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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM 10/A3
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------------
ALLEGIANCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-4095179
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
ONE BAXTER PARKWAY, DEERFIELD, ILLINOIS 60015
(Address of principal executive offices) (Zip Code)
Securities to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
- -------------------------------------- --------------------------------------
Common Stock, $1.00 par value New York Stock Exchange
Chicago Stock Exchange
Series A Junior Participating New York Stock Exchange
Preferred Stock Purchase Rights Chicago Stock Exchange
(Currently traded with common stock)
Securities to be registered pursuant to Section 12(g) of the Act: None
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[LOGO]
Baxter International Inc.
One Baxter Parkway
Deerfield, Illinois 60015
847.948.2000
September 30, 1996
To all Baxter International Inc. Stockholders:
I am pleased to inform you that on September 16, 1996, Baxter's Board of
Directors declared a stock dividend to achieve a distribution of all the
outstanding shares of common stock of Allegiance Corporation to all Baxter
stockholders of record on September 26, 1996.
Allegiance Corporation is a new company, formed initially as a wholly owned
subsidiary of Baxter, that will own and operate the United States distribution,
surgical and respiratory therapy products and health-care cost management
services operations presently conducted by Baxter. When the distribution is
completed, Allegiance and Baxter will be able to focus more sharply on their
respective core businesses: high-tech medical specialties for Baxter; and
health-care distribution, products and cost management services for Allegiance.
Following the distribution, Allegiance Corporation will be an independent
publicly-owned company.
If you are a Baxter stockholder of record at the close of business on
September 26, 1996, the record date for the distribution, you will receive one
share of Allegiance common stock for every five shares of Baxter common stock
you own. Allegiance stock certificates will be distributed beginning October 1,
1996. No action is required on your part to receive your Allegiance stock.
The attached Information Statement, which is being mailed to all Baxter
stockholders, describes the distribution in detail and contains important
information about Allegiance, including financial statements.
We expect that Allegiance's common stock will be listed and traded on the
New York Stock Exchange and that its stock symbol will be "AEH."
Sincerely,
Vernon R. Loucks Jr.
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
<PAGE>
[LOGO]
ALLEGIANCE CORPORATION
1430 WAUKEGAN ROAD
MCGAW PARK, ILLINOIS 60085
September 30, 1996
Dear Stockholder:
It is my pleasure to welcome you as a stockholder of Allegiance Corporation.
We are America's largest provider of health-care products and cost-management
services. Our mission is to help hospitals and others throughout the health-care
field fulfill their mission of serving patients. We will succeed by focusing on
three things: providing high-quality products, excellent service and innovative
ways of managing costs.
I invite you to learn more about Allegiance in the attached Information
Statement. We are a new public company, but we have been serving health care for
more than 70 years. We bring to the marketplace a great base of experience,
breadth of capabilities, commitment to service, strong customer relationships
and financial strength. In 1995, we recorded net revenues of approximately $4.5
billion.
The health-care marketplace is increasingly competitive and cost-conscious.
This presents an opportunity for Allegiance, which enjoys leading positions in
the distribution and manufacturing of health-care products, and in providing a
range of cost-management services. More important, we are the only company that
integrates these capabilities to address one of the most significant challenges
facing health-care professionals: the need to control costs and improve the
quality of patient care at the same time.
Our management team is eager to distinguish Allegiance by continued
leadership and solid financial performance. We are pleased that you will
participate in our mission as a stockholder of Allegiance Corporation.
Sincerely,
Lester B. Knight
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
<PAGE>
Subject to completion, dated September 20, 1996
INFORMATION STATEMENT
[LOGO]
ALLEGIANCE CORPORATION
COMMON STOCK
(PAR VALUE $1.00 PER SHARE)
This Information Statement is being furnished to stockholders of Baxter
International Inc. in connection with the Distribution by Baxter to its
stockholders of all the outstanding shares of common stock of its wholly-owned
subsidiary, Allegiance Corporation.
It is expected that the Distribution will be made on September 30, 1996, to
holders of record of Baxter common stock on September 26, 1996, on the basis of
one share of common stock of Allegiance Corporation for every five shares of
common stock of Baxter International Inc. No consideration will be required to
be paid by stockholders of Baxter for the shares of common stock of Allegiance
Corporation to be distributed, nor will they be required to surrender or
exchange shares of common stock of Baxter International Inc. or take any other
action in order to receive common stock of Allegiance Corporation. Application
has been made to list the common stock of Allegiance Corporation on the New York
Stock Exchange under the symbol "AEH."
In reviewing this Information Statement, you should carefully consider the
matters described under the caption "RISK FACTORS." Neither Baxter nor
Allegiance will receive any cash or other proceeds from the Distribution.
------------------------
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THE DISTRIBUTION.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. ANY SUCH OFFERING MAY
ONLY BE MADE BY MEANS OF A SEPARATE PROSPECTUS PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT AND OTHERWISE IN
COMPLIANCE WITH APPLICABLE LAW.
THE DATE OF THIS INFORMATION STATEMENT IS SEPTEMBER 30, 1996.
<PAGE>
AVAILABLE INFORMATION
Allegiance has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form 10 (as amended, the "Registration
Statement") under the Securities Exchange Act of 1934, as amended and the rules
promulgated thereunder (the "Exchange Act"), with respect to its common stock
and preferred stock purchase rights. This Information Statement does not contain
all of the information in the Registration Statement and the related exhibits
and schedule. Statements in this Information Statement as to the contents of any
contract, agreement or other document are summaries only and are not necessarily
complete. For complete information as to these matters, refer to the applicable
exhibit or schedule to the Registration Statement. The Registration Statement
and the related exhibits and schedule filed by Allegiance with the Commission
may be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as at the Regional Offices of the Commission at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
13th Floor, New York, New York 10048. Copies of such information may be obtained
by mail from the Public Reference Branch of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition, electronic
copies of the Registration Statement and all related exhibits and schedule may
be accessed on the world wide web via the Commission's EDGAR database at its
website (http://www.sec.gov/edgarhp.htm).
Following the Distribution, Allegiance will be required to comply with the
reporting requirements of the Exchange Act and will file annual, quarterly and
other reports with the Commission. Allegiance will also be subject to the proxy
solicitation requirements of the Exchange Act and, accordingly, will furnish
audited financial statements to its stockholders in connection with its annual
meeting of stockholders. Allegiance also intends to furnish quarterly reports
for the first three quarters of each fiscal year containing unaudited financial
information.
NO PERSON IS AUTHORIZED BY BAXTER OR ALLEGIANCE TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS INFORMATION
STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
2
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SUMMARY
THIS IS A SUMMARY. IT IS QUALIFIED BY THE MORE DETAILED INFORMATION
(INCLUDING FINANCIAL INFORMATION AND RELATED NOTES) IN THIS INFORMATION
STATEMENT, WHICH SHOULD BE READ IN ITS ENTIRETY. CAPITALIZED TERMS IN THIS
SUMMARY NOT DEFINED HERE ARE DEFINED ELSEWHERE IN THIS INFORMATION STATEMENT.
THE DISTRIBUTION
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<S> <C>
DISTRIBUTING COMPANY.............. Baxter International Inc., a Delaware corporation
("Baxter").
SHARES TO BE DISTRIBUTED.......... Approximately 54,400,000 shares of common stock, par
value $1.00 per share, of Allegiance Corporation, a
Delaware corporation ("Allegiance"), along with
associated preferred stock purchase rights. The
Allegiance common stock and such rights are collectively
referred to as the "Allegiance Stock", representing all
of the Allegiance Stock outstanding on the Record Date,
based on approximately 272 million shares of common
stock of Baxter ("Baxter Stock") expected to be
outstanding on the Record Date. See "DESCRIPTION OF
ALLEGIANCE CAPITAL STOCK."
ALLEGIANCE; BUSINESS OF
DISTRIBUTED COMPANY.............. Through its subsidiaries, Allegiance is America's
largest provider of health-care products and
cost-management services. On or before the Distribution
Date, Baxter will transfer to Allegiance specified
assets and liabilities that comprise the Allegiance
Business. On and after the Distribution Date, Allegiance
will be an independent publicly held company. See
"ALLEGIANCE BUSINESS" and "ALLEGIANCE PRO-FORMA
FINANCIAL INFORMATION."
REASONS FOR THE DISTRIBUTION...... The Distribution will enable Allegiance and Baxter each
to align its reporting structure, cost structure,
culture, and management process in support of its basic
mission. It will enable management of Allegiance to
focus more precisely on cost management service
initiatives, integrated with offerings of products
manufactured by Allegiance, Baxter and others. The
Distribution will enable Allegiance to more easily form
alliances with companies manufacturing products
competitive with Baxter products and to define its own
investment vision and raise capital without competition
for funds from Baxter's technology businesses. Meanwhile
Baxter management will focus on creating innovative
medical specialty products and on expanding sales
outside the United States. The Distribution will allow
investors to better evaluate the merits of Allegiance
and the remaining Baxter businesses, enhancing the
likelihood that each will achieve appropriate market
recognition for its performance.
DISTRIBUTION RATIO................ One share of Allegiance Stock for every five shares of
Baxter Stock. See "THE DISTRIBUTION -- MANNER OF
EFFECTING THE DISTRIBUTION."
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FRACTIONAL SHARES OF ALLEGIANCE
STOCK............................ No fractional shares of Allegiance Stock will be
distributed. A cash payment will be made to Baxter
stockholders otherwise entitled to a fractional share of
Allegiance Stock as a result of the Distribution. The
amount of such payment will depend upon the prices at
which the fractional shares are sold by the Distribution
Agent in the open market on or around the Distribution
Date. See "THE DISTRIBUTION -- MANNER OF EFFECTING THE
DISTRIBUTION."
RISK FACTORS...................... The businesses of Allegiance are subject to certain
risks, and Allegiance Stock will be subject to those
same risks. Stockholders should carefully consider the
matters described under "RISK FACTORS."
BUSINESSES RETAINED BY BAXTER..... After the Distribution, Baxter will continue to operate
its high-technology medical specialties products
businesses.
REGISTRAR, DISTRIBUTION AND
TRANSFER AGENT................... The First Chicago Trust Company of New York.
RECORD DATE....................... The close of business on September 26, 1996 (the "Record
Date").
DISTRIBUTION DATE................. The close of business on September 30, 1996 (the
"Distribution Date"). On the Distribution Date, the
Distribution Agent will begin distribution of
certificates for Allegiance Stock to holders of Baxter
Stock on the Record Date. Baxter stockholders will not
be required to make any payment or to take any other
action to receive their Allegiance Stock. See "THE
DISTRIBUTION -- MANNER OF EFFECTING THE DISTRIBUTION."
FEDERAL INCOME TAX CONSEQUENCES... On August 8, 1996, Baxter received a tax ruling (the
"Tax Ruling") from the U.S. Internal Revenue Service
(the "IRS") to the effect, among other things, that the
receipt of Allegiance Stock by stockholders of Baxter in
the Distribution will qualify under Section 355 of the
Internal Revenue Code of 1986, as amended (the "Code").
See "THE DISTRIBUTION -- CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE DISTRIBUTION."
</TABLE>
4
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RELATIONSHIP BETWEEN BAXTER AND
ALLEGIANCE AFTER THE
DISTRIBUTION..................... Allegiance and Baxter will pursue independent but
mutually supportive courses. Each will have its own
strategies and interests, while recognizing the
advantages of working together. Allegiance will have
significant continuing relationships with Baxter as an
agent, distributor, customer and supplier for a wide
array of health-care products and services, and for
certain administrative support services. Allegiance will
be Baxter's primary agent in distributing Baxter's
intravenous solutions, cardiovascular devices and other
products in the United States and will provide to Baxter
certain administrative services including credit and
collection, accounts payable, information technology and
telecommunications. Baxter will distribute Allegiance's
products in many countries around the world and will
provide various administrative services to Allegiance.
Neither company will have an ownership interest in the
other; Allegiance will be an independent public company.
See "ARRANGEMENTS BETWEEN BAXTER AND ALLEGIANCE."
ALLEGIANCE DIVIDEND POLICY........ The payment and level of cash dividends by Allegiance
after the Distribution will be based upon a number of
factors, including the operating results, cash-flow and
financial requirements of Allegiance. It is anticipated
that, following the Distribution, Allegiance will pay
quarterly cash dividends which, on an annual basis, will
initially be approximately $.40 per share. Allegiance
expects that its initial dividend rate, combined with
Baxter's continuing dividend rate, will aggregate $1.21
per share, which equals Baxter's current quarterly
dividend rate, annualized. However, no formal action
with respect to any such dividend has been declared, and
the declaration and payment of dividends is at the
discretion of Allegiance's board of directors (the
"Allegiance Board"). See "THE DISTRIBUTION -- LISTING
AND TRADING OF ALLEGIANCE COMMON STOCK."
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5
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ALLEGIANCE BORROWINGS............. Prior to the Distribution Date, Allegiance expects to
have revolving credit facilities amounting to $1,500
million. These facilities will enable Allegiance to
borrow funds on an unsecured basis at variable interest
rates. The banks participating in the facilities are
expected to commit to maintain a $1,200 million facility
for five years and a $300 million facility for one year.
Allegiance expects to incur indebtedness of
approximately $1,100 million from the five year facility
on or about the Distribution Date. This indebtedness
will be used to fund distributions to Baxter. Any
remaining proceeds, together with additional borrowings
after the Distribution Date, will be used for initial
working capital requirements. Under the Reorganization
Agreement, Allegiance may be required to pay Baxter or
Baxter may be required to pay Allegiance an amount to
adjust working capital, which payment will be based upon
specified operating factors as of the Distribution Date.
Allegiance anticipates that it will convert a
significant portion of its initial debt to longer term
fixed rate debt, contingent upon acceptable market
conditions. The debt that is not converted will be
managed as part of a short-term loan portfolio supported
by a long-term credit facility. Management expects that
Allegiance's senior debt will be investment grade.
ALLEGIANCE STOCK LISTING.......... Application has been made to list the Allegiance Stock
on the New York Stock Exchange under the symbol "AEH."
See "THE DISTRIBUTION -- LISTING AND TRADING OF
ALLEGIANCE COMMON STOCK."
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6
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SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected financial information with respect
to Allegiance. Selected unaudited historical financial information for the six
months ended June 30, 1996 and 1995 includes all adjustments, consisting only of
normal recurring accruals that are considered necessary for a fair presentation
of combined operating results for such interim periods. Results for the interim
periods are not necessarily indicative of results for the full year. Historical
financial information may not be indicative of Allegiance's performance as an
independent company. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the "Combined Financial Statements" and related
notes thereto found elsewhere in this Information Statement. Historical per
share data for net income and dividends, and the ratio of earnings to fixed
charges have not been presented because Allegiance was not incorporated until
June 1996, and did not have significant interest expense for the periods
presented below. Pro-forma long term debt and net income per share data are
presented elsewhere in this Information Statement.
SELECTED HISTORICAL FINANCIAL DATA (A)
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<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................ $ 2,201 $ 2,485 $ 4,922 $ 5,109 $ 5,019 $ 4,861 $ 4,402
Gross profit............................. 455 545 1,044 1,378 1,406 1,512 1,448
Restructuring charges (b)................ -- -- 76 -- 484 -- --
Income (loss) before income taxes........ 93 140 476 338 (154) 352 366
Net income (loss) (b) (c)................ $ 57 $ 85 $ 273 $ 215 $ (73) $ 243 $ 250
BALANCE SHEET DATA:
Total Assets............................. $ 3,293 $ 3,765 $ 3,444 $ 4,031 $ 4,590 $ 4,287 $ 4,089
</TABLE>
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(a) See Note 1 to "Notes to the Combined Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
for discussions of the impact of certain divestitures on Allegiance's
revenues and expenses.
(b) See Note 4 to "Notes to the Combined Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
for additional information related to the restructuring charges of $76
million and $484 million that were recorded in 1995 and 1993, respectively.
(c) Net loss for 1993 reflects the impact of a charge equal to $5 million, net
of tax, resulting from the adoption of Statement of Financial Accounting
Standards No. 112, "Employers Accounting for Postemployment Benefits."
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SUPPLEMENTARY FINANCIAL DATA
Allegiance's historical results of operations include revenues and expenses
related to certain divested businesses. The Industrial and Life Sciences
division was sold in September 1995 and the diagnostics manufacturing businesses
were sold in December 1994. See Notes 1 and 3 to "Notes to the Combined
Financial Statements" for additional information related to these divestitures.
The following table presents selected supplementary financial data for
Allegiance excluding the revenue and expenses associated with these divested
businesses.
SUPPLEMENTARY FINANCIAL DATA
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<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net sales..................................................... $ 2,201 $ 2,244 $ 4,575 $ 4,314 $ 4,249
Gross profit.................................................. 455 474 950 1,003 1,004
Restructuring charge.......................................... -- -- -- -- 304
Income (loss) before income taxes............................. 93 108 245 258 (39)
Income (loss)(a).............................................. 57 66 151 157 (26)
</TABLE>
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(a) Income (loss) for 1993 excludes the impact of a charge equal to $5 million,
net of tax, resulting from the adoption of Statement of Financial Accounting
Standards No. 112, "Employers Accounting for Postemployment Benefits."
8
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RISK FACTORS
Certain statements in this Information Statement constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward looking statements involve known and unknown risks,
including, but not limited to, general economic and business conditions,
competition, changing trends in customer profiles, changes in governmental
regulations, and unfavorable foreign currency fluctuations. Although Allegiance
believes that its expectations with respect to the forward looking statements
are based upon reasonable assumptions within the bounds of its knowledge of its
business and operations, there can be no assurance that actual results,
performance or achievements of Allegiance will not differ materially from any
future results, performance or achievements expressed or implied by such forward
looking statements.
UNITED STATES HEALTH-CARE ENVIRONMENT
The United States health-care system continues to undergo fundamental
change. 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.
Accelerating cost pressures on hospitals in the United States are resulting
in increased out-patient and alternate-site health-care service delivery and a
focus on cost-effectiveness and quality. These forces increasingly shape the
demand for, and supply of, medical care. Many private health-care payors are
providing incentives for consumers to seek lower cost care outside the hospital.
Many corporations' employee health plans have been restructured to provide
financial incentives for patients to utilize the most cost-effective forms of
treatment (managed care programs, such as health maintenance organizations, have
become more common), and physicians have been encouraged to provide more
cost-effective treatments. In the past, Allegiance's distribution network has
been focused on traditional distribution to hospitals.
The future financial success of health-care product and service companies,
such as Allegiance, will depend on their ability to work with health-care
providers to help them enhance their competitiveness and to distribute products
to alternate sites as treatment moves outside the hospital. Allegiance
management believes it can help its customers achieve savings in the total
health-care system by automating supply-ordering procedures, optimizing
distribution networks, improving utilization and materials management and
achieving economies through product and procedure standardization, and
performing certain non-clinical services on an outsourced basis. Allegiance
management further believes 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 anticipated realignment
of the United States health-care system that may ultimately occur. If customers
do not respond favorably to the Allegiance strategy, these changes could have a
material effect on Allegiance's business, results of operations and financial
condition.
UNITED STATES COMPETITION
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. There has been substantial consolidation in Allegiance's customer base
and among its competitors. In recent years, Allegiance's overall price increases
have been below the Consumer Price Index, and industry trends and competition
may inhibit Allegiance's ability to increase prices, and may continue to depress
Allegiance's margins in the future. These trends are expected to continue.
In part through its previously announced and ongoing restructuring program,
Allegiance plans to continue to increase its efforts to minimize costs and
better meet accelerating price competition. Allegiance believes that its cost
position will continue to benefit from improvements in manufacturing technology
and increased economies of scale. Allegiance continues to improve the quality of
its products and services. If Allegiance is unsuccessful in maintaining its
service and quality levels while
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decreasing costs, the competitive environment may have a material adverse effect
on Allegiance's business, results of operations and financial condition. See
"ALLEGIANCE BUSINESS -- COMPETITION."
REVENUES FROM CUSTOMERS PURCHASING THROUGH BUYING GROUPS
For the last three years, as a percentage of total revenue, sales to
customers which are members of two large hospital buying groups, Premier and
VHA, comprised 27 per cent and 16 per cent respectively in 1995, 23 per cent and
13 per cent respectively in 1994, and 23 per cent and 13 per cent respectively
in 1993. Loss of the contracts with either or both of these buying groups could
have a material adverse effect on the business, results of operations and
financial condition of Allegiance. However, some member hospitals in each group
are free to purchase from the vendors of their choice. Management of Allegiance
believes that its relationships with its larger customers are excellent. No
other buying group or single customer currently accounts for more than five per
cent of Allegiance's revenue. See "ALLEGIANCE BUSINESS -- CONTRACTUAL
ARRANGEMENTS; BUYING GROUPS."
POTENTIAL TAXABILITY
The Distribution, though intended to be free from United States federal
income tax as of the Distribution Date, could be rendered taxable as a result of
subsequent actions or events. Allegiance has agreed not to undertake specified
actions and has agreed that under specified circumstances it will indemnify
Baxter for taxes, liabilities and associated expenses incurred as a result of
any such actions or events. See "ARRANGEMENTS BETWEEN BAXTER AND ALLEGIANCE --
REORGANIZATION AGREEMENT."
FINANCIAL LEVERAGE
In connection with the Distribution, Allegiance will borrow, on an unsecured
basis, approximately $1.2 billion. This indebtedness is reflected in the pro
forma financial information presented elsewhere in this Information Statement.
Such indebtedness may limit Allegiance's future financial flexibility. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION -- LIQUIDITY AND
CAPITAL RESOURCES" and "ALLEGIANCE PRO-FORMA FINANCIAL INFORMATION."
MUTUAL DISTRIBUTION ARRANGEMENTS
Allegiance and Baxter will enter into various agency and distribution
arrangements pursuant to which Allegiance will distribute certain Baxter
products in the United States and Baxter will distribute certain Allegiance
products in the United States and internationally. The compensation received by
Allegiance under the domestic distribution arrangements generally will be based
upon the internal business unit revenue and expense allocations that were in
effect between the Baxter business units and the Allegiance Business prior to
the date of the Distribution, which management believes will not be materially
different than those that could be negotiated with independent third parties.
The initial terms of these agreements range from three to five years. Although
the present intention of Allegiance and Baxter is that these distribution
arrangements continue as long as the relationship between the parties is
mutually beneficial, no assurance can be given that these arrangements will be
extended beyond their original expiration dates or will not be terminated prior
to their original terms. See "ARRANGEMENTS BETWEEN BAXTER AND ALLEGIANCE --
AGENCY SERVICES AND DISTRIBUTION AGREEMENTS."
DEPENDENCE ON ADMINISTRATIVE SERVICES
After the Distribution, Allegiance and Baxter will rely on each other for
the provision of certain administrative services. See "ARRANGEMENTS BETWEEN
BAXTER AND ALLEGIANCE." Such services will be provided, pursuant to contractual
arrangements that can be terminated by either party upon no more than 12 months
notice, at rates intended to approximate the cost of providing such services. No
assurance can be given that such arrangements will continue in the future, that
the
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cost of arranging substitute service either internally or from a third party
would not increase the cost to the service recipient, or that a service provider
will not be forced to absorb a greater share of its fixed overhead costs in the
event of a termination of these arrangements.
NO OPERATING HISTORY AS AN INDEPENDENT COMPANY
Allegiance does not have an operating history as an independent public
company. While Allegiance has been profitable as part of Baxter, there is no
assurance that as a stand-alone company profits will continue at the same level.
