in October 1993 and continuing through 1995, the company has been
implementing a long-term hedging strategy that uses swaps to fix the interest
rate of the company's short-term borrowings for up to ten years. In addition,
options were used to enable the company to benefit in future periods should
short-term interest rates fall below certain levels. The interest rate exposure
resulting from the ongoing agreement to sell up to $150 million of the company's
lease receivables has been hedged.
In the early part of each year the company assesses and implements appropriate

hedges of its foreign exchange exposure with contracts that usually terminate on
or before each year-end. The company monitors its credit exposure to its
counterparties on a periodic basis using market measures that reflect the long-
term nature of the hedges. In 1995, 1994 and 1993, gains and losses resulting
from interest rate and foreign exchange hedging activities were not material.
In February 1995, the company's board of directors authorized a two-year $500
million stock repurchase program. As of September 30, 1995, the company had
completed this program by repurchasing $500 million (or approximately 14 million
shares) of its common stock. In November 1995, the company's board of directors
authorized the repurchase of an additional $500 million over a period of several
years. As of December 31, 1995, the company had not repurchased any shares under
the program authorized in November 1995.
In connection with a Shared Investment Plan implemented in 1994, the company
received $121 million in cash from 63 members of Baxter's senior management team
who purchased an aggregate of 4.7 million shares of the company's common stock.
This plan was designed to directly align management and shareholder interests.
Under terms of the voluntary program, Baxter managers used personal full-
recourse loans to exercise options to purchase stock at the June 15, 1994
closing price of $26. The loans, borrowed from several commercial banks, are the
personal obligations of the participants. Baxter has agreed to guarantee
repayment to the banks in the event of default by a participant. Baxter may take
all actions necessary to obtain full reimbursement from the participant for
amounts paid to the banks under its guarantee. To further align management and
shareholder interests, Baxter changed its compensation program for non-employee
directors. Since May 8, 1995, Baxter's non-employee directors have been
compensated principally with fixed grants of common stock of the company instead
of cash.
42
<PAGE>
-
--------------------------------------------------------------------------------
In February 1996, the board of directors declared a quarterly dividend on the
company's common stock of 28.25 cents per share (annualized rate of $1.13 per
share). As a result of the proposed Distribution of the health-care cost
management business discussed above, the company will review its dividend policy
in 1996. However, it is management's present intent that the current annual
dividend will be allocated between Baxter's continuing operations and the
health-care cost management business subsequent to the Distribution.
LITIGATION
See Note 14 to the Consolidated Financial Statements for a detailed description
of the company's litigation for the cases and claims from individuals seeking
damages for injuries allegedly caused by silicone mammary implants manufactured
by a division of American Hospital Supply Corporation. Note 14 also discusses
the status of lawsuits and claims involving individuals with hemophilia, seeking
damages for injuries allegedly caused by anti-hemophilic factor VIII and IX
concentrates derived from human blood plasma processed and sold by the company
and other commercial producers. It also discusses the status of lawsuits and
claims stemming from the company's 1994 voluntary withdrawal of Gammagard-
Registered Trademark- IGIV, a concentration of antibodies derived from human
plasma, primarily used to treat immune-suppressed patients.
As of December 31, 1995, the company has been named as a potentially
responsible party for cleanup costs at 18 hazardous waste sites. The company was

a significant contributor to waste disposed of at only one of these sites, the
Thermo-Chem site in Muskegon, Michigan. The company expects that the total
cleanup costs for this site will be between $44 million and $65 million, of
which the company's share will be approximately $5 million. This amount, net of
payments of approximately $1 million, has been accrued and is reflected in the
company's financial statements.
In all of the other sites, the company was a minor contributor and does not
have information on the total cleanup costs. The company has, however, in most
of these cases been advised by the potentially responsible party of its
estimated exposure at these sites. Those estimated exposures total approximately
$7 million. This amount has been accrued and reflected in the company's
financial statements.
The company is a defendant in a number of other claims, investigations and
lawsuits. Upon resolution of any of the uncertainties described in Note 14 to
the Consolidated Financial Statements, the company may incur charges in excess
of presently established reserves. While such future charges could have a
material adverse impact on the company's net income in the period in which it is
recorded, based on the advice of counsel, management believes that any outcome
of these actions, individually or in the aggregate, will not have a material
adverse effect on the company's cash flow or consolidated financial position.
43
<PAGE>
MANAGEMENT'S RESPONSIBILITIES FOR FINANCIAL REPORTING
-
--------------------------------------------------------------------------------
The consolidated balance sheets of Baxter International Inc. and subsidiaries as
of December 31, 1995 and 1994, and the related consolidated statements of
income, cash flows and stockholders' equity for each of the years in the three-
year period ended December 31, 1995, have been prepared by management, which is
responsible for their integrity and objectivity. The statements have been
prepared in conformity with generally accepted accounting principles and include
some amounts that are based upon management's best estimates and judgments. The
financial information contained elsewhere in this annual report is consistent
with that contained in the financial statements.
Management is responsible for establishing and maintaining a system of
internal control over financial reporting and safeguarding of assets against
unauthorized acquisition, use or disposition which is designed to provide
reasonable assurance as to the integrity and reliability of financial reporting
and asset safeguarding. The concept of reasonable assurance is based on the
recognition that there are inherent limitations in all systems of internal
control, and that the cost of such systems should not exceed the benefits to be
derived therefrom.
Management believes that the foundation of an appropriate system of internal
control is a strong ethical company culture and climate. To this end the
Corporate Responsibility Office was created in 1993 to recommend to the Public
Policy Committee of the Board of Directors, revisions to the company's existing
ethics and compliance policies, and to direct the implementation of and
compliance with the company's ethics and compliance policies and procedures. To
further emphasize the importance of business ethics, a revised business ethics
manual was approved by the Public Policy Committee in 1994 and was distributed
throughout the company. A related worldwide ethics-awareness training program
commenced immediately thereafter. By the end of 1995, substantially all domestic
and international employees completed the ethics training and awareness program.
The Corporate Responsibility Office monitors compliance through audit programs
and the requirement for annual representations by senior managers. Additionally,
a professional staff of corporate auditors reviews the related internal control

system design, the accounting policies and procedures supporting this system and
compliance therewith. The results of these reviews are reported annually to the
Public Policy and Audit Committees.
Price Waterhouse LLP performs audits, in accordance with generally accepted
auditing standards, which include a review of the system of internal controls
and result in assurance that the financial statements are, in all material
respects, fairly presented.
The board of directors, through its Audit Committee composed solely of non-
employee directors, is responsible for overseeing the integrity and reliability
of the company's accounting and financial reporting practices and the
effectiveness of its system of internal controls. The independent certified
public accountants and corporate auditors meet regularly with, and have access
to, this committee, with and without management present, to discuss the results
of the audit work.
Management assessed the company's system of internal control as of December
31, 1995, in relation to criteria for effective internal control over financial
reporting described in "Internal Control-Integrated Framework" issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, it is management's opinion that, as of December 31, 1995, the
company had an effective system of internal controls over the preparation of its
published interim and annual financial statements and over safeguarding of
assets against unauthorized acquisition, use or disposition.
/s/ Vernon R. Loucks Jr. /s/ Harry M. Jansen Kraemer Jr. /s/ Brian P. Anderson
VERNON R. LOUCKS JR. HARRY M. JANSEN KRAEMER JR. BRIAN P. ANDERSON
Chairman and Senior Vice President Controller
Chief Executive Officer and Chief Financial Officer
44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
-
--------------------------------------------------------------------------------
BOARD OF DIRECTORS AND STOCKHOLDERS
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, cash flows and stockholders' equity present
fairly, in all material respects, the financial position of Baxter International
Inc. (the company) and its subsidiaries at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Notes 11 and 13 to the consolidated financial statements,
effective January 1, 1993, the company adopted Statement of Financial Accounting

Standards No. 112, "Employers Accounting for Postemployment Benefits" and
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
/s/ Price Waterhouse LLP
Chicago, Illinois
February 14, 1996
45
<PAGE>
CONSOLIDATED BALANCE SHEETS
-
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF DECEMBER 31 (IN MILLIONS, EXCEPT SHARES)
1995 1994
-
--------------------------------------------------------------------------------
--------------------------------------------------
<S>
<C> <C>
CURRENT ASSETS Cash and equivalents
$ 476 $ 468
Accounts receivable, net of allowance for
doubtful accounts of $22 in 1995 and $21 in 1994
973 892
Notes and other current receivables
236 126
Inventories
906 816
Short-term deferred income taxes
189 126
Prepaid expenses
131 120
--------------------------------------------------------------------------------
------------------------------
TOTAL CURRENT ASSETS
2,911 2,548
-
--------------------------------------------------------------------------------
--------------------------------------------------
PROPERTY, PLANT At cost
3,427 3,101
AND EQUIPMENT Accumulated depreciation and amortization
(1,678) (1,458)
--------------------------------------------------------------------------------
------------------------------
NET PROPERTY, PLANT AND EQUIPMENT

1,749 1,643
-
--------------------------------------------------------------------------------
--------------------------------------------------
OTHER ASSETS Net assets of discontinued operations
2,619 3,085
Goodwill and other intangibles
1,098 1,084
Insurance receivables
805 446
Other
255 233
--------------------------------------------------------------------------------
------------------------------
TOTAL OTHER ASSETS
4,777 4,848
--------------------------------------------------------------------------------
------------------------------
TOTAL ASSETS
$9,437 $9,039
-
--------------------------------------------------------------------------------
--------------------------------------------------
-
--------------------------------------------------------------------------------
--------------------------------------------------
CURRENT
LIABILITIES Notes payable to banks
$ 59 $ 131
Current maturities of long-term debt and lease obligations
160 400
Accounts payable and accrued liabilities
1,548 1,113
Income taxes payable
387 402
--------------------------------------------------------------------------------
------------------------------
TOTAL CURRENT LIABILITIES
2,154 2,046
-
--------------------------------------------------------------------------------
--------------------------------------------------
LONG-TERM DEBT AND LEASE OBLIGATIONS
2,372 2,341
-
--------------------------------------------------------------------------------
--------------------------------------------------
LONG-TERM DEFERRED INCOME TAXES
173 112
-
--------------------------------------------------------------------------------
--------------------------------------------------
LONG-TERM LITIGATION LIABILITIES
678 458
-
--------------------------------------------------------------------------------
--------------------------------------------------
OTHER NON-CURRENT LIABILITIES
356 362
-
--------------------------------------------------------------------------------

--------------------------------------------------
STOCKHOLDERS' Common stock, $1 par value, authorized 350,000,000 shares,
EQUITY issued 287,701,247 shares in 1995 and 1994
288 288
Additional contributed capital
1,837 1,810
Retained earnings
2,105 1,762
Common stock in treasury, at cost, 15,801,580 shares in 1995
and 5,391,092 shares in 1994
(550) (135)
Cumulative foreign currency adjustment
24 (5)
--------------------------------------------------------------------------------
------------------------------
TOTAL STOCKHOLDERS' EQUITY
3,704 3,720
--------------------------------------------------------------------------------
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$9,437 $9,039
-
--------------------------------------------------------------------------------
--------------------------------------------------
-
--------------------------------------------------------------------------------
--------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
46
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
-
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (IN MILLIONS, EXCEPT PER SHARE DATA)
1995 1994 1993
-
--------------------------------------------------------------------------------
--------------------------------------------------
<S>
<C> <C> <C>
OPERATIONS NET SALES
$5,048 $4,479 $4,116
Costs and expenses
Cost of goods sold
2,777 2,506 2,243
Marketing and administrative expenses
1,084 952 932
Research and development expenses
345 303 280
Restructuring charges
103 - 216

Special charge for litigation, net
96 - 330
Allocated interest, net
96 96 90
Goodwill amortization
28 27 26
Other (income) expense
(5) 36 73
--------------------------------------------------------------------------------
------------------------------
TOTAL COSTS AND EXPENSES
4,524 3,920 4,190
--------------------------------------------------------------------------------
------------------------------
Income (loss) from continuing operations before
income taxes and cumulative effect of
accounting changes
524 559 (74)
Income tax expense
153 153 119
--------------------------------------------------------------------------------
------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES
371 406 (193)
Discontinued operations
Income (loss) from discontinued operations, net of
applicable income tax expense (benefit) of $88
in 1995, $52 in 1994 and $(181) in 1993
304 190 (75)
Costs associated with effecting the business
distribution, net of income tax benefit of $8
(26) - -
--------------------------------------------------------------------------------
------------------------------
278 190 (75)
--------------------------------------------------------------------------------
------------------------------
Income (loss) before cumulative effect of
accounting changes
649 596 (268)
Cumulative effect of change in accounting for:
Income taxes
- - 81
Other postemployment benefits, net of
income tax benefits of $7
- - (11)
--------------------------------------------------------------------------------
------------------------------
NET INCOME (LOSS)
$ 649 $ 596 $ (198)
-
--------------------------------------------------------------------------------
--------------------------------------------------
-
--------------------------------------------------------------------------------
--------------------------------------------------