See "COMBINED FINANCIAL STATEMENTS."
NO PRIOR MARKET FOR ALLEGIANCE COMMON STOCK
There has been no prior trading market for Allegiance Stock and there can be
no assurance as to the prices at which the Allegiance Stock will trade before or
after the Distribution Date. Until the Allegiance Stock is fully distributed and
an orderly market develops, the prices at which the Allegiance Stock trades may
fluctuate significantly. Prices for the Allegiance Stock will be determined in
the trading markets and may be influenced by many factors, including the depth
and liquidity of the market for Allegiance Stock, investor perceptions of
Allegiance and its business, Allegiance's dividend policy, and general economic
and market conditions. See "THE DISTRIBUTION -- LISTING AND TRADING OF
ALLEGIANCE COMMON STOCK."
ALLEGIANCE DIVIDEND POLICY
The payment and level of cash dividends by Allegiance after the Distribution
will be based upon a number of factors, including the operating results,
cash-flow and financial requirements of Allegiance. However, no formal action
with respect to any such dividend has been declared, and the declaration and
payment of dividends is at the discretion of the Allegiance Board.
EFFECTS ON STOCK
After the Distribution, the Baxter Stock will continue to be listed and
traded on the NYSE and certain other stock exchanges. As a result of the
Distribution, the trading prices of Baxter Stock will likely be lower than the
trading prices of Baxter Stock immediately prior to the Distribution. The
combined trading prices of Baxter Stock and Allegiance Stock after the
Distribution may be less than, equal to or greater than the trading prices of
Baxter Stock immediately prior to the Distribution. Until the market has fully
analyzed the Allegiance Business, the prices at which the Allegiance Stock
trades may fluctuate significantly. In addition, until the market has fully
analyzed the operations of Baxter without the Allegiance Business, the prices at
which the Baxter Stock trades may fluctuate significantly.
CERTAIN ANTI-TAKEOVER EFFECTS
The Certificate of Incorporation, By-laws and Rights Agreement and the
General Corporation Law of the State of Delaware ("Delaware Law") contain
several provisions that could make more difficult a change of control of
Allegiance in a transaction not approved by the Allegiance Board. These
provisions include (i) a classified Board of Directors, (ii) only the Allegiance
Board may fix the number of directors and a majority of directors then in office
may fill any vacancy in the Allegiance Board, (iii) removal of directors only
for cause, (iv) a prohibition against stockholder action by written consent, (v)
special meetings of stockholders may not be called by stockholders, (vi) advance
notice requirements for shareholder proposals to be brought before an annual
meeting and for shareholder nominations to the Allegiance Board, (vii) 66 2/3%
voting requirements for amendment of the By-laws and certain provisions of the
Certificate of Incorporation, (viii) the issuance of the Rights which will cause
substantial dilution to a person or group that attempts to acquire Allegiance on
terms not approved by the Allegiance Board and (ix) Section 203 of the Delaware
Law which makes it more difficult for an "interested stockholder" to effect
various business combinations with a corporation for a three-year period. In
addition, Allegiance expects to adopt the Allegiance Change of Control Plan
providing for certain separation pay and benefits to several executive officers
following a change of control of Allegiance and a subsequent termination of
employment unless such termination is voluntary and unprovoked or results from
death, disability, retirement or cause. Pursuant to certain
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distribution agreements between a Baxter subsidiary and an Allegiance subsidiary
and several services agreements between Baxter and Allegiance, in the event of a
change in control of one of the parties to such an agreement or certain of their
affiliates, the other party to such agreement will have the right, subject to
certain notice periods and other restrictions, to terminate all, or in certain
cases only the affected portion, of such agreement prior to its normal
expiration. See "CERTAIN ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE
CERTIFICATE OF INCORPORATION, BY-LAWS, AND STATE LAW," "DESCRIPTION OF
ALLEGIANCE CAPITAL STOCK," "ALLEGIANCE MANAGEMENT -- CHANGE OF CONTROL PLAN" and
"ARRANGEMENTS BETWEEN BAXTER AND ALLEGIANCE."
PRODUCTS LIABILITY
Upon the Distribution, Allegiance will assume the defense of litigation
involving claims related to the Allegiance Business, including certain claims of
alleged personal injuries as a result of exposure to natural rubber latex gloves
described below. Allegiance has not been named as a defendant in this litigation
but will be defending and indemnifying Baxter Healthcare Corporation ("BHC"), as
contemplated by the Reorganization Agreement, for all expenses and potential
liabilities associated with claims pertaining to this litigation. It is expected
that Allegiance will be named as a defendant in future litigation, and may be
added as a defendant in existing litigation.
Allegiance believes that a substantial portion of any liability and the
defense costs related to natural rubber latex gloves cases and claims will be
covered by insurance, subject to self-insurance retentions, exclusions,
conditions, coverage gaps, policy limits and insurer solvency. BHC has notified
its insurance companies that it believes that these cases and claims are covered
by BHC's insurance. Most of BHC'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. It is not expected that the outcome of these matters will have a
material adverse effect on Allegiance's business, results of operations or
financial condition.
ENVIRONMENTAL CONTINGENCIES
Under the United States Superfund statute and many state laws, generators of
hazardous waste which is sent to a disposal or recycling site are liable for
cleanup of the site if contaminants from that property later leak into the
environment. The law provides that potentially responsible parties may be held
jointly and severally liable for the costs of investigating and remediating a
site. This liability applies to the generator even if the waste was handled by a
contractor in full compliance with the law.
As of June 30, 1996, BHC has been named as a potentially responsible party
for cleanup costs at ten hazardous waste sites for which Allegiance has assumed
responsibility. Allegiance's largest exposure is at the Thermo-Chem site in
Muskegon, Michigan. Allegiance expects that the total cleanup costs for this
site will be between $44 million and $65 million, of which Allegiance's share
will be approximately $5 million. This amount, net of payments of approximately
$1 million, has been accrued and is reflected in Allegiance's combined financial
statements. The estimated exposure for the remaining nine sites is approximately
$4 million, which has been accrued and reflected in Allegiance's combined
financial statements. It is not expected that the outcome of these matters will
have a material adverse effect on Allegiance's business, results of operations
or financial condition.
GOVERNMENT REGULATION
Significant aspects of Allegiance's businesses are subject to state and
federal statutes and regulations governing, among other things, reimbursement
under federal and state medical assistance programs, medical waste disposal,
dispensing of controlled substances, and workplace health and safety. In
addition, most of the products manufactured or sold by Allegiance 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 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. In the
past, Baxter has removed products from the United States market that were found
not to meet
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acceptable standards. This may occur with respect to Allegiance in the future.
Product regulatory laws exist in most other countries where Allegiance will do
business. There can be no assurance that federal or state governments will not
impose additional restrictions or adopt interpretations of existing laws that
could materially adversely affect Allegiance's business, results of operations
or financial condition. See "ALLEGIANCE BUSINESS -- GOVERNMENT REGULATION."
INTERNATIONAL EXPANSION
Allegiance currently has international sales of self-manufactured surgical
products primarily in Canada, France and Germany. Allegiance management expects
to increase its sales efforts internationally, which could expose it to greater
risks associated with government regulation and fluctuations in foreign
currency. See "-- GOVERNMENT REGULATION." There can be no assurance that
Allegiance will be successful in expanding its sales efforts internationally or
employ a risk management strategy that will completely eliminate its exposure to
adverse movements in foreign currency rates.
BACKGROUND
On November 27, 1995, the Board of Directors of Baxter (the "Baxter Board")
authorized management to proceed with a plan to separate Baxter into two
companies by means of a spin-off of its Allegiance Business (as defined below).
The spin-off will be effected through a distribution (the "Distribution") to
holders of Baxter Stock of all of the outstanding shares of Allegiance Stock. At
the time of the Distribution, Allegiance and its subsidiaries will own the
assets, liabilities and operations, which prior to the date of the Distribution
(the "Distribution Date") comprised Baxter's United States health-care
distribution, surgical and respiratory therapy products and health-care cost
management businesses (the "Allegiance Business"). See "ALLEGIANCE BUSINESS." On
the Distribution Date, Baxter will effect the Distribution by delivering all of
the outstanding shares of Allegiance Stock to the First Chicago Trust Company of
New York, as the distribution agent (the "Distribution Agent") for distribution
to the holders of record of Baxter Stock at the close of business on
September 26, 1996 (the "Record Date"). Allegiance's principal executive offices
are located at One Baxter Parkway, Deerfield, Illinois 60015 until September 30,
1996 (thereafter, at 1430 Waukegan Road, McGaw Park, Illinois 60085). Unless the
context otherwise indicates, as used in this Information Statement the term
"Allegiance" means the Allegiance Business of Baxter for periods prior to the
Distribution Date and Allegiance Corporation and its consolidated subsidiaries
for the periods following the Distribution Date, and all references to "Baxter"
include Baxter International Inc. and its consolidated subsidiaries as of the
relevant date.
Stockholders of Baxter with inquiries relating to the Distribution prior to
the Distribution Date should contact the Distribution Agent, telephone number
(201) 324-0498 or Baxter International Inc., Baxter Investor Relations
Department, One Baxter Parkway, Deerfield, Illinois 60015, telephone number
(847) 948-4550. After the Distribution Date, stockholders of Allegiance with
inquiries relating to the Distribution or their investment in Allegiance should
contact Allegiance, Corporate Secretary's Department, 1430 Waukegan Road, McGaw
Park, Illinois 60085, or First Chicago Trust Company of New York, Allegiance's
transfer agent and registrar, at P.O. Box 2500 Jersey City, New Jersey
07303-2500, telephone number (201) 324-0498.
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ALLEGIANCE
Allegiance Corporation is America's largest provider of health-care products
and cost-management services for hospitals and other health-care providers.
Allegiance was formed in June, 1996 as a wholly owned subsidiary of Baxter
consisting of Baxter's U.S. distribution, surgical and respiratory-therapy
products, and health-care cost-management services operations. These integrated
businesses recorded total sales of approximately $4.5 billion in 1995.
Management believes Allegiance, with its size, breadth of product line, customer
relationships, growing array of cost-management services, and financial
strength, is well-positioned competitively for the increasingly cost-conscious
health-care marketplace.
Allegiance's mission is to align its objectives with those of its customers
- -- to help hospitals and others throughout the health-care field fulfill their
mission of serving patients. Allegiance intends to achieve this goal by
providing high-quality products, excellent service and new ways of managing
costs.
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THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
The Distribution is intended to increase the long-term value of Baxter
stockholders' investment.
The Distribution will enable each company to align its reporting structure,
cost structure, culture, and management processes in support of its basic
mission and strategy. For example, Allegiance will focus on its mission of
helping customers manage total costs and improving quality in the managed care
environment. Baxter, for example, will develop measurement and reward systems to
encourage intelligent risk-taking and reward entrepreneurship more comparably to
its technology competitors.
From an Allegiance perspective, the Distribution will enable its management
to more precisely focus on cost management and service initiatives while
building on strong positions within self-manufactured products and distribution.
Allegiance will provide integrated solutions that include many different product
offerings within the context of a comprehensive process that reduces overall
cost and improves total quality as defined by its customers. These products may
be Allegiance products, Baxter products or products of other health-care
companies. The Distribution will provide Allegiance with flexibility to serve a
broader range of customers, AS THEY WOULD LIKE TO BE SERVED. Baxter will be a
preferred supplier to Allegiance, and if customers want to continue buying the
total Baxter package of services and products, they can do so. If, however, a
customer does not want an offering integrated with Baxter products, that will be
available also. As a stand-alone company Allegiance will be able to more easily
form alliances with companies manufacturing products that compete with Baxter
products, without the competitive limitations imposed by ownership by Baxter.
Allegiance will also be able to define its own investment vision and raise
capital on an equal footing with its direct competitors, without competition for
funds from Baxter's technology businesses. This will allow Allegiance to make
investments in logistics, manufacturing, information systems, and cost
management processes required to succeed in the managed care environment.
From a Baxter perspective, the Distribution will enable its management to
better focus on creating innovative medical specialty products and on expanding
sales outside the United States. These two strategic thrusts are intended to
drive its growth. The common links among its businesses will be shared
technical, clinical and regulatory competencies; manufacturing and global sales
and distribution platforms; and market relationships.
From a market perspective, the Distribution will allow investors to better
evaluate the merits of Allegiance and the remaining Baxter businesses, enhancing
the likelihood that each will achieve appropriate market recognition for its
performance. The Distribution will afford stockholders of Baxter the option of
continuing their investment in either the Baxter Stock or Allegiance Stock or
both, depending on their investment objectives, and the separate reporting of
the results of the Allegiance Business and the remaining Baxter businesses
should create a framework for increased and more precisely focused equity
research coverage of both companies by the investment community.
MANNER OF EFFECTING THE DISTRIBUTION
The Distribution is expected to be declared by the Baxter Board on September
16, 1996 and will be made on the Distribution Date to stockholders of record of
Baxter as of the close of business on the Record Date. On or prior to the
Distribution Date, share certificates for Allegiance Stock will be delivered to
the Distribution Agent. Commencing on the Distribution Date, the Distribution
Agent will begin mailing such share certificates to holders of Baxter Stock as
of the close of business on the Record Date on the basis of one share of
Allegiance Stock for every five shares of Baxter Stock held on the Record Date.
All such shares of Allegiance Stock will be fully paid and non-assessable and
holders thereof will not be entitled to preemptive rights. See "DESCRIPTION OF
ALLEGIANCE CAPITAL STOCK -- ALLEGIANCE COMMON STOCK." No certificates or scrip
representing fractional shares of Allegiance Stock will be issued to Baxter
stockholders as part of the Distribution. The Distribution Agent will aggregate
fractional shares into whole shares of Allegiance Stock and sell
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them in the open market at then prevailing prices on behalf of holders who
otherwise would be entitled to receive fractional shares, and such persons will
receive instead a check in payment for the amount of their allocable share of
the total sale proceeds. See "-- CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE
DISTRIBUTION." Such sales are expected to be made as soon as practicable after
the mailing of the Allegiance Stock to Baxter stockholders. Baxter will bear the
cost of any commissions incurred in connection with such sales.
NO HOLDER OF BAXTER STOCK WILL BE REQUIRED TO PAY ANY CASH OR OTHER
CONSIDERATION FOR THE SHARES OF ALLEGIANCE STOCK TO BE DISTRIBUTED OR TO
SURRENDER OR EXCHANGE SHARES OF BAXTER STOCK OR TO TAKE ANY OTHER ACTION IN
ORDER TO RECEIVE ALLEGIANCE STOCK.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
Baxter has received a ruling (the "Tax Ruling") from the United States
Internal Revenue Service (the "IRS") to the effect, among other things, that the
Distribution will qualify under Section 355 of the Internal Revenue Code of
1986, as amended (the "Code") and, accordingly, that under United States federal
income tax law:
1. No income, gain or loss will be recognized by a holder of Baxter
Stock solely as a result of the receipt of Allegiance Stock pursuant to the
Distribution;
2. In general, no gain or loss will be recognized by Baxter or
Allegiance as a result of the Distribution;
3. The tax basis of Baxter Stock held by a Baxter stockholder
immediately prior to the Distribution will be apportioned (based upon
relative market values on the Distribution Date) between such Baxter Stock
and the Allegiance Stock received (including any fractional share interest
deemed received) by such stockholder pursuant to the Distribution; and
4. Assuming that Baxter Stock is held as a capital asset on the
Distribution Date, the holding period for the Allegiance Stock received
pursuant to the Distribution by a holder of Baxter Stock will include the
period during which such Baxter Stock has been held.
If the Distribution does not qualify under Section 355 of the Code, then:
(i) Baxter will recognize taxable gain on the Distribution and (ii) each holder
of Baxter Stock who receives shares of Allegiance Stock pursuant to the
Distribution will be treated as having received a taxable dividend.
The Distribution, though intended to be free from United States federal
income tax as of the Distribution Date, could be rendered taxable as a result of
subsequent actions or events, some of which are within Allegiance's control.
Allegiance has agreed not to undertake such actions and has agreed that under
specified circumstances it will indemnify Baxter for taxes, liabilities, and
associated expenses incurred as a result of specified actions or events. See
"ARRANGEMENTS BETWEEN BAXTER AND ALLEGIANCE -- REORGANIZATION AGREEMENT."
A holder of Baxter Stock who receives cash in lieu of a fractional share
interest in Allegiance Stock will be treated as if such fractional share
interest had been received as part of the Distribution and then sold.
Accordingly, gain or loss will be recognized for United States federal income
tax purposes measured by the difference, if any, between the amount of cash
received and the tax basis allocable (as described above) to such holder's
fractional share interest. Such gain or loss will be capital gain or loss to the
holder, provided that the Baxter Stock has been held as a capital asset on the
Distribution Date.
Stockholders are urged to consult their own tax advisors as to the
particular consequences to them of the Distribution, including the application
of state, local and non-U.S. tax laws.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF THE DISTRIBUTION UNDER CURRENT LAW AND IS INTENDED FOR GENERAL
INFORMATION ONLY. EACH STOCKHOLDER SHOULD CONSULT HIS OR HER TAX
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ADVISOR AS TO THE PARTICULAR CONSEQUENCES OF THE DISTRIBUTION TO SUCH
STOCKHOLDER, INCLUDING THE APPLICATION OF STATE, LOCAL AND NON-U.S. TAX LAWS,
AND AS TO POSSIBLE CHANGES IN TAX LAWS THAT MAY AFFECT THE TAX CONSEQUENCES
DESCRIBED ABOVE. THIS SUMMARY MAY NOT BE APPLICABLE TO STOCKHOLDERS WHO RECEIVED
THEIR ALLEGIANCE STOCK PURSUANT TO THE EXERCISE OF OPTIONS OR OTHERWISE AS
COMPENSATION (INCLUDING HOLDERS OF RESTRICTED STOCK) OR WHO ARE NOT CITIZENS OR
RESIDENTS OF THE UNITED STATES.
LISTING AND TRADING OF ALLEGIANCE COMMON STOCK
An application has been filed for listing the Allegiance Stock on the NYSE.
Allegiance initially will have approximately 74,000 stockholders of record,
based on the number of record holders of Baxter Stock as of August 1, 1996. The
transfer agent and registrar for Allegiance Stock will be First Chicago Trust
Company of New York. For certain information regarding certain options to
purchase Allegiance Stock that will be granted after the Distribution, see
"ALLEGIANCE MANAGEMENT -- COMPENSATION OF EXECUTIVE OFFICERS."
Shares of Allegiance Stock distributed to Baxter stockholders in the
Distribution will be freely transferable, except for shares received by persons
who may be deemed to be "affiliates" of Allegiance under the Securities Act of
1933, as amended, and the rules promulgated thereunder (the "Securities Act").
Persons who may be deemed to be affiliates of Allegiance after the Distribution
generally include individuals or entities that control, are controlled by, or
are under common control with, Allegiance, and may include certain officers and
directors of Allegiance as well as principal stockholders of Allegiance, if any.
Persons who are affiliates of Allegiance will be permitted to sell their shares
of Allegiance Stock only pursuant to an effective registration statement under
the Securities Act or an exemption from the registration requirements of the
Securities Act, such as the exemption afforded by Rule 144 promulgated
thereunder.
FUTURE MANAGEMENT OF ALLEGIANCE
Following the Distribution, Allegiance will have substantially the same
operating management as the Allegiance Business currently has. See "ALLEGIANCE
MANAGEMENT -- EXECUTIVE OFFICERS."
OPINIONS OF FINANCIAL ADVISOR
Baxter has engaged CS First Boston Corporation ("CS First Boston") as a
financial advisor in connection with the Distribution. The Baxter Board relied,
in part, upon the receipt of the below favorable opinions in deciding to
formally declare the Distribution dividend at a meeting held on September 16,
1996.
CS First Boston has delivered to the Baxter Board its written opinions,
dated September 16, 1996 to the effect that: (i) the Distribution will not have
a material adverse effect on the financial viability of New Baxter (which term
shall be deemed to refer to Baxter as constituted immediately following the
Distribution) or Allegiance, as the case may be, during the period immediately
following the Distribution through the end of fiscal year 1998 (the period for
which CS First Boston was provided forecasts), and (ii) the Distribution is fair
to the stockholders of Baxter from a financial point of view.
The term "financial viability" for purposes of these opinions, means and
refers exclusively to the ability of New Baxter or Allegiance, as the case may
be, to finance its currently anticipated operating and capital requirements (as
projected in the financial forecasts provided to CS First Boston by Baxter and
Allegiance) following the Distribution.
Each of CS First Boston's opinions is based upon, among other things, CS
First Boston's review of (i) publicly available business and financial
information relating to Baxter, New Baxter and Allegiance and financial
information contained in the Information Statement in the form provided to it
which it deemed relevant to its review, (ii) financial forecasts provided to CS
First Boston, and other information provided by Baxter prior to the date of each
of the opinions, (iii) discussions with Baxter and Allegiance management
regarding the business and prospects of Baxter, New Baxter and Allegiance,
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(iv) comparisons of financial and stock market data of Baxter, and financial
data of New Baxter and Allegiance with similar data for other publicly held
companies in similar businesses, (v) the financial terms of other transactions
similar to the Distribution that have recently been effected, (vi) prevailing
market conditions, and (vii) other information, financial studies, analyses and
investigations and financial, economic and market criteria that CS First Boston
has deemed relevant.
In each opinion, CS First Boston states that it has not assumed any
responsibility for independent verification of any of the foregoing information
(including the information contained in the Information Statement in the form
provided to it) and has relied on its being complete and accurate in all
material respects. Each opinion further states that, with respect to the
financial forecasts reviewed by CS First Boston, the management of Baxter has
advised CS First Boston that such financial forecasts have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of management as to the future financial performance of New Baxter and
Allegiance. CS First Boston has assumed no responsibility for, and has expressed
no view as to, such financial forecasts or the assumptions on which they were
based.
Each of CS First Boston's opinions states that CS First Boston has assumed
that (i) no income, gain or loss will be recognized to Baxter, New Baxter or
Allegiance for U.S. federal or state income tax purposes as a result of the
Distribution and (ii) with the exception of the receipt of (x) cash in lieu of
fractional shares of Allegiance Stock and (y) Allegiance Stock distributed with
respect to restricted shares of Baxter Stock held by Baxter employees, the
receipt of Allegiance Stock in the Distribution will be tax-free for U.S.
federal and state income tax purposes to the stockholders of Baxter.
Each CS First Boston opinion is subject to the limitations that CS First
Boston neither made any independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of Baxter or Allegiance nor has CS First
Boston been furnished with any such appraisal and that each such opinion is
based on financial, economic, monetary and market conditions as they exist and
can be evaluated on the date of each such opinion. CS First Boston's opinions do
not represent an opinion as to what the market value of the securities of
Allegiance or New Baxter actually will be following the consummation of the
Distribution.
The full text of each of CS First Boston's opinions, each of which set forth
the assumptions made, matters considered and limits on the review undertaken,
will be filed as exhibits to the Registration Statement of which this
Information Statement is a part. The summary of the opinions of CS First Boston
set forth in this Information Statement is qualified in its entirety by
reference to the full text of such opinions.
In arriving at its financial opinions, CS First Boston did not attribute any
particular weight to any analysis or factor considered in reaching its
conclusions, but rather made qualitative judgments as to the significance and
relevance of each analysis and factor. CS First Boston's analyses included
review of other publicly held companies in businesses similar to New Baxter and
Allegiance. CS First Boston analyzed these companies primarily with respect to
operating and trading performance, including such factors as market valuation,
sales, operating income, cash flow and net income, and compared that information
with pro forma and projected operating information relating to Allegiance and
New Baxter. CS First Boston has also reviewed the financial terms of other
transactions similar to the Distribution that recently have been effected,
including (but not limited to) such factors as the debt to equity ratio, book
value and capital structure of the distributed companies, and compared that
information with pro forma data relating to Allegiance and New Baxter.
CS First Boston will receive customary fees, including reimbursement of
expenses, for its services as financial advisor related to the Distribution, a
portion of which is contingent upon the consummation of the Distribution. Baxter
also has agreed to indemnify CS First Boston against certain liabilities and
expenses in connection with its services as financial advisor.
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CS First Boston and its affiliates have acted, and may in the future act, as
an underwriter for, and have participated as members of underwriting syndicates
with respect to, offerings of Baxter securities, and CS First Boston has
effected securities transactions for Baxter and performed financial advisory
services in connection with certain acquisitions and dispositions by Baxter. CS
First Boston has received fees from Baxter in the past for these services. CS
First Boston may in the future serve as an underwriter of Allegiance securities.
Lehman Brothers Inc. has also acted as a financial advisor to Baxter in
connection with the Distribution.
ARRANGEMENTS BETWEEN BAXTER AND ALLEGIANCE
For the purpose of governing certain of the ongoing relationships between
Baxter and Allegiance after the Distribution, and to provide mechanisms for an
orderly transfer of the Allegiance Business from Baxter to Allegiance and
facilitate an orderly transition to the status of two separate, publicly traded
companies, Baxter and Allegiance will enter into the various agreements
described in this section. The agreements summarized below have been, or will
be, filed as exhibits to the Registration Statement or an amendment thereto, of
which this Information Statement is a part, and the following summaries are
qualified in their entirety by reference to the agreements as filed.
It is expected that Allegiance and Baxter will pursue independent but
mutually supportive courses. Each will have its own strategies and interests,
while recognizing the advantages of working together. Allegiance, however, will
have significant continuing relationships with Baxter as an agent, distributor,
customer and supplier for a wide array of health-care products and services, and
for certain administrative support services. Allegiance will be Baxter's primary
agent in distributing Baxter's intravenous solutions, cardiovascular devices and
other products in the United States and will provide to Baxter certain
administrative services including credit and collection, accounts payable,
information technology and telecommunications. Baxter will distribute
Allegiance's products in many countries around the world and will provide
various administrative services to Allegiance. Baxter will have no ownership
interest in Allegiance, and Allegiance will be an independent public company.
REORGANIZATION AGREEMENT
Baxter and Allegiance will enter into an Agreement and Plan of
Reorganization (the "Reorganization Agreement") providing for, among other
things, the principal corporate transactions required to effect the separation
of the Allegiance Business from the remaining Baxter businesses and the
Distribution, and certain other agreements governing the relationship between
Baxter and Allegiance with respect to or in consequence of the Distribution.
Pursuant to the Reorganization Agreement, Baxter will transfer to Allegiance
substantially all of the assets, and Allegiance will assume substantially all of
the corresponding liabilities, of the Allegiance Business. See "ALLEGIANCE
BUSINESS." The assets of the Allegiance Business will be transferred to
Allegiance on an "as is, where is" basis and no representations or warranties
will be made by Baxter with respect thereto other than certain product-related
indemnities.
Subject to certain exceptions, the Reorganization Agreement will provide for
certain cross-indemnities (including an indemnity of Baxter by Allegiance with
respect to certain guarantees by Baxter in connection with certain Allegiance
agreements and certain financial guarantees) principally designed to place
financial responsibility for the liabilities of the Allegiance Business with
Allegiance and financial responsibility for the obligations and liabilities of
Baxter's retained businesses and its other subsidiaries with Baxter.
Specifically, Allegiance has agreed to assume liability for, and to indemnify
Baxter against, any and all liabilities associated with the Allegiance Business,
including any litigation, proceedings or claims relating to the products and
operations thereof whether or not the underlying basis for such litigation,
proceeding or claim arose prior to or after the Distribution Date. See "LEGAL
PROCEEDINGS." Baxter has agreed to indemnify Allegiance against any and all
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liabilities associated with Baxter's retained businesses. Specifically, Baxter
has retained liability for, and agreed to indemnify Allegiance against,
proceedings or claims relating to allegations of disease transmission through
blood products and silicon-gel mammary implants.
The Reorganization Agreement will also provide that Allegiance will assume
all environmental liabilities that arise from or are attributable to the
operations of the Allegiance Business, including, but not limited to, off-site
waste disposal liabilities. Allegiance also has agreed to indemnify Baxter
against any and all such environmental liabilities. Baxter has agreed to
indemnify Allegiance against any and all environmental liabilities associated
with the retained Baxter businesses. In addition, the Reorganization Agreement
provides that each of Baxter and Allegiance will indemnify the other in the
event of certain liabilities arising under the Exchange Act.
The Reorganization Agreement will provide, among other things, that, in
order to avoid potentially adverse tax consequences relating to the
Distribution, for a period of two years after the Distribution Allegiance will
not: (i) cease to engage in an active trade or business within the meaning of
the Code; (ii) issue or redeem any share of stock of Allegiance, except for
certain issuances and redemptions for the benefit of Allegiance's employees or
to effect acquisitions by Allegiance in the ordinary course of business or in
connection with the issuance of any convertible debt by Allegiance or in
accordance with the requirements for permitted purchases of Allegiance Stock as
set forth in section 4.05(1)(b) of Revenue Procedure 96-30 issued by the IRS; or
(iii) liquidate or merge with any other corporation, unless, with respect to
(i), (ii) or (iii) above, either (a) an opinion is obtained from counsel to
Baxter, or (b) a ruling is obtained from the IRS, in either case to the effect
that such act or event will not adversely affect the federal income tax
consequences of the Distribution to Baxter, its stockholders who receive
Allegiance Stock or Allegiance. Allegiance expects that these limitations will
not significantly constrain its activities or its ability to respond to
unanticipated developments. See "THE DISTRIBUTION -- CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE DISTRIBUTION."
The Reorganization Agreement will also provide that if, as a result of
certain transactions occurring after the Distribution Date involving either the
stock or assets of either Allegiance or any of its subsidiaries, or any
combination thereof, the Distribution fails to qualify as tax-free under the
provisions of Section 355 of the Code, Allegiance shall indemnify Baxter for all
taxes, liabilities, and associated expenses, including penalties and interest,
incurred as a result of such failure of the Distribution to qualify under
Section 355 of the Code. The Reorganization Agreement will further provide that
if the Distribution fails to qualify as tax-free under the provisions of Section
355 of the Code, other than as a result of a transaction occurring after the
Distribution Date involving either the stock or assets of Allegiance or any of
its subsidiaries, or any combination thereof, then Allegiance shall not be
liable for such taxes, liabilities, or expenses. See "THE DISTRIBUTION --
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION."
The Reorganization Agreement will also provide for the allocation of
benefits between Baxter and Allegiance under existing insurance policies after
the Distribution Date for claims made or occurrences prior to the Distribution
Date and sets forth procedures for the administration of insured claims. In
addition, the Reorganization Agreement provides that Baxter will use its
reasonable efforts to maintain directors' and officers' insurance at
substantially the level of Baxter's current directors' and officers' insurance
policy for a period of three years with respect to the directors and officers of
Baxter who will become directors and officers of Allegiance as of the
Distribution Date for acts relating to periods prior to the Distribution Date.
The Reorganization Agreement will provide that prior to the Distribution
Date the Certificate of Incorporation and By-laws of Allegiance will be
substantially in the forms attached hereto as Annexes A and B, respectively, and
that as of the Distribution Date the directors of Allegiance will be the persons
named in " ALLEGIANCE MANAGEMENT -- BOARD OF DIRECTORS."
The Reorganization Agreement will also provide that each of Baxter and
Allegiance will be granted access to certain records and information in the
possession of the other, and requires the
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retention by Baxter and Allegiance, for a period of ten years following the
Distribution, of the information in its possession relating to the other, and,
thereafter, requires that prior notice of the intention to dispose of such
information be given by the party in possession thereof.
The Reorganization Agreement will also address the treatment of employee
benefit matters and other compensation arrangements for certain former and
current Allegiance employees and their beneficiaries and dependents, as well as
certain former employees of certain former Allegiance businesses and their
beneficiaries and dependents (collectively, the "Allegiance Participants").
These provisions of the Reorganization Agreement contemplate that Allegiance
will establish certain profit-sharing, retirement savings and welfare plans (the
"Allegiance Plans") effective on the Distribution Date. The Reorganization
Agreement will provide that the account balances (including outstanding loans)
of all Allegiance Participants in the Baxter International Inc. and Subsidiaries
Incentive Investment Plan (the "IIP"), and the plan assets related to such
liabilities will be transferred to Allegiance's new retirement savings plan. The
Reorganization Agreement will also generally provide that, after the
Distribution Date, Allegiance will assume all liabilities for benefits under any
welfare plans related to Allegiance Participants, other than certain claims
incurred on or before the Distribution Date. Moreover, the Reorganization
Agreement will provide that, effective as of the Distribution Date, Allegiance
will become responsible for all other liabilities to Allegiance Participants
(including unfunded supplemental retirement benefits), other than certain
accruals under the Baxter Defined Benefit Excess Plan.
Finally, the Reorganization Agreement provides that the Distribution will
not be made until all of the following conditions are satisfied or waived by the
Baxter Board in its sole discretion: (i) the receipt of the Tax Ruling or an
acceptable opinion of tax counsel as to the tax-free status of the Distribution;
(ii) final approval by the Baxter Board of the Distribution; (iii) receipt of
all material consents required to effect the Distribution; (iv) the Registration
Statement being declared effective; (v) the Allegiance Board, composed of the
persons identified herein as the Allegiance directors, being duly elected; (vi)
the receipt of the opinions of CS First Boston described under "THE DISTRIBUTION
- -- OPINIONS OF FINANCIAL ADVISOR"; (vii) the Allegiance Stock being approved for
listing on the NYSE; (viii) the transactions contemplated by the Reorganization
Agreement in connection with the organization of Allegiance and the separation
of the Allegiance Business and the Baxter remaining businesses being consummated
in all material respects; (ix) Baxter and Allegiance having entered into each of
the agreements, instruments, understandings, assignments and other arrangements
to be entered into in connection with the transactions contemplated by the
Reorganization Agreement, including, without limitation, any conveyance
documents, any Interim Services Agreement (as defined below), and the Tax
Sharing Agreement, and each such agreement being in full force and effect; (x)
the execution of definitive agreements relating to Allegiance's credit
facilities; and (xi) no action shall have been instituted or threatened before
any court or administrative body to restrain, enjoin or otherwise prevent the
Distribution and no order, injunction or decree having been issued by any court
of competent jurisdiction or other legal restraint or prohibition preventing
consummation of the Distribution being in effect. Even if all the conditions are
satisfied, the Reorganization Agreement may be terminated and the Distribution
abandoned by the Baxter Board, in its sole discretion, without the approval of
the Baxter stockholders, at any time prior to the Distribution Date.
TAX SHARING AGREEMENT
Baxter and Allegiance will enter into a tax sharing agreement (the "Tax
Sharing Agreement") which allocates tax liabilities and responsibility for tax
audits for periods prior to, and subsequent to the Distribution Date. The Tax
Sharing Agreement will also allocate consolidated alternative minimum tax and
other tax credit carry-forwards as of the Distribution Date between Baxter and
Allegiance.
AGENCY, SERVICES AND DISTRIBUTION AGREEMENTS
As of October 1, 1996, Baxter's principal domestic operating subsidiary,
Baxter Healthcare Corporation ("BHC"), and an Allegiance subsidiary will enter
into an Agency, Services and Distribution
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Agreement (the "Domestic Distribution Agreements") for each of Baxter's four
primary domestic business units, I.V. Systems, Renal, Cardiovascular, and
Biotechnology, pursuant to which Baxter will supply products to Allegiance, and
Allegiance, as agent or distributor for Baxter, will provide physical
distribution and various sales and sales support services to Baxter. The
Domestic Distribution Agreements cover substantially all of the existing
products of each of the foregoing business units.
In most instances, Allegiance will act as Baxter's agent for the physical
distribution of Baxter's products in return for a fee. In such situations,
Baxter will maintain the contractual relationship with the customer, will manage
sales, order-taking, and billing and collections, and will retain title to the
products until shipment to the ultimate customer. In certain situations,
Allegiance will act as a full-service, value-added distributor for Baxter
products with a direct contractual relationship with the ultimate customer. In
these situations, Allegiance will provide additional sales, sales support, and
other customer and product-related services to the customer and will purchase
the products from Baxter at specified prices. In addition, Baxter will pay to
Allegiance the fee described above. Such additional services may include
aggregating Baxter's products with others to be sold as "kits" for a given
medical procedure or other cost management services which assist the customer in
reducing product consumption, improving utilization of assets, improving
logistics, and reducing or eliminating operating costs.
The initial term of the Domestic Distribution Agreements range from three
years (Renal and Biotechnology) to five years (I.V. Systems and Cardiovascular).
The agreements may be renewed upon expiration upon the mutual agreement of the
parties. In the event of a Change In Control of one of the parties to the
Domestic Distribution Agreements or certain of their affiliates, the other party
to such agreement will have the right, subject to certain notice periods and
other restrictions, to terminate all, or in certain cases only the affected
portion, of such agreement prior to its normal expiration. In the case of a
Change In Control involving a competitor of the non-affected party, the notice
period required for termination may be shorter than if such a competitor was not
involved. For purposes of these agreements, a "Change In Control" includes the
acquisition of more than 30 per cent of the stock of either party or one of its
affiliates, certain mergers or consolidations involving either party or one of
its affiliates, the acquisition by either party of certain significant
subsidiaries, and, in the case of an affiliate of either of the parties, the
disposition of substantially all of its business and assets.
Under the Domestic Distribution Agreements, Baxter is required within the
Territory to distribute all covered I.V. Systems and Cardiovascular products
(including any line extensions of such products) through Allegiance, subject to
certain exceptions. In addition, Allegiance may not market, promote or solicit
orders for any product that competes with any covered I.V. Systems or
Cardiovascular product. Allegiance may however take orders for, stock and sell
competing products in response to customer requests. For purposes of the
Domestic Distribution Agreements, the "Territory" is defined as the 50 states
comprising the United States of America and the District of Columbia.
Allegiance's right to distribute the covered products is limited to the
Territory.
The compensation received by Allegiance under the Domestic Distribution
Agreements generally will approximate or be based upon the internal business
unit revenue and expense allocations that were in effect between the Baxter
business units and the Allegiance Business prior to the date of the
Distribution. Similarly, the service levels and performance standards are to
remain as they were prior to the date of the Distribution.
In addition to the Domestic Distribution Agreements, Baxter and Allegiance
will enter into agreements pursuant to which Baxter will agree to distribute
Allegiance's surgical and other products outside of the United States and to
distribute certain surgical products to the long-term, sub-acute and home care
markets within the United States.
SERVICES AGREEMENTS
Baxter and Allegiance will enter into several services agreements, to be
effective from and after the Distribution Date, pursuant to which Baxter will
provide to Allegiance, and Allegiance will provide to Baxter, certain
administrative services that may be necessary for the conduct of Baxter's and
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Allegiance's businesses. Services to be provided to Baxter by Allegiance include
credit, collection and cash application, accounts payable, telecommunications,
and information technology services. Services to be provided to Allegiance by
Baxter include payroll, sales and use tax, human resources (including
international expatriate services), research and development, travel, property
management, and other services. These agreements will be for varying terms and,
subject to certain exceptions, are generally terminable by either party upon 12
months or less notice. Under certain circumstances involving a Change In Control
(see "-- AGENCY, SERVICES AND DISTRIBUTION AGREEMENTS" above) the agreements may
be terminated earlier than normal. The agreements may be renewed upon expiration
upon the mutual agreement of the parties. The prices at which such services will
be provided generally will be equal to or based on the actual cost of rendering
such services.
In addition, Baxter will lease from Allegiance, for a term of ten years, a
217,000 square foot office building at Allegiance's McGaw Park, Illinois
headquarters site. The leased building will continue to be occupied by Baxter's
Renal Division. Allegiance will sublease from Baxter all or a substantial part
of an 85,000 square foot office building located in Deerfield, Illinois. This
building is part of a three building complex leased by Baxter, and Allegiance's
sublease will be for the remainder of the current term of Baxter's lease. Baxter
and Allegiance may also lease or sublease to each other miscellaneous office or
other space for use in connection with various services performed for one
another pursuant to the agreements described above.
ALLEGIANCE FINANCING
Prior to the Distribution Date, Allegiance expects to have revolving credit
facilities amounting to $1,500 million. These facilities will enable Allegiance
to borrow funds on an unsecured basis at variable interest rates. The banks
participating in the facilities are expected to commit to maintain a $1,200
million facility for five years and a $300 million facility for one year.
Allegiance expects to incur indebtedness of approximately $1,100 million from
the five year facility on or about the Distribution Date. This indebtedness will
be used to fund distributions to Baxter. Any remaining proceeds, together with
additional borrowings after the Distribution Date, will be used for initial
working capital requirements. Under the Reorganization Agreement, Allegiance may
be required to pay Baxter or Baxter may be required to pay Allegiance an amount
to adjust working capital, which payment will be based upon specified operating
factors as of the Distribution Date. Allegiance anticipates that it will convert
a significant portion of its initial debt to longer term fixed rate debt,
contingent upon acceptable market conditions. The debt that is not converted
will be managed as part of a short-term loan portfolio supported by a long-term
credit facility. Management expects that Allegiance's senior debt will be
investment grade.
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ALLEGIANCE BUSINESS
OVERVIEW
Allegiance Corporation is America's largest provider of health-care products
and cost-management services for hospitals and other health-care providers.
Allegiance was formed in June 1996 as a wholly owned subsidiary of Baxter
consisting of Baxter's U.S. distribution, surgical and respiratory-therapy
products, and health-care cost-management services operations. These integrated
businesses recorded total sales of approximately $4.5 billion in 1995.
The economics of health care are undergoing rapid and fundamental change,
particularly in the United States, which is Allegiance's largest current market.
In the past, doctors and nurses were paid for their services with few cost
constraints. Today, large employers, insurance companies and HMOs are
negotiating set fees for the care of patients. For U.S. hospitals and health
systems, Allegiance's main customers, the pressure to reduce costs has never
been greater. At the same time, demand for health services is continuing to
climb with the dramatic growth of elderly populations in the United States and
abroad. This environment offers opportunities for Allegiance, which has invested
in integrated product and service programs that help medical professionals cope
with health care's new economics and demographic trends. Management believes
Allegiance, with its size, breadth of product line, customer relationships,
growing array of cost-management services, and financial strength, is
well-positioned competitively for the increasingly cost-conscious health-care
marketplace.
The health-care distribution market in the United States has experienced
intense competition and a resultant erosion in its margins in recent years in
response to the growth of managed care and increased consolidation among
health-care providers. Allegiance has responded by integrating its
market-leading distribution capabilities with a broad product offering, high
levels of customer service and innovative cost-management services. Within a
larger Baxter organization, Allegiance's cost structure was higher than industry
standards. As an independent public company, Allegiance intends to realign its
cost structure, and improve its distribution returns.
STRATEGIC PROFILE
Allegiance's mission is to align its objectives with those of its customers
- -- to help hospitals and others throughout the health-care field fulfill their
mission of serving patients. Allegiance intends to achieve this goal by
providing high-quality products, excellent service and new ways of managing
costs.
Allegiance's leading competitive position within the health-care marketplace
is a function of several key advantages, including its size and breadth of
products; an intense customer-service orientation; a growing portfolio of
cost-management services and financial strength. Allegiance is the only
health-care company that fully integrates distribution, products and services to
bring greater efficiency to health care. In 1995, Allegiance generated more than
$200 million of documented savings for its customers, which include hospitals,
health systems and other providers. Management believes its key competitive
advantages and integrated product and service offerings provide a solid platform
for growth.
SIZE AND BREADTH
Allegiance is the largest provider of health-care products and
cost-management services in the United States. Total net sales in 1995 were
approximately $4.5 billion. Allegiance offers more than 200,000 products -- the
broadest range of medical and laboratory products in the industry. Allegiance's
offering includes its own products as well as products manufactured by more than
2,000 independent suppliers. Allegiance can furnish up to 80 percent of a
hospital's total supply needs, excluding pharmaceuticals. Allegiance operates
more than 60 distribution centers across the country, delivering products to
more than 6,000 locations, often on a just-in-time basis. Management believes
the size and scope of the company are key competitive advantages in the evolving
health-care environment.
CUSTOMER SERVICE
Allegiance is recognized throughout the industry for its service to
customers. Allegiance develops relationships based on collaboration, quality
management processes and common goals. Its sales and
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service personnel are rewarded for achieving goals that are established jointly
with customers. Allegiance sets service standards in an industry where the time
from customer order to delivery can be critical. Management believes its focus
on customer service and satisfaction will continue to distinguish Allegiance
from competitors.
COST-MANAGEMENT SERVICES
Allegiance has pioneered a broad range of cost-management services, such as
shared-risk/shared-savings agreements that align Allegiance's goals with those
of its customers. In these accounts, Allegiance and its customers work together
to reduce costs and improve the quality of care. Allegiance assigns clinician
consultants to these cost-management customers. Allegiance's consultants use a
proprietary "best demonstrated practices" database of more than 500 procedures
to help health-care professionals use fewer supplies and improve outcomes. In
addition to clinical consulting, Allegiance offers a range of cost-management
services, including just-in-time delivery, procedure-based product packaging and
outsourcing of certain non-clinical functions. Management believes this
portfolio of cost-management services is a key competitive advantage in the
increasingly cost-conscious health-care market.
FINANCIAL STRENGTH
As America's leading provider of health-care products and cost-management
services, Allegiance has unparalleled opportunity to provide its services to
health-care providers. In 1995, on a pro forma basis, Allegiance achieved
approximately $4.5 billion of net sales, $950 million of gross profit and $350
million of earnings before interest, taxes, depreciation and amortization, or
EBITDA. Allegiance has arranged $1.5 billion of unsecured credit and expects to
receive investment-grade ratings on its senior debt. Management believes that
Allegiance's size and flexibility are important competitive advantages in the
rapidly changing health-care industry. In addition, Allegiance has established
an incentive compensation program for senior managers that is linked to
achieving certain cash-flow and earnings objectives.
STRATEGIC PRIORITIES
Allegiance's strategy is designed to continue to improve efficiency and
returns in its distribution operations, to increase market penetration for its
self-manufactured and "best value" preferred distributed products, and to expand
its ability to help health-care professionals manage costs.
DISTRIBUTION SERVICES
Distribution services are the basis for Allegiance's relationships with
hospitals and laboratories and the starting point for strategic relationships
that align Allegiance's objectives with those of its customers. Strategic
priorities include improving the total economics of distribution; segmenting
customers based on their service needs; and increasing sales of "best value"
products, which result in better service for customers and higher returns for
Allegiance.