PER SHARE DATA Earnings (loss) per common share
CONTINUING OPERATIONS
$ 1.34 $ 1.45 $(0.70)
Discontinued operations
Income (loss) from discontinued operations
1.10 0.68 (0.27)
Costs associated with effecting the
business distribution
(0.09) - -
--------------------------------------------------------------------------------
------------------------------
$ 1.01 $ 0.68 $(0.27)
--------------------------------------------------------------------------------
------------------------------
Cumulative effect of change in accounting for:
Income taxes
- - .29
Other postemployment benefits
- - (0.04)
--------------------------------------------------------------------------------
------------------------------
NET INCOME (LOSS)
$ 2.35 $ 2.13 $(0.72)
--------------------------------------------------------------------------------
------------------------------
Average number of common shares and
equivalents outstanding
277 280 277
-
--------------------------------------------------------------------------------
--------------------------------------------------
-
--------------------------------------------------------------------------------
--------------------------------------------------
</TABLE>
STATEMENTS.
47
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
-
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (IN MILLIONS)(BRACKETS DENOTE CASH OUTFLOWS)
1995 1994 1993
-
--------------------------------------------------------------------------------
--------------------------------------------------
<S>

<C> <C> <C>
CASH FLOW Income (loss) from continuing operations
$ 371 $ 406 $ (193)
PROVIDED BY Adjustments
CONTINUING Depreciation and amortization
336 302 273
OPERATIONS Deferred income taxes
(17) 27 28
Gain on asset dispositions, net (pretax)
(65) (10) (7)
Purchased research and development
18 - -
Restructuring and special charge for litigation
199 - 441
Other
20 26 39
Changes in balance sheet items
Accounts receivable
(106) (13) (36)
Inventories
(90) 25 (43)
Accounts payable and accrued liabilities
2 96 (17)
Income taxes payable
(19) 59 4
Restructuring program payments
(40) (52) (12)
Other
(36) 53 (40)
--------------------------------------------------------------------------------
------------------------------
CASH FLOW PROVIDED BY CONTINUING OPERATIONS
573 919 437
-
--------------------------------------------------------------------------------
--------------------------------------------------
CASH FLOW PROVIDED BY DISCONTINUED OPERATIONS
763 354 112
-
--------------------------------------------------------------------------------
--------------------------------------------------
INVESTMENT Capital expenditures
(309) (308) (276)
TRANSACTIONS Additions to the pool of equipment leased
or rented to customers
(90) (72) (56)
Acquisitions (net of cash received)
and investments in affiliates
(44) (60) (107)
Proceeds from asset dispositions
91 72 5
--------------------------------------------------------------------------------
------------------------------
INVESTMENT TRANSACTIONS, NET
(352) (368) (434)
-
--------------------------------------------------------------------------------
--------------------------------------------------
FINANCING Issuances of debt and lease obligations
1,296 970 2,437
TRANSACTIONS Redemption of debt and lease obligations
(891) (1,593) (2,021)

Increase (decrease) in debt with
maturities of three months or less, net
(698) (151) 274
Common stock cash dividends
(306) (286) (278)
Stock issued under Shared Investment Plan
- 121 -
Stock issued under employee benefit plans
103 56 52
Purchase of treasury stock
(500) (47) (124)
--------------------------------------------------------------------------------
------------------------------
FINANCING TRANSACTIONS, NET
(996) (930) 340
-
--------------------------------------------------------------------------------
--------------------------------------------------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS
20 11 (3)
-
--------------------------------------------------------------------------------
--------------------------------------------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
8 (14) 452
-
--------------------------------------------------------------------------------
--------------------------------------------------
CASH AND EQUIVALENTS AT BEGINNING OF YEAR
468 482 30
-
--------------------------------------------------------------------------------
--------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR
$ 476 $ 468 $ 482
-
--------------------------------------------------------------------------------
--------------------------------------------------
-
--------------------------------------------------------------------------------
--------------------------------------------------
</TABLE>
STATEMENTS.
48
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (IN MILLIONS)
1995 1994 1993
-
--------------------------------------------------------------------------------

--------------------------------------------------
<S>
<C> <C> <C>
COMMON STOCK Balance, beginning and end of year
$ 288 $ 288 $ 288
-
--------------------------------------------------------------------------------
--------------------------------------------------
ADDITIONAL Balance, beginning of year
1,810 1,883 1,889
CONTRIBUTED Stock issued under Shared Investment Plan
- (44) -
CAPITAL Stock issued under employee benefit plans
27 (29) (6)
--------------------------------------------------------------------------------
------------------------------
Balance, end of year
1,837 1,810 1,883
-
--------------------------------------------------------------------------------
--------------------------------------------------
RETAINED EARNINGS Balance, beginning of year
1,762 1,452 1,928
Net income (loss)
649 596 (198)
Common stock cash dividends
(306) (286) (278)
--------------------------------------------------------------------------------
------------------------------
2,105 1,762 1,452
-
--------------------------------------------------------------------------------
--------------------------------------------------
COMMON STOCK Balance, beginning of year
(135) (350) (281)
IN TREASURY Purchases
(500) (47) (124)
Stock issued under Shared Investment Plan
- 165 -
Stock issued under employee benefit plans
76 87 55
Stock issued for acquisitions
9 10 -
--------------------------------------------------------------------------------
------------------------------
(550) (135) (350)
-
--------------------------------------------------------------------------------
--------------------------------------------------
CUMULATIVE Balance, beginning of year
(5) (88) (29)
FOREIGN CURRENCY Currency fluctuations
29 83 (59)
ADJUSTMENT
--------------------------------------------------------------------------------
------------------------------
24 (5) (88)
-

--------------------------------------------------------------------------------
--------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY
$3,704 $3,720 $3,185
-
--------------------------------------------------------------------------------
--------------------------------------------------
-
--------------------------------------------------------------------------------
--------------------------------------------------
</TABLE>
STATEMENTS.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the consolidated financial statements.
These policies are in conformity with generally accepted accounting principles
and have been applied consistently in all material respects. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Baxter
International Inc. and its majority-owned subsidiaries ("Baxter" or the
"company"). Operations outside the United States and its territories are
included in the consolidated financial statements on the basis of fiscal years
ending November 30.
The company's financial statements have been restated to reflect the results
of operations and net assets of the health-care cost management business as a
discontinued operation. Accordingly, all amounts included in the Notes to
Consolidated Financial Statements pertain to continuing operations except where
otherwise noted. See further discussion in Note 2.
CASH AND EQUIVALENTS
Cash and equivalents include cash, cash investments and marketable securities
with a maturity of three months or less.
For continuing and discontinued operations, cash payments for interest were
$176 million in 1995, $226 million in 1994 and $217 million in 1993. Cash
payments for income taxes related to continuing and discontinued operations in
1995, 1994 and 1993 were $182, $127 and $79 million, respectively.
INVENTORIES
<TABLE>

<CAPTION>
-
--------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $165 $154
Work in process 164 136
Finished products 577 526
-
--------------------------------------------------------------------------------
TOTAL INVENTORIES $906 $816
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Market for raw materials is based on replacement costs and for other
inventory classifications on net realizable value. Appropriate consideration is
given to deterioration, obsolescence and other factors in evaluating net
realizable value.
PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
-
--------------------------------------------------------------------------------
<S> <C> <C>
Land $ 88 $ 83
Buildings and leasehold improvements 701 663
Machinery and equipment 2,038 1,762
Equipment leased or rented to customers 341 348
Construction in progress 259 245
-
--------------------------------------------------------------------------------
TOTAL PROPERTY, PLANT AND EQUIPMENT, AT COST 3,427 3,101
Accumulated depreciation and amortization (1,678) (1,458)
-
--------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT $1,749 $1,643
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization are provided for financial reporting purposes
principally on the straight-line method over the following estimated useful
lives: buildings and leasehold improvements, 20 to 44 years; machinery and other
equipment, 3 to 20 years; equipment leased or rented to customers, 1 to 5 years.
Leasehold improvements are depreciated over the life of the related facility
leases or the asset, whichever is shorter. Straight-line and accelerated methods
of depreciation are used for income tax purposes.
Depreciation expense was $254, $226 and $206 million in 1995, 1994 and 1993,
respectively. Repairs and maintenance expense was $79 million in 1995, $74
million in 1994 and $78 million in 1993.
GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized on a straight-line basis over estimated useful lives
not exceeding 40 years. Based
50
<PAGE>
-
--------------------------------------------------------------------------------
upon management's assessment of the future undiscounted operating cash flows of
acquired businesses, the carrying value of goodwill at December 31, 1995, has
not been impaired. As of December 31, 1995 and 1994, goodwill was $824 million
and $820 million, respectively, net of accumulated amortization of $270 million
and $242 million, respectively.
Other intangible assets include purchased patents, trademarks, deferred
charges and other identified rights which are amortized on a straight-line basis
over their legal or estimated useful lives, whichever is shorter (generally not
exceeding 17 years). As of December 31, 1995 and 1994, other intangibles were
$274 million and $264 million, respectively, net of accumulated amortization of
$281 million and $218 million, respectively.
INCOME TAXES
Effective January 1, 1993, the company adopted Financial Accounting Standards
Board ("FASB") Statement No. 109, "Accounting for Income Taxes." Under this
standard, deferred income taxes reflect the impact of temporary differences
between the assets and liabilities recognized for financial reporting purposes
and amounts recognized for tax purposes. Deferred income tax accounts are
adjusted to reflect changes in tax rates made from time to time by taxing
authorities in the jurisdiction in which the company operates.
EARNINGS PER SHARE
Earnings per share of common stock are computed by dividing the net income
available for common stock by the weighted average number of common shares
outstanding during the period.
DERIVATIVES
Gains and losses on hedges of existing assets or liabilities are included in the
carrying amounts of those assets or liabilities and are ultimately recognized in
income as part of those carrying amounts. Gains and losses relating to
qualifying hedges of firm commitments or anticipated transactions also are
deferred and are recognized in income or as adjustments of carrying amounts when
the hedged transaction occurs. Gains and losses on interest rate-contracts that
do not qualify as hedges are recognized as other income or expense.
RECLASSIFICATIONS
Certain immaterial reclassifications have been made to conform the 1994 and 1993
financial statements and related footnotes to the 1995 presentation.
2. DISCONTINUED OPERATIONS
On November 28, 1995, the board of directors of Baxter International Inc.
approved in principle a plan to distribute to Baxter stockholders all of the
outstanding stock of its health-care cost management business (the
"Distribution") in a spin-off transaction which is expected to be tax-free. The
creation of two independent companies will enable Baxter and the new company to

devote management time, attention and investments directly to the core
strategies of each business. The new health-care cost management business will
consist of Baxter's cost-management services, U.S. distribution, surgical
products and respiratory-therapy operations. This new company will operate as a
medical supplier, focused on helping customers manage the total cost of
providing patient care. The Distribution is expected to occur in late 1996 and
will result in the health-care cost management business operating as an
independent entity with publicly traded common stock on the New York Stock
Exchange.
The following selected financial information for the new health-care cost
management business (including previously divested businesses) is presented for
informational purposes only and does not necessarily reflect what the results of
operations and financial position would have been had it operated as a stand-
alone entity.
INCOME STATEMENT DATA FOR
HEALTH-CARE COST MANAGEMENT BUSINESS
<TABLE>
<CAPTION>
AS OF DECEMBER 31 (IN MILLIONS) 1995 1994 1993
-
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $4,682 $4,845 $4,763
Income (loss) before income taxes $ 392 $ 242 $ (256)
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
In 1995, income before income taxes includes a $268 million net pretax gain
resulting from the company's divestiture of its Industrial and Life Sciences
division to VWR Corporation.
51
<PAGE>
-
--------------------------------------------------------------------------------
NET ASSETS FOR HEALTH-CARE COST MANAGEMENT BUSINESS
<TABLE>
<CAPTION>
-
--------------------------------------------------------------------------------
<S> <C> <C>
Net current assets $ 722 $1,071
Net noncurrent assets 1,897 2,014
-
--------------------------------------------------------------------------------
Total net assets $2,619 $3,085
-
--------------------------------------------------------------------------------