PRODUCT OFFERING
Allegiance's products -- from latex gloves to customized surgical-procedure
kits -- hold leadership positions in sales to U.S. hospitals. Allegiance's
strategic priorities include: (i) increasing sales through cost-management
agreements; (ii) increasing sales to non-hospital (alternate-site) health-care
providers in the United States and to customers in selected international
marketplaces; (iii) developing new integrated offerings of products and
cost-management services; (iv) selectively expanding its product portfolio; and
(v) maintaining manufacturing operations at the highest levels of quality and
efficiency.
COST-MANAGEMENT SERVICES
Allegiance can bring to its customers more resources to control costs than
are offered by any competitor. Allegiance's strategy is to work in partnership
with hospitals and others in health care to help them become more efficient,
decrease costs and eliminate many of the logistical burdens that detract from
their primary business -- providing health care. Strategic priorities include
signing more
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shared-risk/shared-savings agreements and investing in new cost-management
services -- beyond supplies and logistics -- that help customers reduce costs
across a greater portion of their total operating budget.
DISTRIBUTION SERVICES
Allegiance is the leading distributor of medical and laboratory products in
the United States. Allegiance can supply any of more than 200,000 different
products to its customers. Most items are available for shipment the same day
the customer requests them. Allegiance has more than 60 U.S. distribution
centers that deliver more than 880,000 boxes of products to more than 6,000
locations across the United States every day. Each order can be tracked
electronically. Allegiance has made substantial investments in information
systems to enhance its operations and improve service to customers. In addition
to its own surgical and respiratory-therapy products, Allegiance distributes the
industry's broadest array of products from more than 2,000 manufacturers to a
wide variety of health-care settings. Products range from full lines of
laboratory equipment and operating-room supplies to children's gift packs with
coloring books and crayons.
Allegiance divides its distributed products into two categories:
medical/surgical products ("med/ surg") and laboratory products. It is the
industry leader in both product categories. Allegiance's med/ surg portfolio
comprises a broad array of products, including sutures, endoscopy instruments,
needles and syringes, wound-care products, electrodes, face masks, bed pans,
wash basins, blood-pressure cuffs, stethoscopes, waste-disposal bags and others.
Increasingly, these products are being delivered just-in-time in ready-to-use
quantities. In some cases, Allegiance delivers the products directly to patient
floors. Allegiance distributes products not only to hospitals, but increasingly
to surgery centers, physician clinics, long-term and sub-acute care facilities,
home-care companies and other health-care providers. Laboratory products -- used
primarily to perform diagnostic tests -- are sold primarily to hospitals and
reference labs. These products include supplies such as test tubes, pipettes and
slides and equipment such as microscopes, centrifuges and scales.
THE VALUELINK-REGISTERED TRADEMARK- SERVICE
Allegiance's ValueLink-Registered Trademark- "stockless" inventory service
provides just-in-time deliveries of products in small, ready-to-use quantities
to hospitals and health-care networks primarily in metropolitan areas.
Allegiance was the first to bring just-in-time distribution to the health-care
industry and it remains the leader.
The ValueLink-Registered Trademark- service helps hospitals reduce inventory
levels and operating expenses. Allegiance has helped hospitals save an average
of $500,000 in one-time inventory reductions and another $450,000 in annual
operating expenses. Orders from hospitals are transmitted electronically and
products are delivered several times a day, sometimes directly to patient
floors. In some ValueLink-Registered Trademark- accounts, Allegiance personnel
work at the hospital 24 hours a day, stocking shelves as needed. Demand for this
service has been strong. Allegiance ended 1995 with 133
ValueLink-Registered Trademark- accounts, compared with 108 in 1994 and 53 at
the end of 1993. In 1995, sales in ValueLink-Registered Trademark- accounts
increased 28 percent to more than $650 million.
The ValueLink-Registered Trademark- service also serves as a channel through
which Allegiance delivers labor-saving, made-to-order packages containing
virtually every sterile and non-sterile product needed to perform dozens of
medical procedures, from open-heart bypass surgery to a hernia repair.
STRATEGIC SUPPLIER RELATIONSHIPS
In 1995, Allegiance began a process of consolidating its distribution
service around a carefully selected group of preferred suppliers, not
relinquishing product breadth, but seeking to reduce the number of suppliers
that furnish redundant items. This "best value" products strategy is designed to
strengthen Allegiance's relationships with fewer preferred suppliers, resulting
in savings to Allegiance and better service to its customers. At the same time,
Allegiance is continuing to streamline its distribution network to reduce costs,
improve service and strengthen the growing number of cost-management
relationships it is establishing with health-care providers and systems.
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SUPPLY CHAIN MANAGEMENT
Supply-chain management requires precise knowledge and planning of customer
demand. Given Allegiance's size and scope, advanced information systems, and
balance of internally manufactured and externally supplied products, Allegiance
is well-positioned to maximize service to customers and minimize inventory
levels and variability. To accelerate this process, Allegiance has made major
investments in information technology that uses EDI, or electronic data
interchange, to exchange purchasing and inventory data with many of its
suppliers and largest customers. Management believes this integrated
distribution and product offering strengthens Allegiance's financial and
competitive position. In 1995, Allegiance opened a National Drop Ship Center in
McGaw Park, Illinois, from which it distributes less-frequently ordered items.
By aggregating such products in one facility, the amount of regional inventory
variability has decreased and Allegiance has achieved lower system-wide
inventory levels.
SERVING HEALTH CARE OUTSIDE HOSPITALS
Health care increasingly is being delivered outside hospitals as health-care
providers re-evaluate their cost position and integrate into regional networks.
Many procedures previously performed in hospital operating rooms are now
performed in surgery centers, and some procedures that had been performed in
surgery centers are now taking place in physician clinics. To reach these
alternate-site customers -- surgery centers, physician clinics, subacute and
long-term care facilities, and home-care providers -- Allegiance has developed a
capability to make more frequent deliveries of smaller orders. Allegiance also
is entering into relationships with dealers that specialize in serving these
fast-growing markets. For some very small, or geographically remote customers,
Allegiance provides service through its Network Sales organization. This sales
and customer-service unit conducts business via the telephone, distributing in
some cases by commercial carrier.
PRODUCT OFFERING
Allegiance has differentiated itself by integrating its product offering
with its distribution and cost-management services. Allegiance offers the
industry's broadest range of medical and laboratory products, representing more
than 2,000 suppliers in addition to its own line of surgical and
respiratory-therapy products. In total, Allegiance can furnish up to 80 percent
of a hospital's supply needs, excluding pharmaceuticals.
Increasingly, Allegiance is working with health professionals to reduce the
variety and number of products they buy under agreements that provide incentives
for Allegiance to help customers save money. In return, customers purchase a
greater portion of their supplies from Allegiance. Allegiance's manufacturing
units custom-assemble purchased products into procedure-based modules.
Allegiance's distribution system -- the largest and most technologically
advanced of the industry -- delivers the customized packages as they are needed.
No other single company provides such a comprehensive offering.
Allegiance operates 28 manufacturing plants, producing products used in
surgery and other medical procedures. All Allegiance plants are ISO 9000
certified. Most of Allegiance's self-manufactured products hold leading sales
positions, and investing further in these product lines is a strategic priority.
Allegiance has several major product lines, most of which enjoy leading
sales positions:
CUSTOM-STERILE-TM- PRODUCTS AND THE PBDS-TM- SERVICE
Allegiance's leading Custom-Sterile-TM- products and Procedure Based
Delivery System-TM- (PBDS-TM-) service help health-care providers save time and
money by assembling customer-designated supplies into single packages for
specific procedures. Custom-Sterile-TM- packs contain sterile, disposable
supplies made by Allegiance and other manufacturers. They are used to perform
dozens of procedures, from open-heart surgery and childbirth to treating cuts
and bruises. Customers also can select items for these packs from a data base of
approximately 30,000 products from nearly 800 manufacturers. PBDS-TM- modules
contain Custom-Sterile-TM- packs along with non-sterile supplies. PBDS-TM- is
one of
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Allegiance's fastest-growing product-based cost-management services. Introduced
in 1993, the service was in place in 175 hospitals by the end of 1995 and is
expected to be in place in 400 hospitals by the end of 1996. PBDS-TM- modules
often are delivered to operating rooms and other hospital departments on a
just-in-time basis through Allegiance's ValueLink-Registered Trademark-
distribution service.
CONVERTORS-REGISTERED TRADEMARK- PRODUCTS
The Convertors-Registered Trademark- product line is a leading brand of
single-use surgical drapes, gowns and apparel. These products provide barrier
protection for patients, doctors and clinical staff during surgery, childbirth
and other procedures. Many of Allegiance's Convertors-Registered Trademark-
products are included in Custom Sterile-TM- packs.
Convertors-Registered Trademark- also provides clean-room apparel and equipment
covers for industrial manufacturers.
GLOVES
Allegiance is the world's largest manufacturer and marketer of medical
gloves. Allegiance produces latex surgical and exam gloves in Malaysia, the
world's biggest source of natural latex, as well as in the United States.
Allegiance also manufactures vinyl exam gloves in the United States.
MEDI-VAC-REGISTERED TRADEMARK- PRODUCTS
Allegiance is the world's leading producer of fluid suction and collection
systems. The Medi-Vac-Registered Trademark- line consists of disposable suction
canisters and liners, suction tubing, and supporting hardware and accessories.
These products are used in the operating room to remove fluids and debris from
the body during surgery. Outside the operating room, the products are used when
fluid must be removed from a patient. The Medi-Vac-Registered Trademark- product
line also includes wound-drainage tubing and reservoirs used to remove fluid
from closed wounds, preventing infection and promoting healing.
Medi-Vac-Registered Trademark- autotransfusion systems collect blood for
reinfusion to the patient after filtration, allowing patients to receive their
own blood instead of transfusions from donors.
RESPIRATORY THERAPY PRODUCTS
Allegiance is a leading manufacturer of respiratory-therapy products, which
are used primarily to deliver oxygen to patients suffering from respiratory
distress. This product line includes ventilator circuits (tubing used to connect
patients to ventilator machines), oxygen masks, cannulae, and suction catheters
used to clear the trachea.
V. MUELLER
Allegiance's V. Mueller product line consists of a broad range of
stainless-steel surgical instruments and related products and services. The
business was established in 1895 and is known worldwide for the quality of its
instruments. V. Mueller manufactures about a third of its product line; other
products are sourced from contract manufacturers. V. Mueller products include
clamps, needle-holders, retractors, specialty scissors and forceps. The business
unit also manufactures and markets the cost-saving Genesis-TM- container system
- -- complete instrument sets, assembled to order, sterilized and ready for use in
reusable metal containers.
SPECIAL PROCEDURE PRODUCTS
Allegiance provides specialty biopsy needles for extracting samples of bone
marrow and soft tissue, and a variety of specialty procedure trays. These
include lumbar puncture trays, for measuring pressure and taking samples of
cerebrospinal fluid; thoracentesis trays, for withdrawing fluid from chest or
abdominal cavities, or from joints or cysts; amniocentesis trays, for obtaining
amniotic fluid to assess the condition of fetuses; and other diagnostic trays
and products used by obstetricians and gynecologists.
OTHER PRODUCTS
Allegiance is a manufacturer and a marketer of a range of other leading
products. It is the world's largest producer of latex urinary drainage
catheters, and it manufactures endotracheal tubes for respiration, anesthesia
and other therapies. Allegiance produces a broad line of hot and cold packs used
to provide localized temperature therapy for orthopedic injuries and for
patients recovering from
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childbirth and surgical procedures. It also manufactures and markets a broad
line of patient-preparation, hair-removal and skin-care products such as
clippers, razors, and basins, as well as special soaps, sponges and scrub
brushes for surgeons and other operating-room personnel.
COST-MANAGEMENT SERVICES
Reducing costs while improving quality of care is the most significant
challenge facing health-care providers today. Allegiance offers the broadest
range of cost-management services in the health-care industry and is investing
significantly to expand its offering further.
Through its shared-risk/shared-savings programs, Allegiance aligns its goals
with those of its customers. Under these agreements, which Allegiance introduced
to the health-care industry in late 1994, the company and its customers agree to
share the savings if supply and related costs fall below an agreed-upon target,
or share the overage if these costs exceed the target. As of June 1, 1996,
Allegiance had shared-risk/shared-savings agreements covering 34 hospitals, or
approximately 1.5 per cent of all "adjusted beds in operation", a measure of
U.S. hospital inpatient and outpatient activity. In shared-risk/shared-savings
accounts, Allegiance assigns a clinical project manager to work with a
hospital's clinical staff to identify patterns of supply usage, reduce variation
by standardizing procedures and products, and eliminate unnecessary supplies.
Product standardization involves the selection and use of one preferred brand
from many options. Savings are realized from selecting the best-value product,
cost efficiencies from increased volume for the selected brand and dealing with
fewer vendors. Procedure standardization involves helping clinical staff reach
consensus on what supplies should be used in a given procedure, then packaging
and distributing the products. A typical assignment for a clinical project
manager lasts 24 months. Hospitals ultimately buy fewer supplies, but a greater
total portion of their supplies from Allegiance. Sales of Allegiance's surgical
products, for example, have grown more than 40 percent in these accounts, while
the hospitals' total supply costs have decreased. To the extent that savings do
not materialize from these efforts, Allegiance will be obligated to reimburse
the customer for a portion of the shortfall.
Much of the savings generated in these cost-management accounts come from
the implementation of PBDS-TM- modules, which contain Allegiance's
self-manufactured products, "best value" products from preferred suppliers, and
other third-party distributed products. These modules reduce hospital labor,
purchasing and other product and product-management costs. Rather than ordering
products separately for a procedure, customers can order a single catalog
number. Rather than nurses having to locate and assemble individual products for
a procedure, the products arrive in one package. Additional savings are achieved
when PBDS-TM- modules are delivered just-in-time, direct to the point of use
through Allegiance's ValueLink-Registered Trademark- service. Only Allegiance
can offer such a unique combination of products and cost management services.
In addition, Allegiance offers customers professional consulting services,
including modules derived from Allegiance's proprietary database of
"best-demonstrated practices," to help hospitals improve their clinical
operations, reduce lengths of stay and improve clinical outcomes. Allegiance
also offers, through its ACCESS-TM- program, the expertise and services of
leaders in other industries such as waste management, food service and property
management.
Each of Allegiance's manufacturing units also offers programs to help
customers control costs. There are programs to help health-care providers
standardize and select the most cost-effective drapes, gowns, gloves and other
products for various procedures; identify the most cost-effective mix of
products to include in custom procedure kits; sterilize, repair and refurbish
surgical instruments; and process reusable laundry, linen and textiles. The
Right Choice-TM- glove-management program, for example, helps health-care
providers select the most cost-effective glove for various procedures while
ensuring appropriate patient care and worker safety.
CONTRACTUAL ARRANGEMENTS; BUYING GROUPS
A substantial portion of Allegiance's products are sold through contracts
with purchasers. Some of these contracts are for terms of more than one year and
include limits on price increases. In the case
29
<PAGE>
of hospitals, clinical laboratories and other facilities, these contracts may
provide the customer incentives to purchase particular products or categories of
products. Some of these contracts are entered into with hospital buying groups
which seek to achieve economies of scale in aggregating multiple hospitals'
purchases from Allegiance.
For the last three years, as a percentage of Allegiance's total revenue,
sales to customers which are members of two of the largest hospital buying
groups, Premier Purchasing Partners, LP ("Premier," which is an affiliate of
Premier, Inc.) and VHA, Inc. ("VHA"), comprised 27 per cent and 16 per cent
respectively in 1995, 23 per cent and 13 per cent respectively in 1994, and 23
per cent and 13 per cent respectively in 1993. Some member hospitals in each
group are free to purchase from the vendors of their choice. The loss of the
relationship with either group would not necessarily mean the loss of sales
attributable to all members of such group. In addition, management of Allegiance
believes that its relationships with its larger customers are excellent. No
other buying group or single customer currently accounts for more than five per
cent of Allegiance's revenue.
SALES AND MARKETING
Allegiance conducts its selling efforts through its subsidiaries. These
subsidiaries have their own sales forces and direct their own sales efforts. In
the United States, Allegiance's subsidiary has implemented a "team selling"
approach with many of its hospitals, health systems and multi-hospital group
customers. This approach relies on an account manager to coordinate the various
Allegiance businesses' sales efforts. The account manager assumes responsibility
for all sales and service contacts with a given customer, acting as a focal
point, and assembles cross-functional teams as needed to meet that customer's
requirements. Allegiance manages its field sales and service organization on a
regional basis. The regional sales organization is designed to develop strong
strategic relationships with customers. In addition, sales are made to
independent distributors, dealers and sales agents. Outside of the United
States, Allegiance products are distributed through Baxter. See "ARRANGEMENTS
BETWEEN BAXTER AND ALLEGIANCE".
RAW MATERIALS SUPPLIERS
Raw materials essential to Allegiance'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 Allegiance's
products, including its latex products, are available only from a small number
of suppliers.
In some of these situations, Allegiance has long-term supply contracts with
its suppliers, although it does not consider its obligations under such
contracts to be material. Allegiance does not always recover cost increases
through customer pricing due to contractual limits and market pressure on such
price increases. See "-- CONTRACTUAL ARRANGEMENTS; BUYING GROUPS." See
"ARRANGEMENTS BETWEEN BAXTER AND ALLEGIANCE" for a description of certain
continuing supply arrangements between Baxter and Allegiance.
PATENTS AND TRADEMARKS
Allegiance does not consider any one or more of the patents and trademarks
it holds, or the licenses granted to or by it with respect to any patent or
trademark to be essential to its businesses.
COMPETITION
Allegiance 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 "RISK FACTORS -- UNITED STATES COMPETITION."
The future financial success of health-care product and service companies,
such as Allegiance, will depend on their ability to work with health-care
customers to help them enhance their competitiveness through cost management
initiatives. Allegiance management believes it can help its customers achieve
savings in the total health-care system by automating supply-ordering
procedures, optimizing distribution networks, improving utilization and
materials management and achieving economies
30
<PAGE>
through product and procedure standardization, and performing certain
non-clinical services on an outsourced basis. Allegiance management further
believes that its strategy of providing high levels of 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 anticipated realignment
of the United States health-care system that may ultimately occur.
QUALITY CONTROL
Allegiance 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 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.
GOVERNMENT REGULATION
Most of the products manufactured or sold by Allegiance 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, Baxter has removed products from the market that were
found not to meet acceptable standards. This may occur with respect to
Allegiance in the future. Product regulatory laws exist in most other countries
where Allegiance will do business.
Environmental policies of Allegiance mandate compliance with all applicable
regulatory requirements concerning environmental quality and contemplate, among
other things, appropriate capital expenditures for environmental protection.
Various non-material capital expenditures for environmental protection were made
by Baxter related to the Allegiance Business during 1995 and similar
expenditures are planned for 1996. See "LEGAL PROCEEDINGS."
EMPLOYEES
As of August 1, 1996, Allegiance employed approximately 22,000 people.
LEGAL PROCEEDINGS
Upon the Distribution, Allegiance will assume the defense of litigation
involving claims related to the Allegiance Business, including certain claims of
alleged personal injuries as a result of exposure to natural rubber latex gloves
described below. Allegiance has not been named as a defendant in this litigation
but will be defending and indemnifying Baxter Healthcare Corporation ("BHC"), as
contemplated by the Reorganization Agreement, for all expenses and potential
liabilities associated with claims pertaining to this litigation. It is expected
that Allegiance will be named as a defendant in future litigation, and may be
added as a defendant in existing litigation.
BHC was one of ten defendants named in a purported class action filed in
August 1993, on behalf of all medical and dental personnel in the state of
California who 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. On February 29, 1996, the
California Appellate Court upheld the trial court's ruling. 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
31
<PAGE>
individual claims. On July 1, 1996, the Company was served with a similar
purported class action, WOLF V. BAXTER HEALTHCARE CORP. ET AL., Circuit Court,
Wayne County, MI, 96-617844NP. The Company is the only named defendant in that
suit. As of August 19, 1996, 36 additional lawsuits have been served on BHC
containing similar allegations of sensitization to natural rubber latex
products. Allegiance intends to vigorously defend against these actions. Since
none of these cases has proceeded to a hearing on the merits, Allegiance is
unable to evaluate the extent of any potential liability, and unable to estimate
any potential loss.
Allegiance believes that a substantial portion of the liability and defense
costs related to natural rubber latex gloves cases and claims will be covered by
insurance, subject to self-insurance retentions, exclusions, conditions,
coverage gaps, policy limits and insurer solvency. BHC has notified its
insurance companies that it believes that these cases and claims are covered by
BHC's insurance. Most of BHC'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. It is not expected that the outcome of these matters will have a
material adverse effect on Allegiance's business, results of operations or
financial condition.
Under the United States Superfund statute and many state laws, generators of
hazardous waste which is sent to a disposal or recycling site are liable for
cleanup of the site if contaminants from that property later leak into the
environment. The law provides that potentially responsible parties may be held
jointly and severally liable for the costs of investigating and remediating a
site. This liability applies to the generator even if the waste was handled by a
contractor in full compliance with the law.
As of June 30, 1996, BHC has been named as a potentially responsible party
for cleanup costs at ten hazardous waste sites for which Allegiance has assumed
responsibility. Allegiance's largest exposure is at the Thermo-Chem site in
Muskegon, Michigan. Allegiance expects that the total cleanup costs for this
site will be between $44 million and $65 million, of which Allegiance's share
will be approximately $5 million. This amount, net of payments of approximately
$1 million, has been accrued and is reflected in Allegiance's combined financial
statements. The estimated exposure for the remaining nine sites is approximately
$4 million, which has been accrued and reflected in Allegiance's combined
financial statements. It is not expected that the outcome of these matters will
have a material adverse effect on Allegiance's business, results of operations
or financial condition.
BHC is a defendant in a number of other claims, investigations and lawsuits
for which Allegiance has assumed responsibility. 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
Allegiance's business, results of operations or financial condition.
PROPERTIES
Allegiance owns or has long-term leases on substantially all of its major
manufacturing facilities. Allegiance maintains 28 manufacturing facilities in
the United States, and also operates manufacturing facilities in France,
Malaysia, Malta and Mexico. Allegiance owns or leases 60 distribution centers in
the United States.
Allegiance 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 by Baxter
related to the Allegiance Business were $112 million in 1995, $122 million in
1994 and $273 million in 1993.
32
<PAGE>
ALLEGIANCE PRO FORMA FINANCIAL INFORMATION
INTRODUCTION TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
AND CONDENSED BALANCE SHEET
The following unaudited pro forma combined statements of income and
unaudited combined condensed balance sheet present the combined results of
Allegiance and its financial position assuming that the transactions
contemplated by the Distribution and certain significant divestitures described
below had been completed as of January 1, 1995.