-
--------------------------------------------------------------------------------
</TABLE>
It is estimated that through an issuance of new third-party debt, a
substantial portion of Baxter's existing debt will be indirectly assumed by the
health-care cost management business. The amount of the debt will be determined
when the capital structure for the new company is finalized.
As a result of the board's approval of the plan, the consolidated financial
statements of Baxter and the related Notes to Consolidated Financial Statements
and supplemental data have been adjusted and restated to reflect the results of
operations and net assets of the health-care cost management business as a
discontinued operation in accordance with generally accepted accounting
principles.
3. RESTRUCTURING CHARGES
In November 1993, the company announced that its board of directors approved a
series of strategic actions to improve shareholder value, to extend positions of
leadership in high-growth health-care markets and to reduce costs. These actions
were designed to accelerate growth and reduce costs in the company's businesses
worldwide, including reorganizations and consolidations in the United States,
Europe, Japan and Canada. In November 1993, the company recorded a $230 million
pretax provision to cover costs associated with these restructuring initiatives.
Since the announcement of the 1993 restructuring program, the company has
actions associated with the restructuring program, which is expected to be
completed in 1997.
Employee-related costs include provisions for severance, outplacement
assistance, relocation and retention payments for employees in the affected
operations worldwide. Since the inception of the restructuring program, the
company has eliminated approximately 1,250 of the 1,640 positions affected by
the program. The majority of the remaining reductions will occur in 1996 and
1997, as facility closures and consolidations are completed as planned.
1993 RESTRUCTURING PROGRAM
<TABLE>
<CAPTION>
Divestitures
Employee- and asset Other
(IN MILLIONS) related costs write-downs costs TOTAL
-
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restructuring charges $94 $75 $61 $230
1994 utilization:
Cash 27 - 21 48
Noncash - 29 - 29
-
--------------------------------------------------------------------------------
1995 utilization:
Cash 19 - 17 36
Noncash - 24 - 24
-
--------------------------------------------------------------------------------
December 31, 1995 $48 $22 $23 $ 93
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>

In September 1995, the company completed a global study of its manufacturing
capacity. As a result of the study, management approved a plan to consolidate
the company's manufacturing operations in Puerto Rico in order to eliminate
excess capacity and reduce manufacturing costs. To effect this plan, management
recorded a restructuring charge of $93 million in the third quarter of 1995. The
charge is predominantly composed of the estimated costs to close the company's
intravenous solutions plant and warehouse in Carolina, Puerto Rico. Production
and warehousing will be transferred and consolidated into other facilities in
Puerto Rico and the United States. Implementation of the plan is underway and
completion is anticipated by the end of 1998. Employee-related costs consist
primarily of severance for the approximately 1,450 positions that will be
eliminated in connection with the approved plan.
In addition to the consolidation of the company's manufacturing operations in
Puerto Rico, the company has initiated plans for other organizational structure
changes which have resulted in a $10 million provision for employee severance.
52
<PAGE>
-
--------------------------------------------------------------------------------
1995 RESTRUCTURING PROGRAM
<TABLE>
<CAPTION>
Employee- Asset Other
(IN MILLIONS) related costs write-downs costs TOTAL
-
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restructuring charges:
Puerto Rico facility
consolidations $17 $67 $9 $93
Organizational
changes 10 - - 10
Utilization:
Cash 1 - - 1
Noncash - 48 - 48
-
--------------------------------------------------------------------------------
December 31, 1995 $26 $19 $9 $54
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
4. ACQUISITIONS, INVESTMENTS IN AFFILIATES & DIVESTITURES
The company invested $44 million in 1995, $16 million in 1994 and $91 million in
1993 for acquisitions accounted for as purchase transactions and investments in
affiliated companies. Additionally, the company issued $9 million in 1995 and
$10 million in 1994 of common stock for acquisitions accounted for as purchase
transactions. Investments in 1995 also included $18 million for an acquisition
accounted for as purchased research and development. Had the acquisitions taken

place on January 1, consolidated results in the year of acquisition would not
have been materially different from reported results. These acquisitions
involved no significant change in the company's strategic direction and were
made to acquire technologies, broaden product lines and expand market coverage.
Additionally, the company paid previously recorded acquisition related
liabilities associated with the 1985 acquisition of American Hospital Supply
Corporation ("American") of $44 million in 1994 and $16 million in 1993. These
payments were for costs associated with litigation surrounding mammary implants.
See further discussion in Note 14.
The company disposed of or discontinued several minor non-strategic or
unprofitable product lines or investments which resulted in a net gain of $39
million (net of $26 million in related tax expense) in 1995, as compared to net
gains of $6 million (net of $4 million in related tax expense) in 1994 and net
gains of $5 million (net of $2 million in related tax expense) in 1993. Proceeds
from divestitures were $91 million in 1995, $72 million in 1994 and $5 million
in 1993. The majority of these transactions resulted in the disposition of the
company's entire interest in such product lines and investments.
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
-
--------------------------------------------------------------------------------
<S> <C> <C>
Accounts payable, principally trade $ 355 $ 311
Employee compensation and withholdings 188 163
Restructuring 64 20
Litigation 466 240
Pension and other deferred benefits 11 81
Property, payroll and other taxes 51 47
Other 413 251
-
--------------------------------------------------------------------------------
Accounts payable and accrued liabilities $1,548 $1,113
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
6. CREDIT FACILITIES
At December 31, 1995, Baxter's revolving credit facility enabled the company to
borrow funds on an unsecured basis at variable interest rates. The banks
participating in this facility are committed to maintain the $1.5 billion
facility through July 2000. The agreement contains covenants which include a
maximum debt-to-capital ratio (as defined) and a minimum interest coverage
ratio. At December 31, 1995, there were no borrowings outstanding under this
facility.
Baxter also maintains other short-term credit arrangements totaling
approximately $890 million in support of international and domestic operations.
At December 31, 1995, $99 million of borrowings were outstanding under these
facilities, of which $40 million is classified as long-term debt.
53
<PAGE>

-
--------------------------------------------------------------------------------
7. LONG-TERM DEBT AND LEASE OBLIGATIONS
<TABLE>
<CAPTION>
Effective
AS OF DECEMBER 31 (IN MILLIONS) interest rate 1995 1994
-
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial paper 5.9% $ 615 $ 314
-
--------------------------------------------------------------------------------
Short-term notes 5.9% 559 728
-
--------------------------------------------------------------------------------
Notes due within one year 9.5% 160 299
-
--------------------------------------------------------------------------------
7 1/2% notes due 1997 7.3% 201 201
-
--------------------------------------------------------------------------------
Notes redeemable by
holders/callable by
company in 1998 9.7% 186 185
-
--------------------------------------------------------------------------------
9 1/4% notes due 1999 10.1% 97 97
-
--------------------------------------------------------------------------------
Zero coupon notes
due 2000 10.3% 88 79
-
--------------------------------------------------------------------------------
7 1/4% notes due 2008 6.6% 198 200
-
--------------------------------------------------------------------------------
Swapped notes due 1997,
2001 and 2002 7.3% 325 336
-
--------------------------------------------------------------------------------
Industrial development
obligations, due 1996
through 2013 8.4% 71 71
-
--------------------------------------------------------------------------------
Notes and capitalized lease
obligations due 1996
through 2020 32 231
-
--------------------------------------------------------------------------------
Total long-term debt and
lease obligations 2,532 2,741
Current portion (160) (400)
Long-term portion $2,372 $2,341
-
--------------------------------------------------------------------------------
-

--------------------------------------------------------------------------------
</TABLE>
At December 31, 1995 and 1994, commercial paper and certain short-term notes
together totaling $1,174 million and $953 million, respectively, have been
classified with long-term debt as they are supported by long-term credit
facilities and will continue to be refinanced. Commercial paper and short-term
notes of $89 million as of December 31, 1994 were included in current maturities
as they were supported by short-term credit facilities. The company had
unamortized original issue discounts of $56 and $66 million for the Zero coupon
notes due 2000 at December 31, 1995 and 1994, respectively.
The company leases certain facilities and equipment under capital and
operating leases expiring at various dates. Most of the operating leases contain
renewal options. Total expense for all operating leases was $88 million in 1995,
$92 million in 1994 and $94 million in 1993.
FUTURE MINIMUM LEASE PAYMENTS
<TABLE>
<CAPTION>
Aggregate
debt
maturities
(INCLUDING INTEREST) Operating and capital
AS OF DECEMBER 31 (IN MILLIONS) leases leases
-
--------------------------------------------------------------------------------
<S> <C> <C>
1996 $82 $162
1997 52 227
1998 36 102
1999 25 100
2000 21 1,331
Thereafter 67 668
-
--------------------------------------------------------------------------------
Total obligations and commitments $283 2,590
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Amounts representing interest,
discounts, premiums and deferred
financing costs 58
-
--------------------------------------------------------------------------------
Present value of long-term debt and
lease obligations $2,532
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
CONCENTRATIONS OF CREDIT RISK
The company provides credit, in the normal course of business, to hospitals,
private and government institutions, health-care agencies, insurance agencies
and doctors' offices. The company performs ongoing credit evaluations of its
customers and maintains reserves for potential credit losses which, when

realized, have been within the range of management's allowance for doubtful
accounts.
The company invests the majority of its excess cash, primarily generated
through operations in Puerto Rico, in certificates of deposit with major banks
there. These certificates typically have a maturity of 30 to 45 days. The
company has not experienced any losses on its certificate of deposit
investments.
FINANCIAL INSTRUMENT USE
Baxter uses financial instruments to manage its exposure to adverse movements in
interest rates and foreign exchange rates. Baxter does not use financial
instruments for trading purposes, nor is Baxter a party to leveraged
derivatives. If Baxter did not use financial instruments, its exposure to these
risks would increase.
54
<PAGE>
-
--------------------------------------------------------------------------------
The notional amounts of derivatives summarized below are used to calculate
amounts exchanged in future periods relating to interest rates or foreign
exchange rates. While the company is exposed to credit-related losses equal to
the market value of the financial instrument shown below (which reflects the
gain or loss at December 31, that would result from replacing the instrument in
the case of non-performance by the counterparty), the company does not
anticipate that any of its counterparties will fail to meet their obligations
because of their high credit ratings. Where appropriate, the company has
diversified its selection of counterparties, and has arranged collaterization
and master-netting agreements to minimize the risk of loss.
INTEREST RATE AND DEBT RISK MANAGEMENT
Baxter uses forward contracts, options and interest-rate swaps from one to 10
years in duration to reduce the company's exposure to adverse movements in
interest rates and lower the costs related to various debt instruments. The book
values of debt at December 31, 1995 and 1994 reflect deferred hedge gains of $3
million and $7 million, offset by $6 million and $7 million of deferred hedge
losses, respectively.
In 1995 and 1994, options consisted principally of caps and floors that will
lower the cost of associated fixed rate debt if floating rates fall below 7.5%,
and minimize the impact of increases in floating rates between 1996 and 2005.
The forward starting swap consisted of a fixed to floating rate swap that became
effective January 4, 1996. Hedges of anticipated transactions in 1994 consisted
of forward starting swaps that hedged floating rate debt issued upon maturity of
the company's notes in 1995 at a fixed rate of approximately 7%.
INTEREST-RATE CONTRACTS, MARKET VALUE GAIN (LOSS)
AND WEIGHTED-AVERAGE INTEREST RATES
<TABLE>
<CAPTION>
AS OF DECEMBER 31 (IN MILLIONS)
1995 1994
-
--------------------------------------------------------------------------------

--------------------------------------------------
MARKET
WEIGHTED- Market Weighted-
VALUE
AVERAGE value average
NOTIONAL GAIN
INTEREST Notional gain interest
AMOUNTS (LOSS)
RATE amounts (loss) rate
-
--------------------------------------------------------------------------------
--------------------------------------------------
<S> <C> <C> <C>
<C> <C> <C>
Floating to fixed rate hedges $1,050 $(21)
$950 $57
Average pay rate
5.8% 5.8%
Average receive rate
5.9% 6.2%
Fixed to floating rate (swapped notes) 35 1
395 (31)
Average pay rate
5.9% 6.2%
Average receive rate
6.3% 7.3%
Options 475 32
425 13
Forward starting swap 300 1
- -
Hedges of anticipated transactions - -
300 30
-
--------------------------------------------------------------------------------
--------------------------------------------------
-
--------------------------------------------------------------------------------
--------------------------------------------------
</TABLE>
55
<PAGE>
-
--------------------------------------------------------------------------------
FOREIGN EXCHANGE RISK MANAGEMENT
The company enters into various types of foreign exchange contracts in managing
its foreign exchange risk. The amounts hedged, including the market gain (loss)
on termination, are indicated in the following table:
FOREIGN EXCHANGE RISK MANAGEMENT
<TABLE>
<CAPTION>
AS OF DECEMBER 31 (IN MILLIONS)
1995 1994