The unaudited pro forma information has been prepared utilizing the
historical combined financial statements of Allegiance. This information should
be read in conjunction with the historical combined financial statements and
notes thereto, included elsewhere in this Information Statement. The unaudited
pro forma financial data has been included as required by the rules and
regulations of the Commission and is provided for comparative purposes only. The
unaudited pro forma financial data does not purport to be indicative of the
results of Allegiance in the future or what the financial position and results
of operations would have been had Allegiance been a separate, stand-alone entity
during the periods shown. See, for example, "Adoption of New Accounting
Standards and Policies" on page 42.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
-------------------------------------------------------------------
ADJUSTMENTS
FOR DIVESTED ADJUSTED PRO FORMA
HISTORICAL BUSINESSES (A) HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------- ----------- ----------- -------------
(IN MILLIONS, EXCEPT SHARES AND PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
Net sales...................................... $ 2,201 -- $ 2,201 $ 1(b) $2,202
Costs and expenses
Cost of goods sold........................... 1,746 -- 1,746 2(b) 1,748
Selling, general and administrative
expenses.................................... 345 -- 345 4(b) 349
Interest, net................................ -- -- -- 45(d) 45
Goodwill amortization........................ 18 -- 18 -- 18
Other (income) expense....................... (1) -- (1) -- (1)
----------- ------------- ----------- ----------- -------------
Total costs and expenses................... 2,108 -- 2,108 51 2,159
----------- ------------- ----------- ----------- -------------
Income before income taxes..................... 93 -- 93 (50) 43
Income tax expense (benefit)................... 36 -- 36 (20)(f) 16
----------- ------------- ----------- ----------- -------------
Net income................................. $ 57 -- $ 57 $ (30) $ 27
----------- ------------- ----------- ----------- -------------
----------- ------------- ----------- ----------- -------------
Share information
Shares to be issued (g)...................... 54,472,353
-------------
-------------
Net income per share (g)..................... $ 0.50
-------------
-------------
</TABLE>
33
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1995
----------------------------------------------------------------------
ADJUSTMENTS
FOR DIVESTED ADJUSTED PRO FORMA
HISTORICAL BUSINESSES (A) HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------- ----------- -------------- -------------
(IN MILLIONS, EXCEPT SHARES AND PER SHARE)
<S> <C> <C> <C> <C> <C>
Net sales...................................... $ 2,485 $(241) $ 2,244 $ (7)(b) $2,237
Costs and expenses
Cost of good sold............................ 1,940 (170) 1,770 (3)(b) 1,767
Selling, general and administrative
expenses.................................... 384 (39) 345 2(b) 351
4(c)
Interest, net................................ -- -- -- 45(d) 45
Goodwill amortization........................ 19 -- 19 -- 19
Other (income) expense....................... 2 -- 2 -- 2
----------- ------------- ----------- --- -------------
Total costs and expenses................... 2,345 (209) 2,136 48 2,184
----------- ------------- ----------- --- -------------
Income (loss) before income taxes.............. 140 (32) 108 (55) 53
Income tax expense (benefit)................... 55 (13) 42 (22)(f) 20
----------- ------------- ----------- --- -------------
Net income................................. $ 85 $ (19) $ 66 $ (33) $ 33
----------- ------------- ----------- --- -------------
----------- ------------- ----------- --- -------------
Share information
Shares to be issued (g)...................... 54,472,353
-------------
-------------
Net income per share (g)..................... $ 0.61
-------------
-------------
</TABLE>
34
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------------------
ADJUSTMENTS
FOR DIVESTED ADJUSTED PRO FORMA
HISTORICAL BUSINESSES (A) HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------- ----------- ----------- -------------
(IN MILLIONS, EXCEPT SHARES AND PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
Net sales...................................... $ 4,922 $(347) $ 4,575 $ (4)(b) $4,571
Costs and expenses
Cost of goods sold........................... 3,878 (253) 3,625 3,625
Selling, general and administrative
expenses.................................... 756 (55) 701 3 (b) 714
10 (c)
Interest, net................................ -- -- -- 90 (d) 90
Restructuring................................ 76 (76) -- -- --
Goodwill amortization........................ 38 (1) 37 -- 37
Other (income) expense....................... (302) 269 (33) 37 (e) 4
----------- ------------- ----------- ----------- -------------
Total costs and expenses................... 4,446 (116) 4,330 140 4,470
----------- ------------- ----------- ----------- -------------
Income before income taxes..................... 476 (231) 245 (144) 101
Income tax expense (benefit)................... 203 (109) 94 (56)(f) 38
----------- ------------- ----------- ----------- -------------
Net income................................. $ 273 $(122) $ 151 $(88) $ 63
----------- ------------- ----------- ----------- -------------
----------- ------------- ----------- ----------- -------------
Share information
Shares to be issued (g)...................... 54,472,353
-------------
-------------
Net income per share (g)..................... $ 1.16
-------------
-------------
</TABLE>
PRO FORMA ADJUSTMENTS
(a) To adjust the historical financial statements for the impact of the
divestitures of the diagnostics manufacturing business and the Industrial
and Life Sciences division for the periods presented, to reflect only those
ongoing business operations to be included in the Distribution. See Notes 1
and 3 to "Notes to the Combined Financial Statements" for additional
information related to these divestitures.
(b) To reflect the impact of various business arrangements between Allegiance
and Baxter effective on the Distribution Date for (i) product distribution
and distribution services under agency, services and distribution agreements
in the U.S. with terms from three to five years, (ii) contract manufacturing
agreements under which both Allegiance and Baxter agree to produce certain
products and components for each other for one to three years, and (iii) one
to five year agreements under which Baxter will distribute Allegiance
products in various countries around the world and provide export services.
For more information describing business arrangements between the companies,
see "ARRANGEMENTS BETWEEN BAXTER AND ALLEGIANCE" elsewhere in the
Information Statement.
(c) To reflect (i) the estimated incremental costs associated with being an
independent, public company, including costs associated with corporate
administrative services such as tax, treasury, risk management and
insurance, legal, stockholder relations and human resources and (ii) the
estimated reduction in expenses related to changes in Allegiance's benefit
plans.
(d) To record the estimated interest expense which would have been incurred by
Allegiance based on the incurrence of an estimated $1.2 billion of debt at a
weighted average interest rate of 7.5 percent. An increase or decrease of
0.125 percent in the weighted average interest rate would result in an
increase or decrease in interest expense of $1.5 million.
(e) To adjust the historical financial statements for a non-recurring payment
related to the transfer of rights under various service agreements with
Alliant Foodservices, Inc., to reflect only those ongoing business
operations to be included in the Distribution.
(f) To reflect the estimated tax impact, at statutory rates, for pro forma
adjustments (b) through (e).
(g) Pro forma net income per share is computed as if the 54,472,353 common
shares of Allegiance Stock, estimated to be issuable in the Distribution,
based on an assumed exchange ratio of one for five, had been outstanding for
the periods presented.
35
<PAGE>
PRO FORMA COMBINED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------------------------------------------
ADJUSTMENTS
FOR DIVESTED ADJUSTED PRO FORMA
HISTORICAL BUSINESSES (A) HISTORICAL ADJUSTMENTS PRO FORMA
----------- --------------- ----------- ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Current assets
Cash and equivalents........................... $ 5 -- $ 5 $ 40 (a) $ 45
Accounts receivable, net....................... 450 -- 450 450
Notes and other current receivables............ 26 -- 26 -- 26
Inventories.................................... 656 -- 656 656
Short-term deferred income taxes............... 119 -- 119 -- 119
Prepaid expenses............................... 16 -- 16 -- 16
----------- ------ ----------- ------------ ------------
Total current assets......................... 1,272 -- 1,272 40 1,312
----------- ------ ----------- ------------ ------------
Property, plant and equipment
Property, plant and equipment.................. 1,523 -- 1,523 -- 1,523
Accumulated depreciation and amortization...... 663 -- 663 -- 663
----------- ------ ----------- ------------ ------------
Net property, plant and equipment............ 860 -- 860 -- 860
----------- ------ ----------- ------------ ------------
Other assets
Goodwill and other intangibles................. 1,096 -- 1,096 -- 1,096
Other.......................................... 65 -- 65 -- 65
----------- ------ ----------- ------------ ------------
Total other assets........................... 1,161 -- 1,161 -- 1,161
----------- ------ ----------- ------------ ------------
Total assets............................... $ 3,293 -- $ 3,293 $ 40 $ 3,333
----------- ------ ----------- ------------ ------------
----------- ------ ----------- ------------ ------------
Current liabilities
Accounts payable and accrued liabilities....... $ 550 -- $ 550 $ 550
----------- ------ ----------- ------------ ------------
Long-term debt................................... -- -- -- 1,200 (a) 1,200
----------- ------ ----------- ------------ ------------
Long-term deferred income taxes.................. 115 -- 115 -- 115
----------- ------ ----------- ------------ ------------
Other non-current liabilities.................... 68 -- 68 -- 68
----------- ------ ----------- ------------ ------------
Stockholders' Equity
Divisional retained earnings................... 1,750 1,750 (350)(a) --
(1,400)(b)
Equity investment by parent.................... 810 810 (810)(a) --
Common stock, $1 par value, authorized
200,000,000 shares, outstanding 54,472,353
shares........................................ -- -- -- 54 (b) 54
Retained earnings.............................. -- -- -- 1,346 (b) 1,346
----------- ------ ----------- ------------ ------------
Total liabilities and stockholders'
equity.................................... $ 3,293 -- $ 3,293 $ 40 $ 3,333
----------- ------ ----------- ------------ ------------
----------- ------ ----------- ------------ ------------
</TABLE>
PRO FORMA ADJUSTMENTS
(a) To record the planned incurrence of an estimated $1.2 billion of debt to
fund distributions to Baxter and approximately $40 million of Allegiance's
initial working capital requirements. Working capital of $40 million
represents the best estimate of the level of working capital required
related to negotiated agreements with Baxter. As of the Distribution Date, a
final working capital amount will be determined pursuant to various
operational factors.
(b) To reflect the anticipated distribution of approximately 54,472,353 shares
of common stock at $1.00 par value per share (at an assumed distribution
ratio of one share of Allegiance Stock for every five shares of Baxter Stock
held on the Record Date) and the elimination of divisional retained earnings
and Baxter's equity investment effected by the anticipated distribution of
all outstanding shares of Allegiance Stock to Baxter stockholders.
36
<PAGE>
ALLEGIANCE PRO FORMA CAPITALIZATION
The following table sets forth, as of June 30, 1996, the capitalization of
Allegiance and the pro forma capitalization after giving effect to the
Distribution as described in the Notes below. This information should be read in
conjunction with the historical and pro forma combined financial statements and
the related notes thereto of Allegiance included elsewhere herein. The pro forma
information set forth below may not reflect the capitalization of Allegiance in
the future or as it would have been had Allegiance been a separate, independent
company at June 30, 1996.
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------- -----------
(IN MILLIONS, EXCEPT SHARES)
<S> <C> <C> <C>
Long-term debt
Long-term debt........................................................... $ -- $ 1,200(a) $ 1,200
Equity
Divisional retained earnings............................................. 1,750 (350)(a) --
(1,400)(b)
Equity investment by parent.............................................. 810 (810)(a) --
Stockholders' equity
Common stock, par value $1.00, authorized 200,000,000 shares, outstanding
54,472,353 shares....................................................... -- 54(b) 54
Retained earnings........................................................ -- 1,346(b) 1,346
----------- ------------- -----------
Total capitalization................................................... $ 2,560 $ 40 $ 2,600
----------- ------------- -----------
----------- ------------- -----------
</TABLE>
PRO FORMA ADJUSTMENTS
(a) To record the planned incurrence of an estimated $1.2 billion of debt to
fund distributions to Baxter and approximately $40 million of Allegiance's
initial working capital requirements. Working capital of $40 million
represents the best estimate of the level of working capital required
related to negotiated agreements with Baxter. As of the Distribution Date, a
final working capital amount will be determined pursuant to various
operational factors.
(b) To reflect the anticipated distribution of approximately 54,472,353 shares
of common stock at $1.00 par value per share (at an assumed distribution
ratio of one share of Allegiance Stock for every five shares of Baxter Stock
held on the Record Date) and the elimination of divisional retained earnings
and Baxter's equity investment effected by the anticipated distribution of
all outstanding shares of Allegiance Stock to Baxter stockholders.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis presents the factors that had a
material effect on the results of operations of Allegiance during the three
years ended December 31, 1995, and for the six-month periods ended June 30, 1996
and 1995. Also discussed is Allegiance's financial position as of December 31,
1995 and 1994, and June 30, 1996. This discussion should be read in conjunction
with the historical and pro forma combined financial statements and related
notes thereto included elsewhere in this Information Statement.
OVERVIEW
Allegiance operates in a single industry segment as a leading provider of
health-care products and services that help its health-care customers manage and
reduce the total cost of providing patient care. Through its nationwide
distribution network, Allegiance distributes a broad offering of medical,
surgical and laboratory supplies, including its own self-manufactured surgical
and respiratory-therapy products, to hospital and alternate-care customers.
Allegiance also provides cost management services to its health-care customers,
including inventory management programs, customized packaging, and procedure and
process consulting. The delivery of such a broad array of product and service
offerings requires focused investments in cost management services, information
systems and manufacturing efficiencies.
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. At the same time, the elderly segment
of the population in the U.S. and abroad is growing. These forces increasingly
shape the demand for, and supply of, medical care. Many private health-care
payors are providing incentives for consumers to seek lower cost care outside
the hospital. Many corporations' employee health plans have been restructured to
provide financial incentives for patients to utilize the most cost-effective
forms of treatment (managed care programs, such as health maintenance
organizations, have become more common), and physicians have been encouraged to
provide more cost-effective treatments. In response to these pressures, the U.S.
health-care system has undergone fundamental changes over the past several
years, and such changes and cost-containment efforts are expected to continue
throughout the foreseeable future.
While the high cost of health care is forcing hospitals and other providers
to increase their efficiency, reduce excess capacity and lower costs, Allegiance
management believes that it is well-positioned to work with health-care
providers to help them enhance their competitiveness and to distribute products
to alternate sites as treatment moves outside the hospital. Management believes
that it can help its customers achieve savings in the total health-care system
by automating supply-ordering procedures, optimizing distribution networks,
improving utilization and materials management and achieving economies through
product and procedure standardization, and performing certain non-clinical
services on an outsourced basis. Allegiance management further believes 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 anticipated realignment of the U.S. health-care
system that may ultimately occur.
RESULTS OF OPERATIONS
Allegiance's historical results of operations in 1995, 1994 and 1993 include
revenues and expenses related to certain divested businesses. The Industrial and
Life Sciences division was sold in September 1995 and the diagnostics
manufacturing businesses were sold in December 1994. See Notes 1 and
38
<PAGE>
3 to "Notes to Combined Financial Statements" for additional information related
to these divestitures. The following table presents selected financial data for
Allegiance excluding the revenue and expenses associated with these divested
businesses:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net sales........................................... $ 2,201 $ 2,244 $ 4,575 $ 4,314 $ 4,249
Costs and expenses
Cost of goods sold................................ 1,746 1,770 3,625 3,311 3,245
Selling, general and administrative expenses...... 345 346 701 711 746
Restructuring charge.............................. -- -- -- -- 304
Goodwill amortization............................. 18 18 37 37 37
Other (income) expense............................ (1) 2 (33) (3) (44)
--------- --------- --------- --------- ---------
Total costs and expenses........................ 2,108 2,136 4,330 4,056 4,288
--------- --------- --------- --------- ---------
Pretax income (loss)................................ 93 108 245 258 (39)
Income tax expense (benefit)........................ 36 42 94 101 (13)
--------- --------- --------- --------- ---------
Income (loss)....................................... $ 57 $ 66 $ 151 $ 157 $ (26)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SALES
The following table summarizes net sales, excluding the divested businesses
discussed previously, by major geographic region:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
---------------------- -----------------------------------
1996 1995 1995 1994 1993
----------- --------- ----------- ----------- ---------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Geographic region
United States............................... $ 2,052 $ 2,103 $ 4,284 $ 4,043 $ 4,001
% increase (decrease)..................... (2)% 6% 1%
International............................... 149 141 291 271 248
% increase................................ 6% 7% 9%
----------- --------- ----------- ----------- ---------
Total net sales............................... $ 2,201 $ 2,244 $ 4,575 $ 4,314 $ 4,249
% increase (decrease)..................... (2)% 6% 2%
----------- --------- ----------- ----------- ---------
----------- --------- ----------- ----------- ---------
</TABLE>
The decline in Allegiance's domestic net sales for the six months ended June
30, 1996 as compared to the same period in the prior year, is the result of
planned attempts to reduce sales growth and improve profitability in lower
margin, distributed products in the U.S. Additionally, domestic sales of
self-manufactured surgical products continue to be unfavorably impacted by the
loss of a contract with Columbia/HCA in February 1994. Columbia began
transitioning its surgical supply purchases for certain product lines in early
1994 and continued to transition other product lines throughout 1995 and 1996.
International sales increased by 6% in the first half of 1996 as compared to
1995 as a result of continued focus on the penetration of surgical products into
international markets.
Domestic net sales growth of 6% in 1995 is primarily due to increased sales
volume in lower margin, distributed products, resulting from an increase in
Valuelink-Registered Trademark- distribution agreements and the large supply and
service contract signed with the VHA in 1994. Domestic net sales in 1994 were
adversely affected by pricing pressures experienced in the domestic market place
and the loss of the Columbia/HCA surgical supply contract.
39
<PAGE>
Allegiance currently has international sales of self-manufactured surgical
products primarily in Canada, France and Germany. International sales growth of
7% in 1995 and 9% in 1994 was the result of continued focus on the penetration
of surgical products into these international markets. International sales
growth in local currency was approximately 5% in 1995 and 13% in 1994.
Allegiance expects to increase its sales efforts internationally.
COSTS AND EXPENSES
The following table summarizes Allegiance's gross margin and expense ratios,
excluding the divested businesses discussed previously:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30, YEARS ENDED DECEMBER 31,
------------------------ -------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Gross margin........................................... 20.7% 21.1% 20.8% 23.2% 23.6%
Selling, general and administrative expenses........... 15.7% 15.4% 15.3% 16.5% 17.6%
</TABLE>
The gross margin declined for the six-month period ended June 30, 1996 as
compared with the same period in 1995, due to pricing pressure in the U.S.
combined with lower sales in Allegiance's higher margin surgical products as a
result of the loss of the Columbia/HCA contract. Allegiance's gross margin
decline of 2.8 percentage points between 1993 and 1995 resulted from general
market conditions, growth in lower margin sales of third party products and the
loss of the Columbia/HCA surgical supply contract. Allegiance plans to stabilize
its gross margins by offsetting pricing pressures with manufacturing cost
efficiencies, managing its product mix more effectively, and instituting price
increases.
Total selling, general and administrative expenses remained flat between the
first half of 1996 and 1995. However, such costs as a percent of sales for the
period ended June 30, 1996 increased .3 percentage points from the comparable
period in 1995. The increase in the ratio for the six months ended June 30, 1996
is the result of the decline in sales discussed above, as the timing of expense
reduction initiatives lag the planned reduction in lower-margin product sales.
Selling, general and administrative expenses in 1993 were adversely affected by
a downsizing program. Excluding the impact of the downsizing program, selling,
general and administrative expenses as a percent of sales in 1993 would have
been approximately 16.7%. The remaining 1.4 percentage point decline in selling,
general and administrative expenses that occurred between 1993 and 1995 was the
result of initiatives taken in connection with the 1993 restructuring program
and leverage on the growth in distributed products that occurred in 1994.
Management plans to continue to leverage this ratio.
RESTRUCTURING PROGRAM
In November 1993, Baxter initiated a restructuring program to improve
shareholder value and reduce costs. The strategic actions of the program were
designed in part to make the Allegiance Business more efficient and responsive
in addressing the changes occurring in the U.S. health-care system. See Note 4
to "Notes to the Combined Financial Statements" for discussions related to the
initial charge for the program, components of the charge, any resulting changes
in estimates, and cash and non-cash utilization of the related reserves.
Since the announcement of the 1993 restructuring program, Allegiance
management 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 established financial targets. During
the first half of 1996, Allegiance utilized $55 million of restructuring
reserves, including $34 million in cash payments. In 1995, Allegiance utilized
$171 million of restructuring reserves, including $105 million in cash payments.
Cash outflows pertain primarily to employee-related costs for severance,
outplacement assistance, relocation, implementation teams and facility
consolidation. As of June 30, 1996, Allegiance had eliminated approximately
1,920 positions of the approximately 2,860 positions that were originally
expected to be affected by the program. As process
40
<PAGE>
changes were implemented in connection with the restructuring program, it became
apparent that, as certain management level positions were eliminated, other
lower cost positions were added. While this has generated savings levels
consistent with expectations, management has revised its targeted head count
reduction to 2,230 net positions. The majority of the remaining reductions will
occur in 1996 and 1997, as facility closures and consolidations are completed as
planned. In addition to improvements in the effectiveness of its sales force and
the management of customer relations, Allegiance realized direct savings in
manufacturing and administrative costs from this program of approximately $95
million in 1995 and $40 million in 1994. These savings have mitigated the effect
of declines in gross margin and have been invested in cost management
initiatives. Management is targeting direct savings of approximately $125
million in 1996, $155 million in 1997 and exceeding $155 million in 1998.
Management anticipates that these savings will continue to offset potential
future gross margin erosion and investments into cost-management initiatives.
Management further believes that its remaining restructuring reserves are
adequate to complete the actions contemplated by the restructuring program and
that future cash expenditures related to the program will be funded from cash
generated from operations.
OTHER INCOME AND EXPENSE
Other income and expense, excluding the divested businesses discussed
previously, is principally comprised of net gains associated with the disposal
or discontinuance of minor, non-strategic businesses.
PRETAX INCOME
The following table compares pretax income, excluding divested businesses
and restructuring charges discussed previously:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30, YEARS ENDED DECEMBER 31,
---------------------- -----------------------------------
1996 1995 1995 1994 1993
----------- --------- ----------- ----------- ---------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Pretax income excluding divested businesses and
restructuring charges............................... $ 93 $ 108 $ 245 $ 258 $ 265
% decrease......................................... (14)% (5)% (3)%
</TABLE>
Pretax income in the first six months of 1996 decreased primarily due to the
decline in net sales and gross margins discussed above. Pretax income decreased
in 1995 primarily as a result of gross margin declines, partially offset by a
higher level of net gains associated with the disposal or discontinuance of
minor, non-strategic businesses. Excluding net gains associated with the
disposal or discontinuance of minor, non-strategic businesses, 1995 pretax
income would have declined 16%. The decrease in 1994 is primarily the result of
gross margin declines, partially offset by net gains associated with the
disposal or discontinuance of minor, non-strategic businesses. Excluding these
net gains, 1994 pretax income would have declined 7%.
INCOME TAXES
Allegiance's effective tax rate, excluding divested businesses discussed
previously, was 39% for the six months ended June 30, 1996 and 1995.
Allegiance's effective tax rate, excluding divested businesses discussed
previously, was 38% in 1995, 39% in 1994 and 33% in 1993. The decline in the
effective tax rate in 1995 was a result of a larger proportion of earnings
generated in lower tax jurisdictions. The effective tax rate in 1993 was
impacted by the restructuring charge. Excluding this charge, the effective tax
rate in 1993 would have been 41%; the decrease in the 1994 effective tax rate
was the result of a larger proportion of earnings generated in lower tax
jurisdictions.
NET INCOME
Net income, excluding divested businesses discussed previously, decreased
14% for the six months ended June 30, 1996 as compared to the same period in
1995. This decrease is consistent with the decrease in pretax income discussed
above. Net income for 1995, excluding divested businesses and
41
<PAGE>
net gains associated with the disposal or discontinuance of minor, non-strategic
businesses, decreased 14% as a result of gross margin declines, partially offset
by a decline in the effective tax rate. After adjusting for the restructuring
charge recorded in 1993 and net gains associated with the disposal or
discontinuance of minor, non-strategic businesses, net income excluding divested
businesses decreased by approximately 4% in 1994 as a result of gross margin
declines, partially offset by the decline in Allegiance's effective income tax
rate discussed above.
ADOPTION OF NEW ACCOUNTING STANDARDS AND POLICIES
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
did not have a material impact on Allegiance.
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 has decided to
adopt FASB No. 123 through disclosure only and, accordingly, the required pro
forma information on net income and earnings per share will be included in
Allegiance's fiscal year 1996 financial statements.
As a subsidiary of Baxter, Allegiance has followed the accounting policies
established by Baxter for its consolidated group. Allegiance management believes
that the market value of Allegiance, as a stand-alone company, could be
substantially below its stockholders' equity. While neither Allegiance or Baxter
can forecast Allegiance's market value, Allegiance management is currently
evaluating the accounting policy for assessing impairment of goodwill to ensure
that its present policy remains appropriate for Allegiance as a separate,
publicly-traded company. As of June 30, 1996, actual goodwill was approximately
$1.1 billion and pro-forma stockholders' equity was $1.4 billion. Allegiance
management is considering a change from Baxter's current undiscounted cash flow
methodology to one based upon fair value. A change to a fair value methodology
could result in a material, noncash charge to Allegiance's results of operations
which would be approximately equal to the excess of Allegiance's pro-forma
stockholders' equity value over its market value and could have a substantial
effect on its financial position. If Allegiance were to adopt such a change in
accounting policy, the current annual amortization expense pertaining to
goodwill would be reduced in future periods by 3.4 per cent of any resulting
reduction in the value of goodwill, and would produce a potentially significant
increase in net income. Such a change in accounting policy would be subject to
the review and approval by Allegiance's board of directors.
IMPACT OF INFLATION
In recent years, Allegiance has experienced increases in its labor and
material cost base influenced, in part, by general inflationary trends. While
not directly related to inflationary trends, Allegiance's revenue base 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 Allegiance's pricing levels for
products sold to health-care customers. Management expects that these trends
will continue.
LIQUIDITY AND CAPITAL RESOURCES
Management assesses Allegiance's liquidity in terms of its overall ability
to mobilize cash to support ongoing business levels and to fund its growth.
Management believes that it has sufficient cash flow from operations and
financial flexibility to attract long-term capital to support normal operating
activities and fund short-term and long-term growth objectives.
Allegiance's current assets exceeded current liabilities by $722 million at
June 30, 1996 versus an excess of $680 million and $1,055 million at December
31, 1995 and 1994, respectively. Current assets
42
<PAGE>
at June 30, 1996 included accounts and notes receivable of $476 million and
inventories of $656 million. These sources of liquidity are convertible into
cash over a relatively short period of time and thus, will help Allegiance
satisfy normal operating cash requirements.
DEBT AND FINANCIAL INSTRUMENTS
Prior to the Distribution Date, Allegiance expects to have revolving credit
facilities amounting to $1,500 million. These facilities will enable Allegiance
to borrow funds on an unsecured basis at variable interest rates. The banks
participating in the facilities are expected to commit to maintain a $1,200
million facility for five years and a $300 million facility for one year.
Allegiance expects to incur indebtedness of approximately $1,100 million from
the five year facility on or about the Distribution Date. This indebtedness will
be used to fund distributions to Baxter. Any remaining proceeds, together with
additional borrowings after the Distribution Date, will be used for initial
working capital requirements. Under the Reorganization Agreement, Allegiance may
be required to pay Baxter or Baxter may be required to pay Allegiance an amount
to adjust working capital, which payment will be based upon specified operating
factors as of the Distribution Date. Allegiance anticipates that it will convert
a significant portion of its initial debt to longer term fixed rate debt,
contingent upon acceptable market conditions. The debt that is not converted
will be managed as part of a short-term loan portfolio supported by a long-term
credit facility. Management expects that Allegiance's senior debt will be
investment grade.
Assuming a debt level of $1.2 billion, Allegiance's long-term debt as a
percent of total capital would have been 46.2% at June 30, 1996.
Net-debt-to-net-capital (after consideration of cash equivalents including
working capital) would have been 44.4% at June 30, 1996. Allegiance expects to
maintain a net-debt-to-net-capital ratio between 40% and 45% over the next
several years.
Allegiance intends to fund its short-term and long-term obligations as they
mature through cash flow from operations or by issuing additional debt.
Allegiance believes it will have lines of credit adequate to support ongoing
operational, capital and restructuring requirements. Beyond that, Allegiance
believes it has sufficient financial flexibility to attract long-term capital on
acceptable terms as may be needed to support its growth objectives.
CASH FLOW FROM OPERATIONS
Cash flow provided by operations (which includes working capital components)
was $136 million and $139 million for the six months ended June 30, 1996 and
1995, respectively. Cash flow provided by operations for 1995, 1994 and 1993,
was $253 million, $422 million and $336 million, respectively. The decrease in
cash flow provided by operations for the first six months of 1996 was the result
of a decline in earnings (resulting prinicpally from the divestiture of the
Industrial and Life Sciences division), partially offset by improved balance
sheet management. The decline in cash flow provided by operations in 1995 was
primarily the result of a decline in earnings, resulting principally from the
divestitures of the Industrial and Life Sciences division and the diagnostics
manufacturing businesses. The increase in 1994 was the result of lower cash flow
from operations in 1993. The lower cash flow provided by operations in 1993 was
the result of changes in working capital components (principally inventory and
accrued liabilities).
To facilitate an emphasis on cash flow provided by operations, management
monitors an internal performance measure called "operational cash flow."
"Operational cash flow" is defined as cash flow provided by operations per
Allegiance's combined statement of cash flows, less capital expenditures and
plus the tax effect of divestiture gains (losses). This measure evaluates each
operating unit on all aspects of cash flow under its direct control. In
addition, the incentive compensation programs for Allegiance's senior management
in each operating unit include significant emphasis on the attainment of both
"operational cash flow" as well as earnings objectives.
43
<PAGE>
The following table reconciles cash flow provided by operations, as
determined by generally accepted accounting principles, to Allegiance's internal
measure of "operational cash flow" (brackets denote cash outflows):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Cash flow provided by operations per Allegiance's combined
statements of cash flows................................... $ 136 $ 139 $ 253 $ 422 $ 336
Capital expenditures........................................ (33) (48) (112) (122) (273)
Other....................................................... -- (2) 41 3 15
--------- --------- --------- --------- ---------
Total "operational cash flow"........................... $ 103 $ 89 $ 182 $ 303 $ 78
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The increase in "operational cash flow" in the first six months of 1996 as
compared to the same period in 1995 is primarily the result of reduced capital
expenditures, partially offset by the decline in cash flow provided by
operations discussed above. The decline in "operational cash flow" in 1995 was
primarily the result of the decline in cash flow provided by operations
discussed above. The increase in 1994 was the reuslt of lower "operational cash
flow" in 1993. The lower "operational cash flow" in 1993 was the result of cash
flow provided by operations as discussed above and higher capital expenditures
resulting from the diagnostics manufacturing businesses.
INVESTMENT TRANSACTIONS
Net investment transactions for Allegiance are comprised of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Capital expenditures........................................ $ (33) $ (48) $ (112) $ (122) $ (273)
Acquisitions................................................ (14) -- (5) (2) (14)
Proceeds from asset dispositions............................ (10) 178 626 107 68
--- --------- --------- --------- ---------
Total investment transactions, net...................... $ (57) $ 130 $ 509 $ (17) $ (219)
--- --------- --------- --------- ---------
--- --------- --------- --------- ---------
</TABLE>
The reductions in capital expenditures in 1995 and 1994 are primarily the
result of Allegiance's divestitures of the Industrial and Life Sciences division
and the diagnostics manufacturing businesses. Allegiance management expects to
invest in capital expenditures at levels consistent with 1995 and 1994,
principally for improvements of its existing facilities, construction of new
facilities and system upgrades.
The acquisitions summarized in the above table involved no significant
change to Allegiance's strategic direction, and were made for the purpose of
acquiring technologies, broadening product lines and service offerings, or
expanding market coverage.
Proceeds from asset dispositions in the first half of 1995 primarily related
to cash received from the collection of notes receivable related to Allegiance's
divestiture of the diagnostics manufacturing businesses in December 1994. The
proceeds received from asset dispositions for the year ended December 31, 1995,
primarily related to cash received in connection with Allegiance's divestiture
of its Industrial and Life Sciences division in September 1995 and the
collection of notes receivable related to the divestiture of Allegiance's
diagnostics manufacturing businesses. See Notes 1 and 3 to "Notes to Combined
Financial Statements" for additional information related to these divestitures.
LITIGATION
See Note 12 to "Notes to Combined Financial Statements" for a detailed
description of the status of Allegiance's litigation.
44
<PAGE>
Under the U.S. Superfund statute and many state laws, generators of
hazardous waste which is sent to a disposal or recycling site are liable for
cleanup of the site if contaminants from that property later leak into the
environment. The law provides that potentially responsible parties may be held
jointly and severally liable for the costs of investigating and remediating a
site. This liability applies to the generator even if the waste was handled by a
contractor in full compliance with the law.
As of June 30, 1996, Baxter has been named as a potentially responsible
party for cleanup costs at ten hazardous waste sites, for which Allegiance has
assumed responsibility. The largest assumed exposure is at the Thermo-Chem site
in Muskegon, Michigan. Allegiance expects that the total cleanup costs for this
site will be between $44 million and $65 million, of which Allegiance's share
will be approximately $5 million. This amount, net of payments of approximately
$1 million, has been accrued and is reflected in Allegiance's combined financial
statements. The estimated exposure for the remaining nine sites is approximately
$4 million, which has been accrued and reflected in Allegiance's combined
financial statements.
Upon resolution of any of the uncertainties described in Note 12 to "Notes
to Combined Financial Statements," Allegiance may incur charges in excess of
available reserves. Management does not believe that such charges will have a
material impact on Allegiance's results of operations, cash flow or financial
position.
45
<PAGE>
ALLEGIANCE MANAGEMENT
BOARD OF DIRECTORS
Immediately after the Distribution Date, the Allegiance Board is expected to
consist of the individuals named in the table below. The Allegiance Board will
be divided into three classes. Each director will serve for a term expiring at
the annual meeting of stockholders in the year indicated below. See "CERTAIN
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION,
BY-LAWS AND STATE LAW -- CERTIFICATE OF INCORPORATION AND BY-LAWS."
<TABLE>
<CAPTION>
NAME; AGE TERM AS DIRECTOR BACKGROUND
- -------------------------- --------------------- --------------------------------------------------------------
<S> <C> <C>
Lester B. Knight Expires 1999 Mr. Knight will be the chairman of the board and chief
Age 38 executive officer of Allegiance. At Baxter, he has been
executive vice president, responsible for the U.S. Healthcare
business since 1992, and a director of Baxter since 1995. He
was elected a corporate vice president of Baxter in 1990. Mr.
Knight joined Baxter in 1981.
Joseph F. Damico Expires 1998 Mr. Damico will be the president and chief operating officer
Age 42 of Allegiance. At Baxter, he has been group vice president,
responsible for the Field Sales, Health Systems, and
Distribution organizations in the U.S. Healthcare business
since 1993. He was elected a corporate vice president of
Baxter in 1992. He was president of Baxter's Pharmaseal
division in 1992, and prior thereto, was president of the
Convertors/Custom Sterile business since 1989. Mr. Damico
joined Baxter in 1979.
Silas S. Cathcart Expires 1997 Mr. Cathcart is a director of General Electric Company and The
Age 70 Quaker Oats Company. Mr. Cathcart is also a trustee of
Northern Funds Mutual Fund. From 1985 to 1987, and from 1990
to the present, Mr. Cathcart served as a director of Baxter.
From 1970 to 1985 he served as a director of American Hospital
Supply Corporation. Mr. Cathcart served as chairman of the
board and chief executive officer of Kidder, Peabody Group
Inc., an investment banking firm, from 1988 to 1989, and as
president and chief executive officer from 1987 to 1988. From
1972 to 1986, he was chairman of Illinois Tool Works, Inc.
David W. Grainger Expires 1999 Since 1968, Mr. Grainger has been chairman of the board of W.
Age 68 W. Grainger, Inc., a nationwide distributor of equipment,
components and supplies. He joined W. W. Grainger, Inc. in
1952. From 1990 to the present, Mr. Grainger has served as a
director of Baxter.
Arthur F. Golden Expires 1998 Since 1978, Mr. Golden has been a partner of Davis, Polk &
Age 50 Wardwell, a general practice law firm. He is a director of
Esco Electronics Corporation and Borg Warner Security
Corporation.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
NAME; AGE TERM AS DIRECTOR BACKGROUND
- -------------------------- --------------------- --------------------------------------------------------------
Michael D. O'Halleran Expires 1997 Since 1995, Mr. O'Halleran has been president of Aon Group,
Age 46 Inc., an insurance holding company, and since 1988, he has
been the chairman of the board of Aon Risk Services, Inc., a
subsidiary of that company.
<S> <C> <C>
Kenneth D. Bloem Expires 1999 Since 1994, Mr. Bloem has been the chief executive officer of
Age 50 The Advisory Board Company, a privately held research and
publishing company. From 1989 to 1994, he was the president of
Stanford University Hospital.
Connie Curran, Ed.D. Expires 1998 Since 1995, Ms. Curran has been president of CurranCare, Inc.,
Age 49 a nation-wide hospital based home care management company.
From 1990 to 1995, she was the vice chairman/national director
of patient services of APM, Inc.
</TABLE>
Messrs. Knight, Cathcart and Grainger are currently directors of Baxter and will
resign such positions shortly prior to the Distribution Date.
COMMITTEES OF THE BOARD OF DIRECTORS
Allegiance will be managed under the direction of its Board of Directors.
The Allegiance Board will meet on a regular basis to review Allegiance's
operations, strategic and business plans, acquisitions and dispositions, and
other significant developments affecting Allegiance, and to act on matters
requiring Allegiance Board approval. It will also hold special meetings when
important matters require Allegiance Board action between scheduled meetings.
Members of senior management will be invited to Allegiance Board meetings to
discuss the progress of and future plans relating to their areas of
responsibility.
To facilitate independent director review, and to make the most effective
use of the directors' time and capabilities, the Allegiance By-laws establish
various committees, including those described below. The Allegiance Board is
permitted to establish other committees from time to time as it deems
appropriate.
THE AUDIT AND PUBLIC POLICY COMMITTEE
The Audit and Public Policy Committee will review the scope of the audit by
the independent auditors, inquire into the effectiveness of Allegiance's
accounting and internal control functions, and recommend to the Allegiance Board
any changes in the appointment of independent auditors which the committee may
deem to be in the best interests of the corporation and its stockholders. The
committee will also assist the Allegiance Board in establishing and monitoring
compliance with the ethical standards of Allegiance. The Audit and Public Policy
Committee will also review the policies of Allegiance to assure they are
consistent with its social responsibility to employees, customers and to
society, including policies relating to health and safety and ethics. The
committee shall consist solely of directors who are independent of management.
Members of this committee are expected to be Mr. O'Halleran (Chairman), Mr.
Cathcart, Mr. Grainger, Mr. Golden, Mr. Bloem and Ms. Curran.
THE COMPENSATION AND NOMINATING COMMITTEE
The Compensation and Nominating Committee will determine the compensation of
officers, other than the chairman of the board and chief executive officer,
exercise the authority of the Allegiance Board concerning employee benefit
plans, serve as the administration committee of Allegiance's stock option plans,
and advise the Allegiance Board on other compensation and employee benefit
matters. In addition, the committee will make recommendations to the Allegiance
Board regarding candidates for election as directors of Allegiance. The
committee will also advise the Board on board committee structure and
membership. The committee shall consist solely of directors who are independent
of management. Members of this committee are expected to be Mr. Cathcart
(Chairman), Mr. Grainger, Mr. Golden, Mr. O'Halleran, Mr. Bloem and Ms. Curran.
47
<PAGE>
COMPENSATION OF DIRECTORS
Cash compensation of non-employee directors will consist of a $1,000 fee for
each board and each committee meeting attended. Chairpersons of committees will
receive an additional annual retainer of $3,000. Employee directors are not
compensated separately for their board or committee activities.
In addition, to align the directors' interests more closely with the
interest of all of the company's stockholders, each non-employee director will
receive an annual retainer in the form of 10,000 Allegiance Stock Options.
EXECUTIVE OFFICERS
Set forth below is information with respect to those individuals who are
expected to serve as executive officers of Allegiance immediately following the
Distribution. Those individuals named below who are currently officers or
employees of Baxter will resign from all such positions prior to or as of the
Distribution Date.
LESTER B. KNIGHT, 38, will be chairman of the board and chief executive
officer of Allegiance. At Baxter, he has been executive vice president,
responsible for the U.S. Healthcare business since 1992. Mr. Knight joined
Baxter in 1981 and served in several manufacturing, research-and-development and
management positions before being named general manager of the company's Renal
business in 1987. He was named president of the Renal business in 1988 and
president of the I.V. Systems business the following year. He was elected a
corporate vice president of Baxter in 1990, and was named executive vice
president in 1992. Mr. Knight is a member of the Board of Directors of Baxter,
but will resign from that board shortly prior to the Distribution Date.
JOSEPH F. DAMICO, 42, will be president and chief operating officer of
Allegiance. At Baxter, he has been group vice president, responsible for the
Field Sales, Health Systems, and Distribution organizations in the U.S.
Healthcare business since 1993. Mr. Damico joined Baxter in 1979 as a sales
representative and served in a variety of management positions before being
named vice president and general manager of the company's Custom Sterile
division in 1987. He was named president of the Convertors/Custom Sterile
business in 1989 and also assumed responsibility for Baxter's Pharmaseal
division in 1992. He was elected a corporate vice president the same year and
named group vice president in 1993.
PETER B. MCKEE, 58, will be senior vice president and chief financial
officer of Allegiance. He joined Baxter in May 1996 from FoxMeyer Health
Corporation, a leading pharmaceutical distributor, where he had been senior vice
president and chief financial officer since 1993. Mr. McKee's career as a
financial executive spans more than 35 years. Before joining Dallas-based
FoxMeyer, he worked in financial consulting and held CFO positions at Metro
Airlines and Swift Independent Packing. He also has held senior financial
positions at Ford Motor Company and Cooper Industries Inc.
KATHY BRITTAIN WHITE, 46, will be senior vice president and chief
information officer of Allegiance. At Baxter, she has been corporate vice
president and chief information officer since 1995. She came to Baxter from
AlliedSignal Corporation, where she had served as vice president, information
systems and services, since 1993. Prior to that, she was vice president,
corporate services, for Guilford Mills, Inc.
ROBERT B. DEBAUN, 46, will be a corporate vice president of Allegiance,
responsible for human resources. At Baxter, he has been vice president of human
resources for the U.S. Distribution organization since 1991. Mr. DeBaun joined
Baxter in 1981 as manager of college relations. In 1986, after a series of
increasingly responsible positions, he was named vice president, human
resources, for Baxter's I.V. Systems group.
MARK J. EHLERT, 42, will be a corporate vice president of Allegiance,
responsible for quality assurance and regulatory affairs. At Baxter, he has been
vice president, quality and regulatory affairs, for
48
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the U.S. Sales and Distribution organization since 1994. Mr. Ehlert joined
Baxter in 1975. In 1990, after a series of increasingly responsible positions,
he was promoted to general manager of Baxter's Singapore manufacturing
operations.
GAIL GAUMER, 44, will be a corporate vice president of a subsidiary of
Allegiance, responsible for strategy and business development as well as cost
management services. At Baxter, she has been president of marketing, strategy
and business development for the U.S. Healthcare business since 1995. Ms. Gaumer
joined Baxter in 1980 and held a number of positions in its subsidiary's Renal
business. Most recently, she was president of Renal-Europe. Before that, she was
vice president of global marketing, planning and new business development, and
then vice president and general manager for the Renal business. Before joining
Baxter, she worked for ALZA Corporation, a drug-delivery company. Ms. Gaumer is
a director of FemRx, Inc.
ROBERT J. ZOLLARS, 39, will be a group vice president of a subsidiary of
Allegiance. He will lead the regional companies and health systems organizations
of Allegiance. At Baxter, he has been president, U.S. Distribution, responsible
for its Hospital Supply/Scientific Products, Life Sciences, Hospitex, Dietary
Products, and ValueLink distribution businesses since 1994. Mr. Zollars joined
Baxter in 1979 as a sales representative for the Scientific Products division
and rose to vice president and general manager of the division in 1983. In 1986,
he was named president of the Dietary Products division, and in 1990, became
president of the I.V. Therapy business. He was named president of the Hospital
Supply division in 1992, and assumed additional responsibility for Scientific
Products in 1993.
RICHARD C. ADLOFF, 38, will be a corporate vice president and controller of
Allegiance. He has been vice president of finance for the U.S. Healthcare
business since 1994. Mr. Adloff joined Baxter in 1980 with the Hospital Supply
division. In 1990, after a series of increasingly responsible positions in
distribution and manufacturing, he was promoted to vice president -- finance of
IV Systems.
WILLIAM L. FEATHER, 49, will be senior vice president general counsel and
secretary of Allegiance and will head its law function. At Baxter, he has been
associate general counsel for the U.S. Healthcare business since January 1996.
Mr. Feather joined Baxter in 1986 as corporate counsel. He was promoted to
senior counsel in 1990 and assistant general counsel in January 1994.
LEONARD G. KUHR, 38, will be a corporate vice president and treasurer of
Allegiance. He will also supervise its tax function. At Baxter, he has been vice
president, capital markets, in a subsidiary's Treasury group since 1995. From
1992 to 1995, Mr. Kuhr was vice president, finance, for Baxter's Surgical
business. Mr. Kuhr joined Baxter in 1979 and served in a variety of management
positions in the Corporate Tax department, in both domestic and international
functions. He was named vice president and controller of the Specialty Business
group in the company's U.S. Distribution business in 1992.
ROGER L. SISTERMAN, 52, will be a corporate vice president of a subsidiary
of Allegiance, responsible for manufacturing worldwide. At Baxter, he was vice
president of manufacturing and operations for the U.S. Healthcare business since
1994. Mr. Sisterman joined Baxter in 1977 and held a number of positions. In
1985, Mr. Sisterman became director of materials management for the company's
Pharmaseal division. In 1987, he was promoted to vice president of manufacturing
for Baxter Custom Sterile, and in 1991, for Convertors/Custom Sterile.
1995 COMPENSATION OF EXECUTIVE OFFICERS
The following table shows the 1995 compensation for services rendered by the
chairman of the board and chief executive officer of Allegiance and the
individuals who are expected to be the next four most highly compensated
executive officers of Allegiance (collectively, the "named executive officers")
based on their 1995 Baxter compensation. The compensation shown in this table
was paid by Baxter (or its subsidiaries) for all of their services to Baxter and
its subsidiaries. References to "restricted stock" and "stock options" mean
restricted shares of Baxter Stock and options to purchase Baxter
49
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Stock. Amounts shown are for each individual in their last position with Baxter,
and do not necessarily reflect the compensation which these five individuals
will earn in their new capacities as executive officers of Allegiance.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------------
AWARDS
ANNUAL COMPENSATION ------------------------
---------------------------------------------- RESTRICTED SECURITIES PAYOUTS
OTHER ANNUAL STOCK UNDERLYING ------------- ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) OPTIONS LTIP PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(1) ($)(2) ($)(3) (#)(4) ($)(5) ($)(6)
- ---------------------------- --------- --------- --------- ------------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lester B. Knight 1995 $ 367,000 $ 350,000 $ 12,134 $ 23,139 44,800 -0- $ 23,241
Chairman of the Board &
Chief Executive Officer
Joseph F. Damico 1995 $ 285,000 $ 170,000 $ 2,432 -0- 22,900 -0- $ 13,866
Chief Operating Officer
Kathy B. White 1995 $ 182,692 $ 142,500 $ 929 $ 319,600 41,000 -0- $ 0
Corporate Vice President
Robert J. Zollars 1995 $ 230,000 $ 43,200 -- -0- 10,000 -0- $ 9,346
Corporate Vice President
Gail Gaumer 1995 $ 200,000 $ 43,200 -- -0- 8,500 -0- $ 8,446
Corporate Vice President
</TABLE>
- ------------------------------
(1) Amounts shown include cash compensation earned by the named executive
officers during the year indicated, including amounts deferred at the
election of those officers. Bonuses are paid in the year following the year
during which they are earned.