-
--------------------------------------------------------------------------------
MARKET Market
VALUE value
NOTIONAL GAIN Notional gain
AMOUNTS (LOSS) amounts (loss)
-
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Forwards and options
used to hedge
anticipated sales - - $ 60 -
-
--------------------------------------------------------------------------------
Forwards and swaps
used to hedge
certain receivables
and payables $189 $ (1) $176 $ (2)
-
--------------------------------------------------------------------------------
Forwards and swaps
used to hedge
net investments in
foreign affiliates $154 $(19) $226 $(38)
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
The corporation enters into forward exchange contracts, options and swaps to
hedge anticipated but not yet committed sales expected to be denominated in
foreign currencies and certain receivables and payables. The terms of these
currency financial instruments are less than two years. The purpose of the
company's foreign currency hedging activities is to protect the company from the
risk that the eventual dollar net cash inflows resulting from the sale of
products to foreign customers and purchases from foreign suppliers and the
repayment on non-U.S. dollar borrowings may be adversely affected by changes in
exchange rates. The company also enters into foreign exchange contracts, for up
to 10 years, to hedge its net investments in foreign affiliates. Subsequent to
year-end 1995, the company entered into options to hedge anticipated but not yet
committed sales expected to be denominated in foreign currencies with notional
amounts totaling $166 million. The company principally hedges the following
currencies: Japanese Yen, Belgian Franc, Canadian Dollar, French Franc, Swiss
Franc, Spanish Peseta, Italian Lira, U.K. Pound Sterling, German Deutsch Mark,
Malaysian Ringgit, Singapore Dollar and Australian Dollar.
FAIR VALUES OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
Approximate
Carrying amounts fair values
AS OF DECEMBER 31 (IN MILLIONS) 1995 1994 1995 1994
-
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Long-term insurance
receivables $805 $446 $633 $248
Investment in affiliates 134 163 134 235
Liabilities

Notes payable to banks 59 131 59 131
Short-term borrowings
classified as long-term 1,174 1,042 1,174 1,042
Other long-term debt
and lease obligations 1,358 1,699 1,489 1,694
Interest rate and foreign
exchange hedges 1 9 18 7 (29)
Long-term litigation
liabilities 678 458 532 254
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
1. INTEREST RATE HEDGE CARRYING AMOUNTS ARE INCLUDED IN CORRESPONDING DEBT
BALANCES.
The carrying values of cash and cash equivalents, accounts receivable and
payable, and accrued liabilities, approximate fair value due to the short-term
maturities of these assets and liabilities.
Investments in affiliates are accounted for by both the cost and equity
methods and pertain to several minor equity investments in companies for which
fair values are determined by quoted market prices and others for which fair
values are not readily available, but are believed to exceed carrying amounts.
The aggregate fair value of notes payable to banks and short-term borrowings
approximates its carrying amount because of the recent and frequent repricing
based on market conditions. The fair value of other long-term debt and lease
obligations was based on quoted market prices for the same or similar issues,
giving consideration to quality, interest rates, maturity and other significant
characteristics. The aggregate fair value of hedges was based on market
valuations and is equivalent to the credit exposures at each December 31 for
these instruments. Although the company's litigation has not yet been settled,
the estimated fair values of insurance receivables and long-term litigation
liabilities were computed by discounting the expected cash flows based on
currently available information.
56
<PAGE>
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--------------------------------------------------------------------------------
9. PREFERRED STOCK
The stockholders have authorized the issuance of 100 million shares of no par
value preferred stock. This stock can be issued in series with varying terms as
determined by the board of directors.
PREFERRED STOCK PURCHASE RIGHTS
During 1989, common stockholders received a dividend of one preferred stock
purchase right (collectively, the "Rights") for each share of common stock held
of record. Each Right entitles the registered holder to purchase from the
company one one-hundredth of a share of Series A Junior Participating Preferred
Stock for $70. The Rights will become exercisable (and transferable apart from
the common stock) on the earlier of (1) 10 days following a public announcement
that a person or group has acquired 20% or more of the common stock, or (2) 10
business days following the commencement or announcement of an offer to acquire

20% or more of the common stock.
If, after the Rights become exercisable, any person or group (the "Acquirer")
acquires 20% or more of the common stock (except pursuant to an offer for all
outstanding shares of common stock which the independent directors determine to
be fair to and otherwise in the best interests of the company and its
stockholders) each Right may be exercised for common stock (or, in certain
circumstances, cash, other property or securities) having a value of $140. In
specified circumstances, each Right may be exercised for common stock of an
acquiring entity having a value of $140. All Rights held by the Acquirer will be
null and void. The company may generally redeem the Rights at a price of $.01
per Right at any time until 10 days following a public announcement that a
person or group has acquired 20% or more of the common stock. The Rights will
expire on March 20, 1999, unless redeemed earlier.
10. COMMON STOCK
In connection with a Shared Investment Plan implemented during 1994, the company
received $121 million in cash from 63 members of Baxter's senior management team
who collectively purchased 4,685,000 shares of the company's common stock. This
plan more directly aligns management and shareholder interests. Under the terms
of the voluntary program, Baxter managers used personal full-recourse loans to
exercise options to purchase stock at the June 15, 1994, closing price of $26.
The loans, borrowed from several commercial banks, are the personal obligations
of the participants. Baxter has agreed to guarantee repayment to the banks in
the event of default by a participant.
The company has employee stock purchase plans under which the sale of its
common stock has been authorized. The purchase price is the lower of 85% of the
closing market price on the date of subscription or 85% of the closing market
price on the date sufficient funds have been withheld to purchase 10 shares.
At December 31, 1995, approximately 5,400 of approximately 33,000 eligible
employees in the U.S. and Canada and approximately 900 of approximately 13,000
other eligible employees were participating in the plans. Expiration dates for
these subscriptions run from 1996 to 1998. The weighted average subscription
price approximated $27.74 for U.S. and Canadian employees and $27.98 for other
employees at December 31, 1995.
EMPLOYEE STOCK PURCHASE PLAN
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
Shares subscribed 1995 1994 1993
-
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year 2,050,970 2,496,703 1,704,735
Subscriptions 1,458,638 1,968,058 3,303,465
Purchases (1,579,425) (1,881,757) (1,592,102)
Cancellations (351,583) (532,034) (919,395)
-
--------------------------------------------------------------------------------
End of year 1,578,600 2,050,970 2,496,703
-
--------------------------------------------------------------------------------
Subscription price per
share outstanding,
end of year $18.70-$36.13 $17.21-$31.19 $17.21-$32.78
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------

</TABLE>
The company has various employee stock option plans. All outstanding options
under these plans have been granted at 100% of market value on the dates of
grant.
As of December 31, 1995, options were held by approximately 7,800 employees,
of which 6,258,117 shares were exercisable. Expiration dates for these options
range from 1996 to 2005. The weighted average option price approximated $31.35
at December 31, 1995.
57
<PAGE>
-
--------------------------------------------------------------------------------
OPTION SHARES OUTSTANDING FOR EMPLOYEES AND DIRECTORS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31 1995 1994 1993
-
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Granted 5,193,650 2,777,182 3,496,709
Exercised (2,107,441) (471,837) (466,105)
Cancelled/Expired (802,694) (1,162,590) (692,696)
-
--------------------------------------------------------------------------------
End of year 14,651,835 12,368,320 11,225,565
-
--------------------------------------------------------------------------------
Option price per share
Exercised $13.07-$36.66 $8.35-$26.00 $10.32-$24.36
Outstanding,
end of year $13.07-$37.25 $13.07-$36.66 $8.35-$36.66
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
In addition, stock options were granted to The Baxter Foundation (a
philanthropic organization), as follows: an option to purchase 1,047,000 shares
of common stock, at $33.78 per share (both equitably adjusted) was granted on
April 22, 1991, and expires in 2001; and an option to purchase one million
shares of common stock at $33.75 per share was granted on December 2, 1992, and
expires in 2002.
Under various plans, the company has made grants of restricted stock and
performance shares in the form of the company's common stock to provide
incentive compensation to key employees and non-employee directors.
At December 31, 1995, 174,280 shares were subject to restrictions which lapse
between 1996 and 1998, and 797,479 shares were subject to restrictions which
lapse upon achievement of future performance objectives.

RESTRICTED STOCK OUTSTANDING
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1995 1994 1993
-
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Granted 107,104 508,320 5,400
Vested
(free of restrictions) (562,291) (169,709) (313,353)
Cancelled (144,895) (232,970) (278,624)
-
--------------------------------------------------------------------------------
End of year 971,759 1,571,841 1,466,200
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
PERFORMANCE SHARES OUTSTANDING
<TABLE>
<CAPTION>
-
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year 40,671 49,547 57,736
Granted/awarded 51,000 12,000 12,000
Issued (21,515) (20,001) (20,189)
Cancelled (2,485) (875) -
-
--------------------------------------------------------------------------------
End of year 67,671 40,671 49,547
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
In February 1995, the company's board of directors authorized a two-year, $500
million stock repurchase program. As of September 30, 1995, the company
completed this program by repurchasing $500 million
(or approximately 14 million shares) of its common stock. In November 1995, the
company's board of directors authorized the repurchase of an additional $500
million of the company's common stock over the next several years. As of
December 31, 1995, no additional shares had been repurchased by the company
under this authorization.
COMMON STOCK RESERVED FOR ISSUANCE
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
-

--------------------------------------------------------------------------------
<S> <C>
Acquisitions 986,525
Stock purchase plans 13,005,587
Management incentive compensation programs 19,502,478
Other 2,047,000
-
--------------------------------------------------------------------------------
Total shares reserved 35,541,590
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-
Based Compensation," which is effective for fiscal years beginning after
December 15, 1995. The statement provides management with a choice of accounting
methods for stock-based transactions with employees. Management is currently
evaluating the fair value and disclosure alternatives in the statement and plans
to adopt it in fiscal year 1996.
58
<PAGE>
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11. RETIREMENT AND OTHER BENEFIT PROGRAMS
The company and its subsidiaries sponsor qualified and non-qualified non-
contributory, defined benefit pension plans covering substantially all employees
in the U.S. and Puerto Rico. The benefits are based on years of service and
the employee's compensation during 5 of the last 10 years of employment as
defined by the plans. The company's funding policy is to make contributions to
the trust of the Qualified Plan which meet or exceed the minimum requirements of
the Employee Retirement Income Security Act of 1974. Assets held by the trusts
of the plans consist primarily of equity and fixed income securities. The
company also has various retirement plans in locations outside the U.S. and
Puerto Rico.
The assumed discount rate applied to benefit obligations to determine 1995
pension expense was 9% and the assumed long-term rate of return on assets was
9.5% for the U.S. and Puerto Rico plans. These rates averaged 7% and 8%
respectively, for the international plans.
PENSION EXPENSE
<TABLE>
<CAPTION>
(IN MILLIONS)
-
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned
during the period $27 $33 $30
Interest cost on projected
benefit obligation 62 61 57
Actual return on assets (62) (58) (57)

Net amortization and deferral 8 7 17
-
--------------------------------------------------------------------------------
Total pension expense for
continuing operations $35 $43 $47
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
Total pension expense for
discontinued operations $17 $22 $28
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
ASSUMPTIONS USED IN DETERMINING FUNDED STATUS
<TABLE>
<CAPTION>
AS OF DECEMBER 31 1995 1994
-
--------------------------------------------------------------------------------
<S> <C> <C>
Annual rate of increase in compensation levels:
U.S. plans 4.5% 4.5%
Puerto Rico plan 4.0% 4.0%
International plans (average) 4.9% 4.8%
Discount rate applied to benefit obligations:
U.S. plans 7.25% 9.0%
Return on assets:
U.S. plans 9.5% 9.5%
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
FUNDED STATUS AND AMOUNT INCLUDED IN CONSOLIDATED
BALANCE SHEETS
<TABLE>
<CAPTION>
Plans where Plans where
accumulated assets exceed
benefits exceed accumulated
(IN MILLIONS) assets benefits
AS OF DECEMBER 31 1995 1994 1995 1994
-
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefits $ 72 $ 56 $ 938 $683
-

--------------------------------------------------------------------------------
Accumulated benefits $ 77 $ 59 $ 970 $702
-
--------------------------------------------------------------------------------
Projected benefits $100 $ 80 $1,093 $782
Less plan assets at fair value 13 13 1,042 761
-
--------------------------------------------------------------------------------
Projected benefit obligation
in excess of plan assets 87 67 51 21
Unrecognized net gains
and unrecognized prior
service cost (4) 8 (107) 17
Unrecognized obligation at
January 1, net of
amortization (10) (7) (31) (37)
Additional minimum liability 1 - - -
-
--------------------------------------------------------------------------------
Net pension liability (asset) $ 74 $ 68 $ (87) $ 1
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
The company is currently exploring its options relative to pension benefits
for the new health-care cost management business (See Note 2). Until final
decisions are made regarding the pension plan, the net pension liability above
reflects the total net liability for eligible employees of both Baxter and the
health-care cost management business. If allocated, the net pension liability
for the health-care cost management business would have been $9 million in 1995
and $21 million in 1994.
59
<PAGE>
-
--------------------------------------------------------------------------------
The company also offers non-qualified supplemental retirement benefits to
certain individuals. The liability for these benefits was $10 million and $11
million at December 31, 1995 and 1994, respectively.
Most U.S. employees are eligible to participate in a qualified 401(k) plan.
Participants may contribute up to 12% of their annual compensation (limited in
1995 to $9,240 per individual) to the plan and the company matches participants'
contributions, up to 3% of compensation. Matching contributions made by the
company were $24 million in 1995, $27 million in 1994 and $28 million 1993 for
both continuing and discontinued operations.
In addition to pension benefits, the company sponsors certain contributory
health-care and life insurance benefits for substantially all domestic retired
employees. These postretirement benefit plans are not funded.
Effective January 1, 1993, the company adopted FASB Statement No. 112,
"Employers' Accounting for Postemployment Benefits" which requires accrual
accounting for postemployment benefits such as disability-related and workers-
compensation payments. The company recorded the obligation as a cumulative
effect of an accounting change for $11 million (net of $7 million in related
income tax benefits). The effect of this change on 1993 operating income versus
the prior method of accounting for these benefits was not material. The

company's liability for these benefits was approximately $19 million at December
31, 1995 and 1994.
NET POSTRETIREMENT HEALTH-CARE AND
LIFE INSURANCE EXPENSE
<TABLE>
<CAPTION>
-
--------------------------------------------------------------------------------
<S> <C> <C>
Service cost-benefits earned during the period $ 3 $ 3
Interest cost on projected benefit obligation 15 14
Net amortization and deferral (2) (1)
-
--------------------------------------------------------------------------------
Net postretirement benefits cost $16 $16
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
ASSUMPTIONS USED IN DETERMINING THE NET POSTRETIREMENT BENEFITS COST
<TABLE>
<CAPTION>
1995 1994
-
--------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 9% 7.5%
Annual rate of increase in the per capita cost 11% 13%
Rate to decrease to 5% 5%
by the year ended 2002 2002
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
PRESENT VALUE OF THE COMPANY'S OBLIGATION INCLUDED IN
THE CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
-
--------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit
obligation ("APBO"):
Retirees $157 $118
Fully eligible active participants 6 4
Other active participants 61 35
Unrecognized net gains (6) 50
-

--------------------------------------------------------------------------------
Accrued postretirement benefit liability $218 $207
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
ASSUMPTIONS USED IN DETERMINING THE APBO
<TABLE>
<CAPTION>
AS OF DECEMBER 31 1995 1994
-
--------------------------------------------------------------------------------
<S> <C> <C>
Discount rate applied to APBO 7.25% 9%
Annual rate of increase in the per capita cost 10% 11%
Rate to decrease to 5% 5%
By the year ended 2002 2002
Increase if health-care trend rates increase by
1% in each year (in millions)
APBO $25 $24
Expense $ 2 $ 3
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
60
<PAGE>
-
--------------------------------------------------------------------------------
12. INTEREST AND OTHER (INCOME) EXPENSE
<TABLE>
<CAPTION>
-
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest, net
Interest cost $219 $242 $232
Interest cost capitalized (5) (5) (10)
-
--------------------------------------------------------------------------------
Interest expense 214 237 222
Interest income (34) (44) (30)
-
--------------------------------------------------------------------------------
Total interest, net $180 $193 $192
-
--------------------------------------------------------------------------------

Allocated to discontinued
operations $ 84 $ 97 $102
Allocated to continuing
operations $ 96 $ 96 $ 90
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
As shown above, the allocation of interest to continuing and discontinued
operations was based on relative net assets of these operations.
OTHER (INCOME) EXPENSE
<TABLE>
<CAPTION>
-
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in losses of affiliates $ 17 $ 26 $ 36
Asset dispositions, net (65) (10) (7)
Foreign exchange 22 12 28
Termination of interest-rate
hedging contracts - (10) -
Other 21 18 16
-
--------------------------------------------------------------------------------
Total (income) expenses $ (5) $ 36 $ 73
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
13. INCOME TAXES
U.S. federal income tax returns filed by Baxter International Inc. through
December 31, 1986, have been examined and closed by the Internal Revenue
Service. In the opinion of management, the company has made adequate provisions
for tax expenses for all open years. Income (loss) before tax expense by
category is as follows:
INCOME (LOSS) BEFORE TAX EXPENSE BY CATEGORY
<TABLE>
<CAPTION>
-
--------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. $ 4 $132 $(292)
International 520 427 218
-
--------------------------------------------------------------------------------
Income (loss) from continuing
operations before income tax

expense $524 $559 $(74)
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
Income tax expense related to continuing operations and before cumulative
effect of accounting changes by category and by income statement classification
is as follows:
INCOME TAX EXPENSE
<TABLE>
<CAPTION>
-
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
U.S.
Federal $ 21 $ 3 $ 16
State and local 26 31 20
International 123 92 55
-
--------------------------------------------------------------------------------
Current income tax expense 170 126 91
-
--------------------------------------------------------------------------------
Deferred
U.S.
Federal 13 23 27
State and local (27) 4 10
International (3) - (9)
-
--------------------------------------------------------------------------------
Deferred income tax expense
(benefit) (17) 27 28
-
--------------------------------------------------------------------------------
Income tax expense $153 $153 $119
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
The income tax for continuing operations was calculated as if Baxter were a
stand-alone entity (without income from discontinued operations).
Effective January 1, 1993, the company adopted FASB Statement No. 109,
"Accounting for Income Taxes." Baxter recorded a tax benefit of $81 million, or
29 cents per common share reflecting the cumulative effect of the accounting
change.
DEFERRED TAX ASSETS AND LIABILITIES
<TABLE>
<CAPTION>

-
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets
Accrued expenses $192 $191 $242
Accrued postretirement benefits 80 87 90
Merger and restructuring costs 97 71 151
Alternative minimum tax credit 62 77 75
Tax credits and net operating losses 20 26 23
Valuation allowances (30) (43) (36)
-
--------------------------------------------------------------------------------
Total deferred tax assets 421 409 545
-
--------------------------------------------------------------------------------
Deferred tax liabilities
Asset basis differences 241 248 267
Subsidiaries' unremitted earnings 121 132 195
Other 26 13 39
-
--------------------------------------------------------------------------------
Total deferred tax liabilities 388 393 501
-
--------------------------------------------------------------------------------
Net deferred tax assets $ 33 $ 16 $ 44
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
-
--------------------------------------------------------------------------------
Income tax expense before cumulative effect of accounting changes applicable to
consolidated income from continuing operations differs from income tax expense
calculated by using the U.S. federal income tax rate for the following reasons:
INCOME TAX EXPENSE
<TABLE>
<CAPTION>
-
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense (benefit) at
statutory rate $183 $196 $(26)
Tax-exempt operations (125) (107) (91)
Nondeductible goodwill 8 7 16
Unremitted foreign earnings - - 151
State and local taxes 7 11 4
Repatriation of foreign earnings 57 47 45
Foreign tax expense 14 6 22

Other factors 9 (7) (2)
-
--------------------------------------------------------------------------------
Income tax expense $153 $153 $119
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
The company has received a tax exemption grant from Puerto Rico which provides
that manufacturing operations will be partially exempt from local taxes until
the year 2002. Appropriate taxes have been provided for these operations
assuming repatriation of all available earnings. In addition, the company has
other manufacturing operations outside the U.S. that benefit from reductions in
local tax rates under tax incentives that will continue at least through 1997.
U.S. federal income taxes, net of available foreign tax credits, on unremitted
earnings deemed permanently reinvested would be approximately $191 million as of
December 31, 1995. A tax provision of $151 million was made in 1993 for
unremitted foreign earnings to allow the transfer of $430 million cash to the
U.S. to fund restructuring costs.
14. LEGAL PROCEEDINGS
In both 1995 and 1993, the company recorded special charges for major litigation
settlements and minimum liability exposures, and recorded significant estimated
insurance recoveries with respect to these liabilities.
LITIGATION CHARGES
<TABLE>
<CAPTION>
Plasma Patent
Mammary based settlement
(in millions) implants therapies and other
-
--------------------------------------------------------------------------------
<S> <C> <C> <C>
1995:
Gross litigation charge $298 $247 -
Estimated insurance
recoveries 258 191 -
-
--------------------------------------------------------------------------------
Net 1995 litigation charge $ 40 $ 56 -
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
1993:
Gross litigation charge $580 $131 $128
Estimated insurance
recoveries 426 83 -
-
--------------------------------------------------------------------------------
Net 1993 litigation charge $154 $ 48 $128
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------

</TABLE>
As of December 31, 1995, the company was a defendant, together with other
defendants, in 6,961 lawsuits and had 1,764 pending claims from individuals, all
of which seek damages for injuries allegedly caused by silicone mammary implants
manufactured by the American Heyer-Schulte division of American Hospital Supply
Corporation ("American"). The comparable number of cases and claims was 7,992 as
of December 31, 1994. In the fourth quarter of 1995, 22 cases and claims were
disposed of.
The typical case or claim alleges that the individual's mammary implants
caused one or more of a wide range of ailments, including non-specific
autoimmune disease, scleroderma, lupus, rheumatoid arthritis, fibromyalgia,
mixed connective tissue disease, Sjogren's syndrome, dermatomyositis,
polymyositis, and chronic fatigue.
In addition to the individual suits against the company, a class action on
behalf of all women with mammary implants filed against all manufacturers of
such implants has been conditionally certified and is pending in the United
States District Court for the Northern District of Alabama (Dante, et al., v.
Dow Corning, et al., U.S.D.C., N. Dist., Ala., 92-2589; part of In re: Silicone
Gel Breast Implant Product Liability Litigation, U.S.D.C., N. Dist. Ala., MDL
926, (U.S.D.C., N. Dist. Ala., CV 92-P-10000-S) (now held in abeyance pending
settlement proceedings in Lindsey, et al., v. Dow Corning, et al., U.S.D.C., N.
Dist. Ala., CV 94-P-11558-S)). Another class action has been certified and is
pending in state court in Louisiana (Spitzfadden, et al., v. Dow Corning Corp.,
et al., Dist. Ct., Parish of Orleans, 92-2589). Baxter also has been named in 10
other purported additional class actions, none of which is currently
62
<PAGE>
-
--------------------------------------------------------------------------------
certified. A suit seeking class certification on behalf of all residents of the
Province of Ontario, Canada, who received Heyer-Schulte implants was dismissed
as to Baxter (Burke v. American Heyer-Schulte, et al., Ontario Prov. Court, Gen.
Div., 15981/93). That case currently is on appeal. Three other suits seeking
class certification on behalf of all women in the Provinces of Ontario, Quebec
and British Columbia, respectively, who received Heyer-Schulte mammary implants
have been filed (Bennett v. American Heyer-Schulte, et al., Ontario Prov. Court,
Gen. Div., 18169/94; Pelletier v. Baxter Healthcare Corporation, et al., Quebec
Prov. Court, Dist. of Montreal, 500-06-000005-955; Harrington v. Dow Corning
Corporation, et al., Supreme Court, British Columbia, C954330).
Additionally, the company has been served with a purported class action
brought on behalf of children allegedly exposed to silicone in utero and through
breast milk. (Feuer, et al., v. McGhan, et al., U.S.D.C., E. Dist. NY, 93-0146.)
The suit names all mammary implant manufacturers as defendants and seeks to
establish a medical monitoring fund.
These implant cases and claims generally raise difficult and complex factual
and legal issues and are subject to many uncertainties and complexities,
including, but not limited to, the facts and circumstances of each particular
case or claim, the jurisdiction in which each suit is brought, and differences
in applicable law. Many of the cases and claims are at very preliminary stages,
and the company has not been able to obtain information sufficient to evaluate
each case and claim.
There also are issues concerning which of the company's insurers are
responsible for covering each matter and the extent of the company's claims for
contribution against third parties. The company believes that a substantial
portion of the liability and defense costs related to mammary implant cases and
claims will be covered by insurance, subject to self-insurance retentions,
exclusions, conditions, coverage gaps, policy limits and insurer solvency. Most