(2) As permitted by the Commission's rules regarding disclosure of executive
compensation, this column excludes perquisites and other personal benefits
for the named executive officer if their total cost in 1995 did not exceed
the lesser of $50,000 or 10% of the total of annual salary and bonus
reported for the named executive officer for such year.
(3) Amounts shown represent the market value at the date of grant, without
giving effect to the diminution in value attributable to the restrictions on
such stock. The amounts shown in this column include grants to the specified
named executive officers under Baxter's 1989 Long-Term Incentive Plan. The
restricted shares granted to Mr. Knight and Ms. White under that Plan could
be earned based on 1996 performance and, if so, they would ordinarily vest
on December 31, 1997. As of December 31, 1995, the number and value of the
aggregate Baxter restricted stock holdings of the named executive officers
are as follows: Mr. Knight -- 22,000 shares ($921,250); Mr. Damico -- 11,508
shares ($481,898); Ms. White -- 9,400 shares ($393,625); Mr. Zollars --
6,931 shares ($290,236); Ms. Gaumer -- 4,408 shares ($184,585). Dividends
are payable on all outstanding shares of Baxter restricted stock held by all
executives at the same rate and time and in the same form in which dividends
are payable on all outstanding shares of Baxter Stock, as required by
Baxter's 1987 Incentive Compensation Program.
(4) No Stock Appreciation Rights ("SARs") were granted by Baxter in 1995, and
there are no outstanding SARs held by any employee or director of
Allegiance. The number shown represents the number of shares of Baxter Stock
for which Baxter options were granted to the named executive officer.
(5) The Commission's rules regarding disclosure of executive compensation allow
awards of restricted stock that are subject to performance-based conditions
on vesting, in addition to lapse of time and/or continued service with
Baxter, to be reported as awards under a long-term incentive plan ("LTIP"),
instead of as restricted stock awards. The rules define an LTIP as a plan
providing compensation intended to serve as incentive for performance to
occur over a period longer than one fiscal year. Restricted stock awards
which are earned based on annual financial performance cannot be reported as
LTIP awards, even if, as in the case of the restricted stock awards
identified in the "Restricted Stock Awards" column, the stock may not be
earned and vested until the end of at least two years.
(6) Amounts shown represent Baxter matching contributions in Baxter's Incentive
Investment Plan, a qualified section 401(k) profit sharing plan, additional
matching contributions in Baxter's deferred compensation plan and the dollar
value of Baxter split-dollar life insurance benefits. Those three amounts
for 1995, expressed in the same order as identified above, for the named
executive officers are as follows: Mr. Knight -- $4,500, $18,510, and $231;
Mr. Damico -- $4,500, $9,300, and $66; Ms. White -- (none); Mr. Zollars --
$4,500, $4,762, and $84; Ms. Gaumer -- $4,500, $3,852, and $94.
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Of the five named executive officers, Mr. Zollars and Ms. Gaumer are
eligible to receive a special incentive payment equal to one times annual base
salary. The payment will be made three months after the Distribution Date as
long as they have not voluntarily resigned, been terminated for cause, or have
accepted a position outside of the Allegiance organization.
STOCK OPTION GRANTS
The following table contains information relating to the Baxter stock option
grants made in 1995 under Baxter's 1994 Incentive Compensation Program to the
named executive officers.
OPTION GRANTS TABLE
OPTION GRANTS IN LAST FISCAL YEAR (1)(6)(7)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS POTENTIAL REALIZABLE VALUE AT ASSUMED
SECURITIES GRANTED TO ANNUAL RATES OF STOCK
UNDERLYING EMPLOYEES IN EXERCISE OR PRICE APPRECIATION FOR OPTION TERM
OPTIONS FISCAL BASE PRICE EXPIRATION ------------------------------------------
NAME GRANTED (#) YEAR (2) ($/SH)(3) DATE 0% ($) 5% ($)(4) 10% ($)(4)
- ----------------------------- ----------- ------------- ----------- ----------- --------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mr. Knight................... 44,800 0.9% $ 37.25 7/29/05 $ -0- $ 1,049,498 $ 2,659,637
Mr. Damico................... 22,900 0.4% $ 37.25 7/29/05 $ -0- $ 536,462 $ 1,359,502
21,000 0.4% $ 37.25 7/29/05 $ -0- $ 491,952 $ 1,246,705
20,000 0.4% $ 34.00 4/24/05 $ -0- $ 427,648 $ 1,083,744
Ms. White (5)................
Mr. Zollars.................. 10,000 0.2% $ 37.25 7/29/05 $ -0- $ 234,263 $ 593,669
Ms. Gaumer................... 8,500 0.2% $ 37.25 7/29/05 $ -0- $ 199,124 $ 504,619
All Stockholders............. N/A N/A N/A N/A $ -0- $6,369,603,169 $16,141,840,341
All Optionees................ 5,200,000 100.0 % $ 37.25 7/29/05 $ -0- $ 121,816,760 $ 308,707,880
Optionee Gain as % of All
Stockholders Gain........... N/A N/A N/A N/A N/A 1.9% 1.9%
</TABLE>
- ------------------------------
(1) No SARs were granted by Baxter in 1995.
(2) In 1995, Baxter granted options on approximately 5.2 million shares of
Baxter Stock to approximately 6,400 employees.
(3) The exercise price shown is the closing price of Baxter Stock on the date of
grant, which was July 31, 1995 for all options except the option granted to
Ms. White for 20,000 shares. The exercise price shown for the 20,000 shares
granted to Ms. White is the closing price of Baxter Stock on the date of
grant which was April 24, 1995.
(4) The amounts shown in these two columns represent the potential realizable
values using the options granted and the exercise price. The assumed rates
of stock price appreciation are set by the Commission's executive
compensation disclosure rules and are not intended to forecast the future
appreciation of Baxter Stock.
(5) The 20,000 share grant to Ms. White was an element of the compensation
package provided to her upon joining Baxter in her current role. The 21,000
share grant she received was part of Baxter's normal option grant process.
(6) All options shown in this table except for the 20,000 share grant to Ms.
White, become exercisable five years from the date of grant, subject to
accelerated vesting as follows. One hundred percent of the option will
become exercisable on the first business day after the ninetieth consecutive
calendar day during which the average fair market value of Baxter Stock
equals or exceeds $50 per share. Ms. White's 20,000 share grant becomes
exercisable five years from the date of grant, subject to accelerated
vesting as follows. Fifty percent of the option became exercisable on
December 27, 1995; fifty percent of the option will become exercisable on
the first business day after the ninetieth consecutive calendar day during
which the average fair market value of Baxter Stock equals or exceeds $50
per share. The exercise price may be paid in cash or shares of Baxter Stock.
Baxter's 1994 Program provides that if specified corporate control changes
occur, all outstanding options will become exercisable immediately.
(7) It is expected that the Compensation Committee of the Board of Directors of
Baxter will adopt an equitable adjustment formula applicable to all options
to purchase Baxter Stock which are outstanding as of the Distribution Date.
The formula, which is consistent with tax and accounting rules, is intended
to preserve the value of the options after the Distribution Date.
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<PAGE>
STOCK OPTION EXERCISES
The following table contains information relating to the exercise of Baxter
stock options by the named executive officers in 1995 as well as the number and
value of their unexercised Baxter options as of December 31, 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES (1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES FISCAL YEAR-END (#)(2) AT FISCAL YEAR END ($)(3)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Knight..................... -0- N/A 46,757 53,800 $ 619,426 $ 350,075
Mr. Damico..................... -0- N/A 32,140 27,733 $ 486,278 $ 182,652
Ms. White...................... -0- N/A 10,000 31,000 $ 78,750 $ 175,875
Mr. Zollars.................... -0- N/A 27,784 12,534 $ 429,462 $ 82,722
Ms. Gaumer..................... -0- N/A 20,320 9,867 $ 310,449 $ 61,014
</TABLE>
- ------------------------
(1) No Baxter SARs were exercised by any Allegiance employee in 1995, and there
are no outstanding Baxter SARs held by any employee or director of
Allegiance.
(2) The sum of the numbers under the Exercisable and Unexercisable columns of
this heading represents each named executive officer's total outstanding
Baxter options.
(3) The dollar amounts shown under the Exercisable and Unexercisable columns of
this heading represent the number of exercisable and unexercisable Baxter
options, respectively, which were "In-the-Money" on December 31, 1995,
multiplied by the difference between the closing price of Baxter Stock on
December 31, 1995, which was $41.875 per share, and the exercise price of
the Baxter options. For purposes of these calculations, In-the-Money options
are those with an exercise price below $41.875 per share.
BAXTER PENSION PLAN
The Baxter International Inc. and Subsidiaries Pension Plan's (the "Baxter
Pension Plan") normal retirement benefit equals 1.75% of the average of an
employee's five highest consecutive calendar years of earnings out of his or her
last ten calendar years of earnings ("Final Average Pay"), multiplied by the
employee's years of benefit service, as determined by the Baxter Pension Plan.
In general, the earnings covered by the Baxter Pension Plan include salary,
annual cash bonuses and other regular pay. The figures shown include benefits
payable under the Baxter Pension Plan and Baxter's related defined benefit
excess pension plan. The estimates assume that benefit payments begin at age 65
under a single life annuity form. The figures are net of the Social Security
offset specified by the Baxter Pension Plan's benefit formula and therefore do
not include Social Security benefits payable from the federal government. The
primary Social Security amount used in the calculations is that payable for an
individual attaining age 65 in 1995.
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PENSION PLAN TABLE
Estimated Annual Retirement Benefits
Years of Pension Plan Participation (1)
<TABLE>
<CAPTION>
FINAL
AVERAGE
PAY (1) 15 20 25 30 35
- ------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 100,000 $ 22,300 $ 29,800 $ 37,200 $ 44,700 $ 52,300
200,000 48,600 64,800 81,000 97,200 113,500
300,000 74,800 99,800 124,700 149,700 174,800
400,000 101,100 134,800 168,500 202,200 236,000
500,000 127,300 169,800 212,200 254,700 297,300
600,000 153,600 204,800 256,000 307,200 358,500
700,000 179,800 239,800 299,700 359,700 419,800
</TABLE>
- ------------------------
(1) As of January 1, 1996, the named executive officers' years of Baxter Pension
Plan participation and Final Average Pay for purposes of calculating annual
retirement benefits payable under the Baxter Pension Plan are as follows:
Mr. Knight -- 13 years and $538,702; Mr. Damico -- 16 years and $370,048;
Ms. White -- 0 years and $0; Mr. Zollars -- 16 years and $254,798; Ms.
Gaumer -- 16 years and $216,743.
Although age 65 is the normal retirement age under the Baxter Pension Plan,
the Baxter Pension Plan has early retirement provisions based on a "point"
system. Under the point system, each participant is awarded one point for each
year of benefit service as determined by the Baxter Pension Plan and one point
for each year of age. Participants who terminate employment after accumulating
65 points, and who wait to begin receiving their Baxter Pension Plan benefits
until they have 85 points, receive the same Baxter Pension Plan benefits they
would otherwise receive at age 65, regardless of their actual age when they
begin receiving their Baxter Pension Plan benefits.
BAXTER STOCK HELD BY ALLEGIANCE EMPLOYEES
Baxter restricted stock held by Allegiance employees will continue to be
earned, based upon performance through December 31, 1996, and vested, in
accordance with the terms and conditions of those grants, as if the employee's
service with Allegiance were service with Baxter. Allegiance employees holding
Baxter Stock Options will, as of the Distribution Date, be considered terminated
and, as such, vesting and exercise will be in accordance with the terms and
conditions of the outstanding grants.
COMPENSATION OF EXECUTIVE OFFICERS
The compensation of Allegiance's executive officers for periods beginning on
and after the Distribution Date will be determined by the Allegiance Board of
Directors or its Compensation Committee.
COMPENSATION PHILOSOPHY FOR EXECUTIVE OFFICERS
Allegiance's philosophy will be to provide compensation opportunities
supporting Allegiance's values. Forms and levels of total compensation will be
structured to be competitive when compared to other companies of similar focus
and size. These companies are reported in surveys whose participants include
many companies in the Fortune 500 as well as other companies with which
Allegiance and its subsidiaries compete for executive talent ("comparable
companies"). This philosophy is intended to assist Allegiance in attracting,
retaining and motivating executives with superior leadership and management
abilities. Consistent with this philosophy, a total compensation structure will
be determined for each officer, including Mr. Knight, consisting primarily of
salary, cash bonus, stock options and benefits. The proportions of these
elements of compensation will vary among the officers depending upon their
levels of responsibility. The senior executive officers will receive a larger
portion of their total compensation through performance-based incentive plans,
which place a greater percentage of their compensation at risk while more
closely aligning their interests with the interests of Allegiance's
stockholders.
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Allegiance's philosophy with respect to the cap on the tax-deductibility of
executive compensation will be to maximize the benefit of tax laws for
Allegiance's stockholders by seeking performance-based exemptions where
consistent with Allegiance's compensation policies and practices. Allegiance
will adopt performance goals for the officer cash bonus plan which are expected
to satisfy the deductibility requirements with respect to any payments under
those plans.
COMPENSATION ELEMENTS
Salaries will be established each year at a level primarily intended to be
competitive at the 50th percentile with salaries of executive officers in
comparable companies. In addition, officer salaries will be based on the
officer's individual performance. Bonuses are intended to provide executive
officers with an opportunity to receive additional cash compensation but only if
they earn it through Allegiance's achievement of strong performance results as
measured by key financial indicators. Each year, a bonus target will be
established for each executive officer at the 50th percentile of the market data
of comparable companies. After year-end results are calculated, each officer's
bonus will be determined based on Allegiance's performance against the key
financial indicators established for the year. Achievement of the performance
objective will determine an officer's opportunity to earn bonus compensation
either significantly above or below the 50th percentile of opportunity within
comparable companies.
Stock options will be granted under the Allegiance Corporation's 1996
Incentive Compensation Program. They represent a vehicle for more closely
aligning management's and stockholders' interests, specifically motivating
executives to remain focused on the market value of Allegiance Stock.
The number of stock options granted to executive officers is expected to be
formula-driven. The formula is designed to provide an opportunity to earn
stock-based compensation at a third-quartile level compared to executives in
comparable companies.
1996 INCENTIVE COMPENSATION PROGRAM
Allegiance expects to adopt the Allegiance Corporation 1996 Incentive
Compensation Program ("Program"). The 1996 Program will be approved by Baxter as
sole stockholder of Allegiance prior to the Distribution.
GENERAL
The 1996 Program is designed to promote success and enhance the value of
Allegiance by linking participants' interests more closely to those of
Allegiance stockholders and by providing participants with an incentive for
excellence.
The Program will be administered by the Compensation Committee of Allegiance
("Committee"). The Committee must consist of two or more directors who qualify
as non-employee directors under Rule 16b-3 of the Securities Exchange Act of
1934 and as outside directors under Section 162(m) of the Code. Incentives may
consist of the following: (a) stock options; (b) restricted stock; (c) stock
awards; (d) performance shares; and (e) other incentives, including cash.
Incentives may be granted to any employee of Allegiance (including directors of
Allegiance who are also employees of Allegiance) selected from time to time by
the Committee.
The number of shares of Allegiance Stock authorized for issuance under the
Program will not exceed 17.8% of the outstanding shares of Allegiance Stock as
of the Distribution Date.
STOCK OPTIONS
Under the Program, the Committee may grant non-qualified and incentive stock
options to eligible employees to purchase shares of Allegiance Stock from
Allegiance. The Program gives the Committee discretion, with respect to any such
stock option, to determine the number and purchase price of the shares subject
to the option, the term of each option and the time or times during its term
when the option becomes exercisable, subject to the following limitations. No
stock option may be granted with a purchase price less than the fair market
value of the shares subject to the option on the date of grant and the term may
not exceed 10 years and one day from the date of grant. Except to the
54
<PAGE>
extent that the Committee determines that another value is more appropriate
given the circumstances, the fair market value of shares on the date of a grant
shall mean the closing sale price of Allegiance Stock as reported on the New
York Exchange composite reporting tape. No person may receive, in any calendar
year, stock options which, in the aggregate, represent more than 1,000,000
shares of Allegiance Stock. The initial option grant to the named executive
officers will be as follows: Mr. Knight, 514,000 shares; Mr. Damico, 330,000
shares; Ms. White, 124,000 shares; Mr. Zollars, 106,000 shares; and Ms. Gaumer,
80,000 shares. These grants are intended to cover a two-year period.
STOCK APPRECIATION RIGHTS
SARs may be granted by the Committee pursuant to the Program in such number
and on such terms as the Committee may decide, provided that the term of an SAR
may not exceed 10 years and one day from the date of grant. SARs may be granted
together with or independently of any stock option. SARs may be paid in
Allegiance Stock or cash, as determined by the Committee. No person may receive,
in any calendar year, SARs which, in the aggregate, represent more than
1,000,000 shares of Allegiance Stock.
RESTRICTED STOCK
Restricted stock consists of the sale or transfer by Allegiance to an
eligible employee of one or more shares of Allegiance Stock which are subject to
restrictions on their sale or other transfer by the employee. The price, if any,
at which restricted stock will be sold will be determined by the Committee, and
it may vary from time to time and among employees and may require no payment or
be less than the fair market value of the shares at the date of sale. All shares
of restricted stock may be subject to the attainment of performance goals under
Section 162(m) of the Code and other restrictions as the Committee may
determine. Subject to these restrictions and the other requirements of the
Program, a participant receiving restricted stock will have the rights of a
stockholder (including voting and dividend rights) as to those shares only to
the extent the Committee designates such rights at the time of the grant. Not
more than 750,000 shares of Allegiance Stock may be issued in the form of
restricted stock under the Program.
STOCK AWARDS
Stock awards consist of the transfer by Allegiance to an eligible employee
of shares of Allegiance Stock, without payment, as additional compensation for
his or her services to Allegiance or a subsidiary of Allegiance. Stock awards
are subject to the following limitations: No person subject to Section 16(a) of
the Exchange Act (executive officers of Allegiance) may receive a stock award,
and no person eligible to receive a stock award may receive a stock award
representing more than 2,500 shares of Allegiance Stock in any calendar year.
PERFORMANCE SHARES
Performance shares consist of the grant by Allegiance to an eligible
employee of a contingent right to receive payment of shares of Allegiance Stock.
The performance shares will be paid in shares of Allegiance Stock to the extent
performance goals set forth in the grant are achieved. All grants of performance
shares will be subject to the attainment of performance goals under Section
162(m) of the Code. The number of shares granted and the performance goals will
be determined by the Committee.
OTHER INCENTIVES
Other incentives may consist of a payment in cash or stock by Allegiance to
an eligible employee as additional compensation for his or her services to
Allegiance or a subsidiary of Allegiance. The form, amount and the terms and
conditions of other incentives will be determined by the Committee.
SECTION 162(M) PERFORMANCE GOALS
Under the Program, grants of restricted stock, performance shares, and other
incentives (as defined in the Program) may be subject to the attainment of
performance goals under Section 162(m) of the Code. The regulations under
Section 162(m) require the performance goals related to grants
55
<PAGE>
under the Program to be approved separately by Allegiance's stockholders.
Performance goals for performance based grants may include, but are not limited
to stock price, sales, return on equity, cash flow, market share, earnings per
share and/or costs.
NON-TRANSFERABILITY OF INCENTIVES
Unless otherwise determined by the Committee, no stock option, SAR,
restricted stock, performance share or other incentive granted under the Program
will be transferable by its holder, except in the event of the holder's death,
by will or the laws of descent and distribution. During an employee's lifetime,
an incentive may be exercised only by the employee or the employee's guardian or
legal representative. The Committee may allow the limited transfer of an
incentive to the immediate family of an employee to facilitate estate planning.
AMENDMENT OF THE PROGRAM
The Board of Directors may amend or discontinue the Program at any time.
However, no amendment or discontinuance may adversely affect an incentive
previously granted. In addition, the Board of Directors may not amend the
Program without approval of Allegiance's stockholders to the extent such
approval is required by law, agreement or any exchange on which Allegiance Stock
is traded.
ACCELERATION OF INCENTIVES
In the event of a change in control of Allegiance (as specified in the
Program), the restrictions on all outstanding shares of restricted stock will
lapse immediately, all outstanding stock options and SARs will become
exercisable immediately and all performance goals will be deemed to be met and
payment made immediately.
CHANGE OF CONTROL PLAN
Allegiance expects to adopt the Allegiance Change of Control Plan ("Change
of Control Plan"). Pursuant to agreements entered into under this Plan,
employees selected to participate (including each of the named executive
officers) will be entitled to separation pay and benefits following a change of
control in Allegiance and the employee's subsequent termination of employment
unless such termination is voluntary and unprovoked or results from death,
disability, retirement or cause. The eligible termination must occur within 24
months of the change of control or the agreement is void. Each Agreement will
continue for three years from the distribution date and automatically renew
every three years from that date unless the participants receive written notice
of termination at least ninety days prior to the renewal date.
Under this Plan, the separation pay will equal either three years'
annualized base salary and target cash bonus or one years' annualized base
salary and target cash bonus (as determined by the Committee in its discretion
depending on the employee's position) plus the value of all deferred or unvested
awards under all incentive compensation plans per the terms of the 1996
Incentive Compensation Program.
In the event that any payments would be subject to an excise tax under the
Code, the Company will pay an additional gross-up amount for any excise tax and
federal, state and local income taxes, such that the net amount of the payments
would be equal to the net payments after income taxes had the excise tax and
resulting gross-up not been imposed.
ALLEGIANCE RETIREMENT PLAN
Allegiance will adopt a qualified defined contribution retirement plan (the
"Allegiance Retirement Plan") for its United States employees effective on the
Distribution date. This plan will include a section 401(k) deferred compensation
account ("401(k) account"), a company matching contribution account, a
performance account, and a transition account for each eligible employee as
described below.
The defined contribution accounts for transferring employees under the
Baxter International Inc. and Subsidiaries Incentive Investment Plan (the
"Baxter Incentive Investment Plan"), Baxter's qualified section 401(k) profit
sharing plan, will be transferred to the Allegiance Retirement
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Plan. The Allegiance Retirement Plan will establish a fund to hold the Baxter
stock currently held on behalf of Allegiance employees in the Baxter Incentive
Investment Plan. The Allegiance Retirement Plan will allow participants to
redirect the balances of their Allegiance Retirement Plan accounts that are
invested in the Baxter stock fund but will not allow participants to direct that
their plan accounts make new investments in Baxter stock within the Allegiance
Retirement Plan.