of the company's insurers have reserved (i.e., neither admitted nor denied), and
may attempt to reserve in the future, the right to deny coverage, in whole or in
part, due to differing theories regarding, among other things, the applicability
of coverage and when coverage may attach. The company is engaged in active
negotiations with its insurers concerning coverages and the settlement described
below. The company has recently consummated a "Coverage-in-Place" Agreement with
certain London Market Insurers which it believes collectively subscribed the
majority of the company's solvent London occurrence coverage for the period 1979
to 1985. The Agreement resolves the signatory insurers' coverage defenses and
specifies rules and procedures for their allocation and payment of defense and
indemnity costs. The amounts the signatory insurers will pay the company depends
upon how much loss the company incurs in connection with breast implant claims,
subject to policy limits. Three of the company's claims-made insurers have
tendered the full amounts of their policies to the company and a fourth has
tendered the full amounts of its policy ratably as claims are paid.
Additionally, the company received certain funds in settlement of claims pending
against a carrier in liquidation. The total amount tendered from the claims-made
insurers and others exceeds $100 million.
Some of the mammary implant cases pending against the company seek punitive
damages and compensatory damages arising out of alleged intentional torts.
Depending on policy language, applicable law, and agreements with insurers, the
damages awarded pursuant to such claims may or may not be covered, in whole or
in part, by insurance. On February 7, 1994, the company filed suit against all
of the insurance companies that issued product liability policies to American,
American Heyer-Schulte and Baxter for a declaratory judgment that: the policies
cover each year of injury or claim; the company may choose among multiple
coverages; coverage begins with the date of implant; and legal fees and punitive
damages are covered. Subsequently, certain of the company's product liability
insurance carriers filed suit against the company and all of its other carriers
for a declaratory judgment to define various terms in the company's insurance
policies, the extent of the company's coverage, the date of the occurrences
giving rise to coverage, and the relative liabilities of the various insurance
carriers involved. In both cases, the parties have entered into a "stand-still"
agreement while negotiations continue.
In 1994, representatives of the plaintiffs and certain defendants in these
cases negotiated a global settlement of the issues under the jurisdiction of the
Court in the Lindsey v. Dow Corning, et al. case. The monetary provisions of the
settlement, providing compensation for all present and future plaintiffs and
claimants through a series of specific
63
<PAGE>
-
--------------------------------------------------------------------------------
funds and a disease compensation program involving scheduled medical conditions,
were agreed upon by most of the significant defendants and representatives of
the plaintiffs. The total of all of the specific funds and the disease
compensation program, which would be paid-in and made available over
approximately 30 years following final approval of the settlement by the courts,
was $4.255 billion. The company's share of this settlement was established by
the settlement negotiations at $556 million. Appeals have been filed challenging
the global settlement.
The time to file current claims against the fund ended on September 16, 1994.
Since that date, the Court's claims administration office has been evaluating
the current claims filed against the scheduled medical conditions. If those
claims exceed the funds available, the settlement agreement provides for
reductions of the amounts payable for scheduled medical conditions (a
"ratchet"), and for negotiations among the representatives of the plaintiffs and

the settling defendants with respect to the shortfall in funding for current
claims. The Court has indicated that it expects that there will be a substantial
ratchet downward in the amounts payable, and this expectation has resulted in
further negotiations among the parties. On October 20, 1995, Baxter, Bristol-
Myers Squibb Company and Minnesota Mining and Manufacturing Company presented a
draft proposal to the Court modifying, among other things, the compensation
program under the current settlement. The settlement continues to provide
compensation for all present and future plaintiffs and claimants who have, or
had at any time, one or more mammary implants manufactured by any of the
settling defendants; however, current claims would be paid substantially through
a claims-made program and all compensation amounts have been substantially
reduced. On November 13, 1995, the company's Board of Directors authorized the
company to participate in the revised settlement. Subsequently, Union Carbide
Corporation and McGhan Medical Corporation joined the revised settlement. On
December 22, 1995, the Court approved the revised settlement program. On January
16, 1996, the company, Bristol-Myers Squibb Company and Minnesota Mining and
Manufacturing Company each paid $125 million into the Court-established fund as
an initial reserve to pay claims under the revised settlement.
The global settlement gave individual plaintiffs and claimants the opportunity
to remove themselves from the settlement ("opt-out"). The initial opt-out period
ended July 1, 1994. As of December 1, 1995, approximately 11,041 individuals
have opted out of the global settlement, of which approximately 2,959 allege
claims against Baxter. Of the opt-outs who filed claims against Baxter, 1,888
represent U.S. claimants and 1,071 represent foreign claimants. The number of
opt-outs against Baxter will change as some claimants are found to not have
valid claims against Baxter, and others are identified as having claims against
Baxter. The company believes that a substantial number of the suits filed in the
second, third and fourth quarters of 1994 against Baxter will ultimately be
dismissed because it will be determined that no Heyer-Schulte mammary implant is
involved. As a result of the anticipated substantial ratchet in the global
settlement, on October 9, 1995, the Court in the Lindsey case reopened the right
to opt-out, commencing on December 1, 1995.
On May 15, 1995, Dow Corning Corporation, one of the defendants in the breast
implant cases declared bankruptcy and filed for protection under Chapter 11 In
re: Dow Corning Corporation, U.S.D.C., E.D. Mich. 95-20512, 95CV72397-DT. ("Dow
Corning Bankruptcy"). The full impact of these proceedings on the global
settlement is unclear. As a result of the Dow Corning bankruptcy, Baxter was
able to remove a substantial number of opt-out claims from state to federal
courts. As of June 30, 1995, Baxter had removed the claims of 2,361 individuals
and moved to transfer all of those cases to the federal district court in
Michigan in which the Dow Corning bankruptcy is pending. The court denied
transfer of these cases. Baxter has filed a notice of appeal.
In the fourth quarter of 1993, the company accrued $556 million for its
estimated liability resulting from the global settlement of the mammary implant
class action and recorded a receivable for estimated insurance recovery of $426
million, resulting in a net charge of $130 million. Based on its continuing
evaluation of the remaining opt-outs, the company accrued an additional $298
million for its estimated liability to litigate and/or settle cases and claims
involving opt-outs and recorded an additional receivable for estimated insurance
recovery of $258 million, resulting in an additional net charge of $40 million
in the first quarter of 1995.
At present, the company is not able to estimate the nature and extent of its
further potential future liability with respect
64
<PAGE>
-
--------------------------------------------------------------------------------

to mammary implants. The company believes that most of its potential future
liability with respect to mammary implant cases is covered by insurance. The
company intends to continue to litigate pending mammary implant cases.
Upon resolution of any of the uncertainties concerning these cases, the
company may ultimately incur charges in excess of presently established
reserves. While such a future charge could have a material adverse impact on the
company's net income in the period in which it is recorded, management believes
that any outcome of this litigation will not have a material adverse effect on
the company's consolidated financial position.
As of December 1, 1995, the company was a defendant, together with other
defendants, in 366 lawsuits, and had 860 pending claims in the United States,
Canada, Ireland, Italy, Spain, Japan and the Netherlands, involving individuals
who have hemophilia, or their representatives. Those cases and claims seek
damages for injuries allegedly caused by anti-hemophilic factor concentrates
VIII and IX derived from human blood plasma processed and sold by the company.
The typical case or claim alleges that the individual with hemophilia was
infected with HIV by infusing Factor VIII or Factor IX concentrates ("Factor
Concentrates") containing HIV.
All Federal Court Factor Concentrate cases have been transferred to the
U.S.D.C. for the Northern District of Illinois for case management under Multi
District Litigation (MDL) rules. In addition to the individual suits against the
company, a purported class action was filed on September 30, 1993, on behalf of
all U.S. residents with hemophilia (and their families) who were treated with
Factor Concentrates and who allegedly are infected with HIV as a result of the
use of such Factor Concentrates. This lawsuit was filed in the United States
District Court for the Northern District of Illinois (Wadleigh, et al., v.
Rhone-Poulenc Rorer, et al., U.S.D.C., N. Dist., Ill. 93C 5969). On November 3,
1994, the court certified the class only for the purpose of determining whether
the defendants' actions were negligent. The defendants in this case filed a
petition for a Writ of Mandamus with the 7th Circuit Court of Appeals seeking an
order directing the district court judge to vacate that certification. On March
16, 1995, the Court of Appeals granted the petition and stated that it would
issue a Writ of Mandamus directing the District Court to vacate its
certification. On April 28, 1995, the Court of Appeals denied the plaintiffs
request for a rehearing en banc, but stayed enforcement of the writ pending a
petition for certiorari by the plaintiffs to the U.S. Supreme Court. On October
2, 1995, the U.S. Supreme Court denied the plaintiffs petition for certiorari.
On January 16, 1996, the District Court decertified the class. Baxter has also
been named in five other purported class actions, none of which have been
certified and three of which have been transferred to the MDL for discovery
purposes. The company denies these allegations.
Many of the cases and claims are at very preliminary stages, and the company
has not been able to obtain information sufficient to evaluate each case and
claim. In most states, the company's potential liability is limited by laws that
provide that the sale of blood or blood derivatives, including Factor
Concentrates, is not the sale of a "good," and thus is not covered by the
doctrine of strict liability. As a result, each claimant will have to prove that
his or her injuries were caused by the company's negligence. The Wadleigh case
alleges that the company was negligent in failing: to use available purification
technology; to promote research and development for product safety; to withdraw
Factor Concentrates once it knew or should have known of viral-contamination of
such concentrates; to screen plasma donors properly; to recall contaminated
Factor Concentrates; and to warn of risks known at the time the Factor
Concentrates were used.
The company believes that a substantial portion of the liability and defense
costs related to anti-hemophilic Factor Concentrate cases and claims will be
covered by insurance, subject to self-insurance retentions, exclusions,
conditions, coverage gaps, policy limits and insurer solvency. Most of the
company's insurers have reserved their rights (i.e., neither admitted nor denied
coverage), and may attempt to reserve in the future, the right to deny coverage,
in whole or in part, due to differing theories regarding, among other things,
the applicability of coverage and when coverage may attach.
The company has filed suit in California, against all of the insurance
companies that issued comprehensive general liability and excess liability

policies to the company for a declaratory judgment that the policies of all of
the carriers provide coverage. In that suit, the company also sued Zurich for
failure to defend it. The company subsequently dismissed without prejudice its
claims against all of the
65
<PAGE>
-
--------------------------------------------------------------------------------
excess insurance carriers except Columbia Casualty Company (one of the company's
excess insurers during part of the relevant time period). The company has filed
an Amended Complaint in the California action seeking a declaration that Zurich
has a duty to defend the company in connection with the Factor Concentrate cases
and claims.
Zurich Insurance Co., one of the company's comprehensive general liability
insurance carriers has filed a suit in Illinois against the company, seeking a
declaratory judgment that the policies it had issued do not cover the losses
that the company has notified it of for a number of reasons, including that
Factor Concentrates are products, not services, and are, therefore, excluded
from the policy coverage, and that the company has failed to comply with various
obligations of notice, and the like under the policies.
The company's excess liability insurance carriers also brought suit in
Illinois for a declaratory judgment as to the parties' respective liabilities.
That suit has been dismissed without prejudice. The suit filed by Zurich in
Illinois had been stayed pending resolution of the company's California case.
Zurich appealed that stay and the Illinois Appellate Court reversed and issued a
certificate of importance ensuring the Illinois Supreme Court will hear the
company's appeal. In January 1996, the Illinois Supreme Court issued an interim
order precluding the company from prosecuting the California action during the
pendency of the appeal before the Illinois Supreme Court. Thus, the California
action is currently stayed.
The company has notified its insurers concerning coverages and the status of
the cases. Also, some of the anti-hemophilic Factor Concentrates cases pending
against the company seek punitive damages and compensatory damages arising out
of alleged intentional torts. Depending on policy language, applicable law and
agreements with insurers, the damages awarded pursuant to such claims may or may
not be covered, in whole or in part, by insurance. Accordingly, the company is
not currently in a position to estimate the amount of its potential future
recoveries from its insurers, but has estimated its recovery with respect to the
reserves it has established.
The company is vigorously defending each of the cases and claims against it.
The company will continue to seek ways to resolve pending and threatened
litigation concerning these issues through a negotiated resolution.
On June 29, 1995, the German parliament approved the creation of an assistance
fund for approximately 1,900 individuals, and their families, who contracted HIV
from blood and blood products in the early 1980s. The fund of approximately $180
million will be established by contributions from the German federal and state
governments, the German Red Cross and fractionators who sold Factor Concentrate
during the relevant period of time. The company has agreed to contribute
approximately $12 million over a four-year period of time. Claims against the
German federal and state governments, the German Red Cross and fractionators
contributing to the fund are, by law, extinguished.
In Japan, the company is a defendant, along with the Japanese government and
four other co-defendants, in multiple-plaintiff Factor Concentrate cases in
Osaka and Tokyo. Both cases currently involve 374 plaintiffs, at least 166 of
whom allegedly used Baxter Factor Concentrates. The Japanese Ministry of Health
and Welfare ("MHW") estimates that there are approximately 1,400 hemophiliacs
who are HIV-positive or AIDS-manifested, and approximately 400 who have died.

In October, 1995, the Osaka and Tokyo courts issued interim opinions setting
forth a first proposal for settlement. In general, the settlement
recommendations provided for payment of an up-front, lump sum amount of
approximately $450,000 per plaintiff, 40% funded by the Japanese government and
60% funded by the corporate defendants. The proposal foresees limited credits
to be applied to the corporate defendants' share of the settlement for prior
payments made under the "Yuai Zaidan" (a government-administered program, funded
almost entirely by the corporate defendants, which pays monthly allowances to
HIV-infected and AIDS-manifested hemophiliacs and their survivors). The courts
also raised the possibility of additional payments of unspecified amounts
supplemental to the lump-sum, which will be paid during the life of an infected
hemophiliac. The courts directed the parties to commence settlement negotiations
under the framework outlined above. Settlement discussions have proceeded, but
have not yet reached a resolution.
On February 9, 1996, the MHW announced that it had recently discovered several
files of documents which confirmed that the Ministry was aware, at the time the
heat-treated Factor Concentrates were available, that non heat-treated Factor
Concentrates could transmit the AIDS virus.
66
<PAGE>
-
--------------------------------------------------------------------------------
On February 16, 1996, the MHW admitted the responsibility on the part of the
government as indicated in the courts' interim opinions and presented a public
apology. The second proposal of settlement is expected from the courts in early
March.
The company has been notified that approximately 1,354 HIV-positive
hemophiliacs in Spain are investigating the possibility of filing suit both in
the United States and in Spain against the company and other fractionators which
sold factor concentrate in Spain in the early 1980s. As of this time, no formal
suits have been filed against the company either in Spain or the United States.
Approximately 800 of these individuals have taken Baxter factor concentrates.
On February 21, 1994, the company began the voluntary withdrawal worldwide of
its Gammagard-Registered Trademark- IGIV (intravenous immune globulin) because
of indications that it might be implicated in Hepatitis C infections occurring
in users of Gammagard. Gammagard is a concentration of antibodies derived from
human plasma and is used to treat immune-suppressed patients. A new immune
globulin, Gammagard-Registered Trademark- S/D, produced with an additional viral
inactivation process was introduced by the company after licensure in the United
States and certain other countries.
As of December 31, 1995, the company had received reports of alleged Hepatitis
C transmission from 342 patients. The exact cause for these reports has not been
determined; however, many of the reports have been associated with Gammagard
injections produced from plasma which was screened for antibodies to the
Hepatitis C virus through second-generation testing. The number of patients
receiving Gammagard-Registered Trademark- IGIV produced from the second-
generation screened plasma is not yet known, nor is the number of patients
claiming exposure to Hepatitis C known.
As of December 31, 1995, the company was a defendant in 88 lawsuits and had 91
pending claims in United States, Denmark, France, Germany, Italy, Spain, Sweden
and the United Kingdom resulting from this incident. Seven suits in the United
States have been filed as purported class actions: (Lowe v. Baxter, U.S.D.C.,
W.D. KY, C94-0125; Mock v. Baxter, et al., U.S.D.C., ID, CIV-94-0524-S-LMV;
Fayne v. Baxter, U.S.D.C., S.D., NY, 95CIV1129; Gutterman v. Baxter, U.S.D.C.,
S.D., IL, 95-198-WDS; Geary v. Baxter, U.S.D.C., W.D., PA, 95 0457; Kelley v.
Baxter, U.S.D.C., M.D., NC, 6:95CV00178; and Logan, et al., v. Baxter, U.S.D.C.,
Central Dist., CA, 95-3584). On December 18, 1995, the Lowe class action

allegations were voluntarily dismissed with prejudice by the plaintiffs. The
suits allege infection with the Hepatitis C virus from the use of Gammagard. On
June 9, 1995, the judicial panel on multi-district litigation ordered all
federal cases involving Gammagard to be transferred to the Central District of
California for coordinated pretrial proceedings before Judge Manuel L. Real, MDL
docket no. 1060. Of the 82 pending suits in the United States, 67 are filed in
federal court (including the 6 class actions), and all are expected to be
transferred to Judge Real. Judge Real has indicated that he intends to certify a
class action of all persons who took Gammagard but he has not yet entered such
an order. Judge Real has scheduled a trial for September 1996. The company is
vigorously defending these cases.
In the fourth quarter of 1993, the company accrued $131 million for its
estimated worldwide liability for litigation and settlement expenses involving
anti-hemophilic Factor Concentrate cases, and recorded a receivable for
insurance coverage of $83 million, resulting in a net charge of $48 million. The
expense associated with the German settlement is covered by this accrual.
In the third quarter of 1995, significant developments occurred, primarily in
the United States, Europe and Japan relative to claims and litigation pertaining
to the company's plasma based therapies, including Factor Concentrates. After
analyzing circumstances in light of recent developments and considering various
factors and issues unique to each geography, the company revised its estimated
exposure from the $131 million previously recorded for Factor Concentrates to
$378 million for all plasma based therapies. Related estimated insurance
recoveries were revised from $83 million for Factor Concentrates to $274 million
for all plasma based therapies. This resulted in a net charge of $56 million in
the third quarter of 1995.
Upon resolution of any of the uncertainties concerning these cases, or if the
company, along with the other defendants, enters into comprehensive settlements
of the putative class actions described above, the company may incur charges in
excess of presently established reserves. While such a future charge could have
a material adverse impact on the company's net income in the period in which it
is recorded, management believes that any outcome of
67
<PAGE>
-
--------------------------------------------------------------------------------
this litigation will not have a material adverse effect on the company's
consolidated financial position.
Baxter Healthcare Corporation ("BHC") was one of 10 defendants named in a
purported class action filed in August 1993, on behalf of all medical and dental
personnel in the state of California who allegedly suffered allergic reactions
to natural rubber latex gloves and other protective equipment or who allegedly
have been exposed to natural rubber latex products (Kennedy, et al., v. Baxter
Healthcare Corporation, et al., Sup. Ct., Sacramento Co., Cal., #535632). The
case alleges that users of various natural rubber latex products, including
medical gloves made and sold by BHC and other manufacturers, suffered allergic
reactions to the products ranging from skin irritation to systemic anaphylaxis.
The Court granted defendants' demurrer to the class action allegations. This is
currently on appeal. In April 1994, a similar purported class action, Green, et
al. v. Baxter Healthcare Corporation, et al., (Cir. Ct., Milwaukee Co., WI,
94CV004977) was filed against Baxter and three other defendants. The class
action allegations have been withdrawn, but additional plaintiffs added
individual claims. As of December 31, 1995, 15 additional lawsuits have been
served on the company containing similar allegations of sensitization to natural
rubber latex products. The company will vigorously defend against these actions.
Management believes that the outcome of these matters will not have a material
adverse effect on the company's results of operations or consolidated financial

position.
A purported class action has been filed against the company, Caremark
International Inc. ("Caremark"), C.A. (Lance) Piccolo, James G. Connelly and
Thomas W. Hodson (all current officers of Caremark) alleging securities law
disclosure violations in connection with the November 30, 1992, spin-off of
Caremark in the Registration and Information Statement ("Registration
Statement") and subsequent SEC filings submitted by Caremark (Isquith v.
Caremark International, Inc., et al., U.S.D.C., N. Dist. Ill., 94C 5534). The
plaintiffs allege, among other things, that the Registration Statement and
subsequent SEC filings contained false and misleading statements regarding the
scope of the Office of Inspector General for the Department of Health and Human
Services' investigation of Caremark's business and Medicare/Medicaid patient-
referral practices. The company has responded to the complaint and is vigorously
defending this action. Management believes that the outcome of this matter will
not have a material adverse effect on the company's results of operations or
consolidated financial position.
As of December 31, 1995, the company has been named as a potentially
responsible party for cleanup costs at 18 hazardous waste sites. The company was
a significant contributor to waste disposed of at only one of these sites, the
Thermo-Chem site in Muskegon, Michigan. The company expects that the total
cleanup costs for this site will be between $44 million and $65 million, of
which the company's share will be approximately $5 million. This amount, net of
payments of approximately $1 million, has been accrued and is reflected in the
company's financial statements.
In all of the other sites, the company was a minor contributor and does not
have information on the total cleanup costs. The company has, however, in most
of these cases been advised by the potentially responsible party of its roughly
estimated exposure at these sites. Those estimated exposures total approximately
$7 million. This amount has been accrued and reflected in the company's
financial statements.
The company is a defendant in a number of other claims, investigations and
lawsuits. Based on the advice of counsel, management does not believe that the
other claims, investigations and lawsuits individually or in the aggregate, will
have a material adverse effect on the company's operations or its consolidated
financial condition.
15. INDUSTRY AND GEOGRAPHIC INFORMATION
The company operates in a single industry segment as a world leader in providing
health-care products for use in hospitals and other health-care settings. On a
global basis, Baxter develops, manufactures and markets intravenous solutions
and related administration equipment, highly specialized medical products for
treating kidney and heart disease and blood disorders, and for collecting and
processing blood. These products include intravenous solutions and pumps;
dialysis equipment and supplies; prosthetic heart valves and cardiac catheters;
blood-clotting therapies; and machines and supplies for collecting, separating
and storing blood. These products require extensive research and development and
investment in worldwide manufacturing, marketing, and administrative
infrastructure.
68
<PAGE>
-
--------------------------------------------------------------------------------
FINANCIAL INFORMATION BY GEOGRAPHIC AREA
<TABLE>

<CAPTION>
YEARS ENDED DECEMBER 31 (IN MILLIONS)
Canada
Pacific Latin
and other Inter-area
United States Europe Rim(1) America
international Other eliminations Total
-
--------------------------------------------------------------------------------
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
<C> <C> <C>
1995
Trade sales $2,634 1,215 860 204
135 - - $5,048
Inter-area sales $ 675 158 191 113
2 - (1,139) -
-
--------------------------------------------------------------------------------
---------------------------------------------------
Total sales $3,309 1,373 1,051 317
137 - (1,139) $5,048
Pretax income (loss) $ 85 244 320 30
37 (192) - $ 524
Identifiable assets $4,975 1,156 533 209
82 - (137) $6,818
-
--------------------------------------------------------------------------------
---------------------------------------------------
-
--------------------------------------------------------------------------------
---------------------------------------------------
1994
Trade sales $2,429 1,057 695 166
132 - - $4,479
1 - (935) -
-
--------------------------------------------------------------------------------
---------------------------------------------------
Total sales $3,034 1,186 839 222
133 - (935) $4,479
39 (96) 7 $ 559
Identifiable assets $4,371 959 486 182
88 - (132) $5,954
-
--------------------------------------------------------------------------------
---------------------------------------------------
-
--------------------------------------------------------------------------------
---------------------------------------------------
1993
Trade sales $2,242 996 573 155
150 - - $4,116
1 - (830) -
-
--------------------------------------------------------------------------------
---------------------------------------------------
Total sales $2,766 1,103 730 196
151 - (830) $4,116

12 (420) (8) $ (74)
Identifiable assets $4,545 866 424 135
102 - (117) $5,955
-
--------------------------------------------------------------------------------
---------------------------------------------------
-
--------------------------------------------------------------------------------
---------------------------------------------------
</TABLE>
1. INCLUDES JAPAN, AUSTRALIA, NEW ZEALAND AND ASIA.
Inter-area transactions are accounted for using arm's-length principles.
Identifiable assets are those assets associated with a specific geographic area.
Goodwill and amortization have been allocated to geographic areas as applicable.
Other consists of litigation charges and interest, net.
Foreign net sales (including U.S. export sales) and net assets (including
advances from the company and its subsidiaries) of all consolidated foreign
subsidiaries and branches located outside the U.S., its territories and
possessions for the three years ended December 31 are as follows:
NET SALES AND NET ASSETS FOR ALL CONSOLIDATED FOREIGN
SUBSIDIARIES AND BRANCHES
<TABLE>
<CAPTION>
-
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign net sales $2,556 $2,187 $2,004
Foreign assets net of liabilities
at end of year $1,382 $1,154 902
-
--------------------------------------------------------------------------------
-
--------------------------------------------------------------------------------
</TABLE>
69
<PAGE>
-
--------------------------------------------------------------------------------
16. QUARTERLY FINANCIAL RESULTS AND MARKET FOR THE COMPANY'S STOCK
<TABLE>
<CAPTION>
First
Second Third Fourth Total
(UNAUDITED, IN MILLIONS, EXCEPT PER SHARE DATA) quarter

quarter quarter quarter year
-
--------------------------------------------------------------------------------
--------------------------------------------------
<S> <C>
<C> <C> <C> <C>
1995
Net sales $1,158
$1,275 $1,261 $1,354 $5,048
Gross profit 506
573 566 626 2,271
Income from continuing operations before
cumulative effect of accounting change 98
114 11 148 371
Net income 145
165 163 176 649
Per common share:
Income from continuing operations .35
.41 .04 .54 1.34
Net income(1) .52
.59 .59 .65 2.35
Dividends .
2625 .2825 .2825 .2825 1.11
Market price
High 34.875
37.00 41.375 44.75
Low 26.75
32.50 33.75 36.75
-
--------------------------------------------------------------------------------
--------------------------------------------------
-
--------------------------------------------------------------------------------
--------------------------------------------------
1994
Net sales $1,013
$1,111 $1,117 $1,238 $4,479
Gross profit 438
476 499 560 1,973
Income from continuing operations before
cumulative effect of accounting changes 84
84 105 133 406
Net income 131
144 149 172 596
Per common share:
Income from continuing operations .30
.30 .38 .47 1.45
Net income .47
.52 .53 .61 2.13
Dividends .25
.25 .2625 .2625 1.025
Market price
High 24.75
26.75 28.75 28.88
Low 21.75
21.63 25.25 23.75
-
--------------------------------------------------------------------------------
--------------------------------------------------
-
--------------------------------------------------------------------------------
--------------------------------------------------
</TABLE>

1. THE FOURTH QUARTER INCLUDES A PRETAX CHARGE OF $34 MILLION FOR COSTS
ASSOCIATED WITH EFFECTING THE DISTRIBUTION OF THE HEALTH-CARE COST MANAGEMENT
BUSINESS.
Baxter common stock is listed on the New York, Chicago and Pacific Stock
Exchanges, on The London Stock Exchange and on the Swiss stock exchanges of
Zurich, Basel and Geneva. The New York Stock Exchange is the principal market on
which the company's common stock is traded. At January 31, 1996, there were
approximately 74,000 holders of record of the company's common stock.
70
<PAGE>
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
-
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1995(1) 1994 1993(2) 1992 1991
-
--------------------------------------------------------------------------------
--------------------------------------------------
<S> <C>
<C> <C> <C> <C>
OPERATIONS Net sales
$5,048 4,479 4,116 3,857 3,365
(IN MILLIONS) Income (loss) from continuing operations $
371 406 (193) 373 302
Net income (loss) $
649 596 (198) 441 591
Depreciation and amortization $
336 302 273 251 231
Research and development expenses $
345 303 280 257 226
-
--------------------------------------------------------------------------------
--------------------------------------------------
CAPITAL EMPLOYED Working capital $
757 502 546 347 539
(IN MILLIONS) Capital expenditures (3) $
399 380 332 362 306
Net property, plant and equipment
$1,749 1,642 1,434 1,469 1,337
Total assets
$9,437 9,039 9,211 8,310 8,428
Net debt (4)
$2,115 2,404 3,139 2,902 2,338
Long-term obligations
$2,372 2,341 2,800 2,433 2,246
Stockholders' equity
$3,704 3,720 3,185 3,795 4,373
Total capitalization
$6,076 6,061 5,985 6,228 6,619
-
--------------------------------------------------------------------------------
--------------------------------------------------
PER COMMON Average number of common shares
SHARE outstanding (in millions) (5) $

277 280 277 279 280
Earnings (loss)
Continuing operations $
1.34 1.45 (0.70) 1.34 1.08
Net income $
2.35 2.13 (0.72) 1.56 2.03
Cash dividends declared $
1.11 1.025 1.00 0.86 0.74
Market price-high
$44.75 28.88 32.75 40.50 40.88
Market price-low
$26.75 21.63 20.00 30.50 25.63
Net book value
$13.39 13.28 11.52 13.59 14.45
-
--------------------------------------------------------------------------------
--------------------------------------------------
PRODUCTIVITY Employees at year-end
35,500 32,400 32,600 32,000 32,300
MEASURES Sales per year-end employee
$142,037 138,138 126,099 120,400 112,462
Operating assets per employee (6)
$108,708 107,211 96,927 99,167 89,660
-
--------------------------------------------------------------------------------
--------------------------------------------------
GROWTH STATISTICS Net sales
12.7% 8.8 6.7 6.1 N/A
(PERCENT CHANGE Income (loss) from continuing operations
(8.6)% N/A N/A 23.5 N/A
FROM PRIOR YEAR) Cash dividends per common share
8.3% 2.5 16.3 16.2 15.6
Net book value per year-end common share .
8% 15.3 (15.2) (5.9) 7.4
-
--------------------------------------------------------------------------------
--------------------------------------------------
FINANCIAL RETURNS Income from continuing operations as a
AND STATISTICS percent of sales
7.3% 9.0 (4.7) 9.7 8.3
Return on average common stockholders'
equity--total company
17.5% 17.3 (5.7) 11.3 15.2
Long-term debt as a percent of total
year-end capital
39.0% 38.6 46.8 39.1 33.9
-
--------------------------------------------------------------------------------
--------------------------------------------------
-
--------------------------------------------------------------------------------
--------------------------------------------------
</TABLE>
1. INCOME (LOSS) FROM CONTINUING OPERATIONS INCLUDES A PROVISION FOR
RESTRUCTURING CHARGES OF A PRETAX AMOUNT OF $103 MILLION AND A SPECIAL
CHARGE FOR LITIGATION OF A PRETAX AMOUNT OF $96 MILLION.
2. INCOME (LOSS) FROM CONTINUING OPERATIONS INCLUDES A PROVISION FOR
RESTRUCTURING CHARGES OF A PRETAX AMOUNT OF $216 MILLION AND A SPECIAL
CHARGE FOR LITIGATION OF A PRETAX AMOUNT OF $330 MILLION.
3. INCLUDES ADDITIONS TO THE POOL OF EQUIPMENT LEASED OR RENTED TO CUSTOMERS.

4. TOTAL DEBT AND LEASE OBLIGATIONS NET OF CASH AND EQUIVALENTS.
5. EXCLUDES COMMON STOCK EQUIVALENTS.
6. ACCOUNTS RECEIVABLE, NOTES AND OTHER CURRENT RECEIVABLES, INVENTORIES AND
NET PROPERTY, PLANT AND EQUIPMENT.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>10
<DESCRIPTION>SIGNIFICANT SUBSIDIARIES
<TEXT>
<PAGE>
EXHIBIT 21
-
--------------------------------------------------------------------------------
SIGNIFICANT SUBSIDIARIES OF THE COMPANY, AS OF MARCH 15, 1996
<TABLE>
<CAPTION>
% OWNED BY
ORGANIZED UNDER IMMEDIATE
SUBSIDIARY
LAWS OF PARENT(1)(2)
-
--------------------------------------------------------------------------------
----------------------------------
<S> <C>
<C>
Baxter International Inc. (parent company).................................
Delaware
Baxter Healthcare Corporation............................................
Delaware 100
Baxter World Trade Corporation...........................................
Delaware 100
Baxter S.A.............................................................
Belgium 93(4)
Baxter S.A...........................................................
France 65(4)
Baxter Deutschland GmbH................................................
Germany 100
Baxter Pharmacy Services Corporation...................................
Delaware 100(3)
Baxter Sales and Distribution Corporation............................
Delaware 100
Baxter Healthcare Corporation of Puerto Rico.........................
Alaska 100(3)
Baxter Healthcare (Holdings) Ltd.......................................
United Kingdom 99(4)
Baxter Healthcare Limited............................................
United Kingdom 99(4)
Baxter Healthcare, S.A.................................................
Panama 100
Baxter Healthcare Pte. Ltd.............................................
Singapore 100
Baxter World Trade S.A...............................................
Belgium 52(4)
Baxter Limited.........................................................
Japan 100

Baxter Healthcare Pty. Ltd.............................................
Australia 99(4)
Baxter A.G.............................................................
Switzerland 99(4)
Baxter S.A. de C.V.....................................................
Mexico 99(4)
-
--------------------------------------------------------------------------------
----------------------------------
</TABLE>
Subsidiaries omitted from this list, considered in the aggregate as a single
subsidiary, would not constitute a significant subsidiary.
* * * * *
(1) Including director's qualifying and other nominee shares.
(2) All subsidiaries set forth herein are reported in the Company's financial
statements through consolidations or under the equity method of accounting.
(3) Of common stock.
(4) Remaining shares owned by the Company, its subsidiaries or employees.
25
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>11
<TEXT>
<PAGE>
EXHIBIT 23
-
-------------------------------------------------------------------------------
CONSENT OF PRICE WATERHOUSE LLP
-
-------------------------------------------------------------------------------
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-8 (Nos. 2-82667,
2-86993, 2-97607, 33-8812, 33-15523, 33-15787, 33-28428, 33-33750 and
33-54069), on Form S-3 (Nos. 33-5044, 33-23450, 33-27505, 33-31388 and
33-49820) and on Form S-4 (Nos. 33-808, 33-15357 and 33-53937) of Baxter
International Inc. of our report dated February 14, 1996 appearing on page 45
of the Annual Report to Stockholders incorporated by reference herein. We
also consent to the incorporation by reference of our report on the Financial
Statement Schedule, which appears on page 15 of this Form 10-K.
Chicago, Illinois
March 21, 1996
</TEXT>

</DOCUMENT>
<DOCUMENT>
<TYPE>EX-24
<SEQUENCE>12
<TEXT>
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
ANNUAL REPORT ON FORM 10-K
The undersigned director of Baxter International Inc., a Delaware corporation
("the Company"), which proposes to file with the Securities and Exchange
Commission its annual report on Form 10-K for year ended December 31, 1995,
pursuant to the Securities Exchange Act of 1934, as approved by the Company's
principal executive and financial officers and controller, hereby appoints
Vernon R. Loucks Jr. for him/her and in his/her name as a director to be his/her
lawful attorney-in-fact, with full power (i) to sign and file with the
Securities and Exchange Commission the proposed report and (ii) to perform every
other act which said attorney-in-fact may deem necessary or proper in connection
with such report.
/S/ Silas S. Cathcart
/S/ Pei-yuan Chia
/S/ John W. Colloton
/S/ Susan Crown
/S/ Mary Johnston Evans
/S/ Frank R. Frame
/S/ David W. Grainger
/S/ Martha R. Ingram
/S/ Lester B. Knight
/S/ Harry M. Jansen Kraemer, Jr.
/S/ Arnold J. Levine, Ph.D.
/S/ Georges C. St. Laurent, Jr.
/S/ Monroe E. Trout, M.D.
/S/ Fred L. Turner
Dated: As of March 18, 1996
21
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27

<SEQUENCE>13
<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, 1995 AND CONSOLIDATED STATEMENT OF
INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 476
<SECURITIES> 0
<RECEIVABLES> 995
<ALLOWANCES> 22
<INVENTORY> 906
<CURRENT-ASSETS> 2,911
<PP&E> 3,427
<DEPRECIATION> 1,678
<TOTAL-ASSETS> 9,437
<CURRENT-LIABILITIES> 2,154
<BONDS> 2,372
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 288
<OTHER-SE> 3,416
<TOTAL-LIABILITY-AND-EQUITY> 9,437
<SALES> 5,048
<TOTAL-REVENUES> 5,048
<CGS> 2,777
<TOTAL-COSTS> 2,777
<OTHER-EXPENSES> 373<F1>
<LOSS-PROVISION> 9
<INTEREST-EXPENSE> 117
<INCOME-PRETAX> 524
<INCOME-TAX> 153
<INCOME-CONTINUING> 371
<DISCONTINUED> 278
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 649
<EPS-PRIMARY> 2.35
<EPS-DILUTED> 2.31
<FN>
<F1>FOR "OTHER COSTS AND EXPENSES" - REF #5-03(b)3 - INCLUDES R&D AND GOODWILL
AMORTIZATION.
</FN>
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----

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