401(k) ACCOUNT AND COMPANY MATCHING CONTRIBUTION ACCOUNT
Employees of Allegiance will be eligible to contribute to the Allegiance
401(k) account on or after the Distribution Date. Participants may elect to
contribute, on a before-tax basis, up to twelve percent of their annual base
compensation into their 401(k) accounts. Allegiance will match the first three
percent of the participant's annual base compensation contributed to the plan on
a dollar for dollar basis.
PERFORMANCE ACCOUNT
Subject to the terms of the Allegiance Retirement Plan, employees of
Allegiance will be eligible to receive contributions to their performance
accounts under such plan. Allegiance will make annual contributions to each
performance account equal to three percent of a participant's annual base
compensation.
In addition, Allegiance may make additional performance account
contributions on a discretionary basis as certain performance measures are
achieved. The additional contributions will be allocated to each eligible
participant's account in proportion to each participant's annual base
compensation. These additional discretionary contributions may be made more
frequently or less frequently than the annual three percent contribution.
TRANSITION ACCOUNT
Allegiance recognizes that certain longer service employees need additional
benefits to assist in transitioning from Baxter's United States Pension Plan to
Allegiance's Retirement Plan. Contributions to a transition account within
Allegiance's Retirement Plan will be provided to two groups of Allegiance
employees.
Employees with at least 55 "points" and 10 years of "benefit service" (as
determined under the terms of the Baxter Pension Plan explained on page 49) as
of the Distribution Date will have transition profit sharing contributions made
annually over an eight year period, and each of these contributions will be
equal to not less than 3% and not more than 8% of the participant's annual base
compensation, depending on the participant's points under the Baxter Pension
Plan as of the Distribution Date. The named executive officers eligible to
receive contributions to the transition account are as follows: Mr. Knight --
0%; Mr. Damico -- 3%; Ms. White -- 0%; Mr. Zollars -- 3%; and Ms. Gaumer -- 3%.
Allegiance employees who have at least 15 years of "benefit service" but
less than 55 "points" (as determined under the terms of the Baxter Pension Plan
explained on page 49) as of the Distribution Date will receive transition profit
sharing contributions made annually over an eight year period, and each of these
contributions will be equal to 2% of the participant's annual base compensation.
ALLEGIANCE EXCESS PLAN
Federal income tax laws limit the amount Allegiance may contribute to the
accounts of certain highly compensated participants under the Allegiance
Retirement Plan. Federal income tax laws also limit the amount participants may
contribute to their accounts under the Allegiance Retirement Plan. Allegiance
will adopt an unfunded non-qualified excess plan (the "Allegiance Excess Plan")
that will credit participants affected by the limits with the amount of
contributions that the participants would have contributed or that Allegiance
would have contributed on their behalf to the Allegiance Retirement Plan but for
such limits.
BAXTER PENSION PLAN
Eligible Allegiance employees (transferring employees) will continue to
participate for purposes of benefit accruals in the Baxter Pension Plan through
the Distribution Date. All benefit accruals for
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Allegiance employees in the Baxter Pension Plan cease as of the Distribution
Date and all Allegiance employees will be fully vested in their accrued benefits
under the Baxter Pension Plan as of such date. The terms of the Baxter Pension
Plan will be amended with respect to Allegiance employees to impute certain
compensation paid by Allegiance during 1996 in order to provide for a full
year's earnings for 1996 to be included in determining the Final Average Pay of
transferring employees. Allegiance employees with vested accrued benefits in the
Baxter Pension Plan will have those benefits maintained by the Baxter Pension
Plan until they are eligible or required to receive them.
EMPLOYEE STOCK PURCHASE PLAN
Allegiance will adopt an employee stock purchase plan for its United States
employees, as described in Section 423 of the Code. All active employees of
Allegiance and its United States subsidiaries will be eligible to participate in
the Plan. The employee stock purchase plan makes available shares of Allegiance
Stock for purchase by eligible employees through payroll deductions at a maximum
rate to be determined by the Committee. The purchase price per share will be
equal to 85% of the lesser of the fair market value of Allegiance Stock on the
effective date of subscription or the fair market value of Allegiance Stock on
the date of exercise. 2,000,000 shares will be reserved for issuance under this
plan.
COMPENSATION COMMITTEE INTERLOCKS DISCLOSURE AND INSIDER PARTICIPATION
There are no compensation committee interlocks.
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OWNERSHIP OF ALLEGIANCE COMMON STOCK BY CERTAIN BENEFICIAL OWNERS
Until the Distribution Date, Baxter will own all of the outstanding shares
of Allegiance Stock. No person or group is anticipated to be the beneficial
owner of more than five per cent of Allegiance Stock outstanding as of the
Distribution Date based upon the number of outstanding shares of Baxter Stock on
June 1, 1996. The following table sets forth information, as of June 1, 1996,
with respect to the expected beneficial ownership of Baxter Stock by each
director and named executive officer of Allegiance and by all directors and
executive officers of Allegiance as a group. The information relating to
directors and named executive officers is furnished by the respective directors
and officers. No director or named executive officer of Allegiance beneficially
owned more than one per cent of the outstanding Baxter Stock. All Allegiance
directors and executive officers as a group own less than one per cent of the
outstanding Baxter Stock. It is not expected that any director or executive
officer of Allegiance will own more than one per cent of the outstanding
Allegiance Stock.
<TABLE>
<CAPTION>
BAXTER STOCK
BENEFICIALLY RIGHT TO
NAME OF BENEFICIAL OWNER OR GROUP OWNED ACQUIRE
- ------------------------------------------------------------------------------ ---------------- ---------------
<S> <C> <C>
Lester B. Knight.............................................................. 281,742(1) 46,757
Joseph F. Damico.............................................................. 195,416(1) 32,140
Silas S. Cathcart............................................................. 7,334(1) --
David W. Grainger............................................................. 32,500(1) --
Arthur F. Golden.............................................................. -- --
Michael D. O'Halleran......................................................... -- --
Kenneth D. Bloem.............................................................. -- --
Connie Curran, Ed.D........................................................... -- --
Kathy Brittain White.......................................................... 19,400 (1) 10,000
Gail Gaumer................................................................... 86,832 (1) 20,320
Robert J. Zollars............................................................. 90,711 (1) 28,451
All Directors and Executive Officers.......................................... 941,260 (1) 22,203
</TABLE>
- ------------------------
(1) Amounts to less than one per cent; total includes all shares listed under
right to acquire.
CERTAIN TRANSACTIONS
Allegiance has in the past engaged in numerous transactions with Baxter.
Such transactions have included, among other things, the extension of
inter-company loans, the provision of various other types of financial support
by or to Baxter, and the sharing of services and administration and the costs
thereof. See "ARRANGEMENTS BETWEEN BAXTER AND ALLEGIANCE -- REORGANIZATION
AGREEMENT."
HART-SCOTT-RODINO FILING REQUIREMENT
Any person receiving shares of Allegiance Stock pursuant to the Distribution
and meeting the criteria set forth below may be required to file a Pre-merger
Notification and Report pursuant to the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"). In general, if (i) a person receiving
shares of Allegiance Stock pursuant to the Distribution would own, upon
consummation of the Distribution, Allegiance Stock that exceeds $15 million in
value, (ii) certain jurisdictional requirements are met and (iii) no exemption
applies, then the HSR Act would require that such person file a Pre-merger
Notification and Report Form and observe the applicable waiting periods under
the HSR Act prior to acquiring Allegiance Stock pursuant to the Distribution.
If such waiting periods have not expired or been terminated at the
Distribution Date with respect to such recipient, Baxter may be required to
deliver such recipient's shares of Allegiance Stock into an escrow facility
pending the expiration or termination of such waiting period. Holders of Baxter
Stock are urged to consult their legal counsel to determine whether the
requirements of the HSR Act will apply to the receipt by them of shares of
Allegiance Stock in the Distribution.
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DESCRIPTION OF ALLEGIANCE CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The authorized capital stock of Allegiance will consist of 200,000,000
shares of Allegiance Stock and 20,000,000 shares of preferred stock, par value
$.01 per share (the "Allegiance Preferred Stock"). No shares of Allegiance
Preferred Stock will be issued in connection with the Distribution. Based on the
number of shares of Baxter Stock outstanding as of June 1, 1996, up to
approximately 54.4 million shares of Allegiance Stock will be issued to
stockholders of Baxter in the Distribution. All of the shares of Allegiance
Stock issued in the Distribution will be validly issued, fully paid and
non-assessable. The following summary description of the capital stock of
Allegiance is qualified in its entirety by reference to the proposed forms of
the Certificate of Incorporation and By-laws of Allegiance, forms of which are
attached hereto as Annexes A and B, respectively.
ALLEGIANCE STOCK
Holders of Allegiance Stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders and, except with respect to the
election of directors which requires a plurality of the votes cast, and except
as described under "CERTAIN ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE
CERTIFICATE OF INCORPORATION, BY-LAWS AND STATE LAW -- CERTIFICATE OF
INCORPORATION, BY-LAWS AND STATE LAW -- AMENDMENT OF CERTAIN PROVISIONS OF THE
CERTIFICATE OF INCORPORATION AND BY-LAWS", a majority of the votes cast is
required for all action to be taken by stockholders. Holders of Allegiance Stock
do not have cumulative voting rights in the election of directors and have no
preemptive, subscription, redemption, sinking fund or conversion rights. Subject
to preferences that may be applicable to holders of any outstanding shares of
any Allegiance Preferred Stock, holders of Allegiance Stock are entitled to such
dividends as may be declared by the Allegiance Board out of funds legally
available therefor. Upon any liquidation, dissolution or winding-up of
Allegiance, the assets legally available for distribution to stockholders are
distributable ratably among the holders of Allegiance Stock at that time
outstanding, subject to prior distribution rights of creditors of Allegiance and
to the preferential rights of any outstanding shares of Allegiance Preferred
Stock.
ALLEGIANCE PREFERRED STOCK
Under the Certificate of Incorporation the Allegiance Board is authorized to
provide for the issuance of Allegiance Preferred Stock, in one or more series,
and to determine, with respect to any such series, the designations, voting
powers, preferences and rights of such series, and such qualifications,
limitations or restrictions thereof, as the Allegiance Board shall determine.
See "CERTAIN ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CERTIFICATE OF
INCORPORATION, BY-LAWS AND STATE LAW -- CERTIFICATE OF INCORPORATION AND
BY-LAWS." In connection with the Rights Agreement to be adopted by Allegiance,
the Allegiance Board will designate a series of Preferred Stock (the "Preferred
Shares"). See "-- Allegiance Rights Agreement."
ALLEGIANCE RIGHTS AGREEMENT
Prior to the Distribution, it is expected that the Allegiance Board will
adopt a Rights Agreement (the "Rights Agreement") between Allegiance and First
Chicago Trust Company of New York (the "Rights Agent") and cause to be issued
one preferred share purchase right (a "Right") with each share of Allegiance
Stock issued to holders of Baxter Stock at the close of business on the Record
Date.
Each Right will entitle the registered holder to purchase from Allegiance
one one-hundredth of a share of the Series A Junior Participating Preferred
Stock (a "Preferred Share") at a price of $ per one one-hundredth of a
Preferred Share (the "Purchase Price") subject to adjustment. The terms of the
Rights will be set forth in the Rights Agreement. The description set forth
below is intended as a summary only and is qualified in its entirety by
reference to the Rights Agreement, which is attached hereto as Annex C.
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Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons has acquired
beneficial ownership of 15% or more of the outstanding shares of Allegiance
Stock (an "Acquiring Person") or (ii) 10 business days (or such later date as
may be determined by action of the Allegiance Board prior to such time as any
person or group of affiliated persons becomes an Acquiring Person) following the
commencement of a tender offer or exchange offer the consummation of which would
result in the beneficial ownership by a person or group of 15% or more of the
outstanding shares of Allegiance Stock (the earlier of (i) and (ii) being the
"Rights Distribution Date"), the Rights will be evidenced, with respect to any
shares of Allegiance Stock outstanding as of the Record Date, by such Allegiance
Stock certificates with a copy of a summary of rights attached thereto.
The Rights Agreement provides that, until the Rights Distribution Date (or
earlier redemption or expiration of the Rights), the Rights will be transferred
with and only with the shares of Allegiance Stock. Until the Rights Distribution
Date (or earlier redemption or expiration of the Rights), new Allegiance Stock
certificates issued after the Record Date upon transfer or new issuance of
Allegiance Stock will contain a notation incorporating the Rights Agreement by
reference. Until the Rights Distribution Date (or earlier redemption or
expiration of the Rights), the surrender for transfer of any certificates for
Allegiance Stock outstanding, even without such notation or a copy of the
summary of rights being attached thereto, will also constitute the transfer of
the Rights associated with the Allegiance Stock represented by such certificate.
As soon as practicable following the Rights Distribution Date, separate
certificates evidencing the Rights ("Rights Certificates") will be mailed to
holders of record of Allegiance Stock as of the close of business on the Rights
Distribution Date and such separate Rights Certificates alone will evidence the
Rights.
The Rights are not exercisable until the Rights Distribution Date. The
Rights will expire on October 1, 2006 (the "Final Expiration Date"), unless the
Final Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by Allegiance, in each case, as described below.
The Purchase Price payable, and the number of Preferred Shares or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights
or warrants to subscribe for or purchase Preferred Shares at a price, or
securities convertible into Preferred Shares with a conversion price, less than
the then-current market price of the Preferred Shares, or (iii) upon the
distribution to holders of the Preferred Shares of evidences of indebtedness,
cash (other than a regular quarterly cash dividend out of the earnings or
retained earnings of Allegiance), assets (other than a dividend payable in
Preferred Shares) or of subscription rights or warrants (other than those
referred to above).
The number of outstanding Rights and the number of one one-hundredths of a
Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of Allegiance Stock or a stock dividend
on Allegiance Stock payable in Allegiance Stock or subdivisions, consolidations
or combinations of Allegiance Stock occurring, in any such case, prior to the
Rights Distribution Date.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a minimum preferential
quarterly dividend payment of $1 per share but will be entitled to an aggregate
dividend of 100 times the dividend declared per share of Allegiance Stock. In
the event of liquidation, the holders of the Preferred Shares will be entitled
to a minimum preferential liquidation payment of $100 per share. Each Preferred
Share will have 100 votes, voting together with the Allegiance Stock. Finally,
in the event of any merger, consolidation or other transaction in which shares
of Allegiance Stock are exchanged, each Preferred Share will be entitled to
receive 100 times the amount received per share of Allegiance Stock. The Rights
are protected by customary anti-dilution provisions.
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Because of the nature of the dividend, liquidation and voting rights, the
value of the one one-hundredth interest in a Preferred Share purchasable upon
exercise of each Right should approximate the value of one share of Allegiance
Stock.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights beneficially owned by the Acquiring Person (which
will thereafter be void), will thereafter have the right to receive upon
exercise that number of shares of Allegiance Stock having a market value of two
times the exercise price of the Right. In the event that Allegiance is acquired
in a merger or other business combination transaction or 50% or more of its
consolidated assets or earning power are sold after a person or group of
affiliated or associated persons has become an Acquiring Person, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive, upon the exercise thereof at the then current exercise price
of the Right, that number of shares of common stock of the acquiring company
which at the time of such transaction will have a market value of two times the
exercise price of the Right.
At any time after any person or group of affiliates or associated persons
becomes an Acquiring Person and prior to the acquisition by such person or group
of 50% or more of the outstanding shares of Allegiance Stock, the Allegiance
Board may exchange the Rights (other than Rights owned by such person or group
which will have become void), in whole or in part, at an exchange ratio of one
share of Allegiance Stock, or one one-hundredth of a Preferred Share (or of a
share of a class or series of Allegiance Preferred Stock having equivalent
rights, preferences and privileges), per Right (subject to adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% in such Purchase
Price. No fractional Preferred Shares will be issued (other than fractions which
are integral multiples of one one-hundredth of a Preferred Share, which may, at
the election of Allegiance, be evidenced by depositary receipts) and, in lieu
thereof, an adjustment in cash will be made based on the market price of the
Preferred Shares on the last trading day prior to the date of exercise.
In general, Allegiance may redeem the Rights in whole, but not in part, at a
price of $.01 per Right (payable in cash, Allegiance Stock or other
consideration deemed appropriate by the Allegiance Board) at any time until ten
days following the first public announcement that a person or group of
affiliated or associated persons has become an Acquiring Person. Immediately
upon the action of the Allegiance Board authorizing any redemption, the Rights
will terminate and the only right of the holders of the Rights will be to
receive the redemption price.
The terms of the Rights may be amended by the Allegiance Board without the
consent of the holders of the Rights, including an amendment to lower certain
thresholds described above to not less than 10%, except that from and after such
time as any person or group of affiliated or associated persons becomes an
Acquiring Person no such amendment may adversely affect the interests of the
holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of Allegiance, including, without limitation, the right to vote
or to receive dividends.
The Rights will have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire Allegiance on
terms not approved by the Allegiance Board. The Rights should not interfere with
any merger or other business combination approved by the Allegiance Board
because the Rights may be redeemed by Allegiance until the tenth day following
the first public announcement that a person or group has become an Acquiring
Person.
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CERTAIN ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE
CERTIFICATE OF INCORPORATION, BY-LAWS AND STATE LAW
CERTIFICATE OF INCORPORATION AND BY-LAWS
The Certificate of Incorporation and the By-laws of Allegiance contain
certain provisions that could make more difficult the acquisition of Allegiance
by means of a tender offer, proxy contest or otherwise. The description set
forth below is intended as a summary only and is qualified in its entirety by
reference to the Certificate of Incorporation and the By-laws, forms of which
are attached hereto as Annex A and Annex B, respectively.
CLASSIFIED BOARD OF DIRECTORS.
The Certificate of Incorporation of Allegiance provides that the Allegiance
directors (other than those who may be elected by the holders of any series of
Preferred Shares under specified circumstances), will be divided into three
classes of directors, with the classes to be as nearly equal in number as
possible. Immediately after the Distribution, the Allegiance Board will consist
of the persons referred to in "ALLEGIANCE MANAGEMENT -- DIRECTORS." The
Certificate of Incorporation provides that the term of office of the first class
will expire at the 1997 annual meeting of stockholders, the term of office of
the second class will expire at the 1998 annual meeting of stockholders and the
term of office of the third class will expire at the 1999 annual meeting of
stockholders.
The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the Allegiance Board. At
least two annual meetings of stockholders, instead of one, will generally be
required to effect a change in a majority of the Allegiance Board. Such a delay
may help ensure that Allegiance's directors, if confronted by a holder
attempting to force a proxy contest, a tender or exchange offer or an
extraordinary corporate transaction, would have sufficient time to review the
proposal as well as any available alternatives to the proposal and to act in
what they believe to be the best interest of the stockholders. The
classification provisions will apply to every election of directors, however,
regardless of whether a change in the composition of the Allegiance Board would
be beneficial to Allegiance and its stockholders and whether or not a majority
of Allegiance's stockholders believe that such a change would be desirable.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of Allegiance, even though such an attempt might be
beneficial to Allegiance and its stockholders. The classification of the
Allegiance Board could thus increase the likelihood that incumbent directors
will retain their position. In addition, because the classification provisions
may discourage accumulations of large blocks of Allegiance's stock by purchasers
whose objective is to take control of Allegiance and remove a majority of the
Allegiance Board, the classification of the Allegiance Board could tend to
reduce the likelihood of fluctuations in the market price of Allegiance Stock
that might result from accumulations of large blocks. Accordingly, stockholders
could be deprived of certain opportunities to sell their shares of Allegiance
Stock at a higher market price than might otherwise be obtainable.
NUMBER OF DIRECTORS; FILLING VACANCIES; REMOVAL.
The Allegiance Certificate of Incorporation provides that, subject to any
rights of holders of Allegiance Preferred Stock to elect additional directors
under specific circumstances, the number of directors will be the number from
time to time fixed by the Allegiance Board. In addition, the Certificate of
Incorporation provides that, subject to any rights of holders of Allegiance
Preferred Shares, any vacancy that results from an increase in the number of
directors or for any other reason, may be filled by a majority of directors then
in office. Accordingly, absent an amendment to the Allegiance Certificate of
Incorporation, the Allegiance Board could prevent any stockholder from enlarging
the Allegiance Board and filling the new directorships created thereby with such
stockholder's own nominees. Under the Delaware Law, unless otherwise provided in
the Certificate of Incorporation, directors serving on a classified board may
only be removed by the stockholders for cause.
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NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS.
The Allegiance Certificate of Incorporation prohibits stockholder action by
written consent in lieu of a meeting. The By-laws provide that special meetings
of the stockholders may be called only (a) by the chairman of the board or the
secretary, and shall be called upon a request signed by a majority of the
directors or (b) by resolution of the directors.
The provisions of the Certificate of Incorporation of Allegiance prohibiting
stockholder action by written consent may have the effect of delaying
consideration of a stockholder proposal until the next annual meeting unless a
special meeting is called at the request of a majority of the Board. These
provisions would also prevent the holders of a majority of the voting power of
the Voting Stock from unilaterally using the written consent procedure to take
stockholder action. Moreover, a stockholder could not force stockholder
consideration of a proposal over the opposition of the Allegiance Board by
calling a special meeting of stockholders prior to the time a majority of the
Board believes such consideration to be appropriate.
ADVANCE NOTICE OF STOCKHOLDER NOMINATIONS AND STOCKHOLDER
PROPOSALS REQUIRED.
The Allegiance By-laws establish an advance notice procedure for
stockholders to make nominations of candidates for election as directors, or
bring other business before an annual meeting of stockholders of Allegiance (the
"Stockholder Notice Procedure").
The Stockholder Notice Procedure provides that only persons who are
nominated by, or at the direction of, the Allegiance Board, or by a stockholder
who has given timely written notice to the Secretary of Allegiance prior to the
meeting at which directors are to be elected, will be eligible for election as
directors of Allegiance. The Stockholder Notice Procedure provides that at an
annual meeting only such business may be conducted as has been brought before
the meeting by, or at the direction of, the Allegiance Board or by a stockholder
who has given timely written notice to the Secretary of Allegiance of such
stockholder's intention to bring such business before such meeting. Under the
Stockholder Notice Procedure, for notice of stockholder nominations to be made
at an annual meeting to be timely, such notice must be received by Allegiance
not less than 60 days nor more than 90 days prior to the first anniversary of
the previous year's annual meeting (if the date of any other annual meeting is
advanced by more than 30 days from such anniversary date, not later than the
10th day after the notice of the date of the annual meeting was mailed or public
announcement of the date of such meeting was made). Under the Stockholder Notice
Procedure, for notice of a stockholder nomination to be made at a special
meeting at which directors are to be elected to be timely, such notice must be
received by Allegiance not earlier than the 90th day before such meeting and not
later than the 10th day after the notice of the date of the special meeting was
mailed or public announcement of the date of such meeting was made. For the
purpose of determining whether a stockholder's notice is timely delivered in
connection with the 1997 annual meeting, the first anniversary of the previous
year's annual meeting is deemed to be May 1, 1997.
Under the Stockholder Notice Procedure, a stockholder's notice to Allegiance
proposing to nominate a person for election as a director must contain certain
information including, without limitation, the name and address of the
nominating stockholder, the class and number of shares of stock of Allegiance
which are owned by such stockholder, and all information regarding the proposed
nominee that would be required to be included in a proxy statement soliciting
proxies for the proposed nominee. Under the Stockholder Notice Procedure, a
stockholder's notice relating to the conduct of business other than the
nomination of directors must contain certain information about such business and
about the proposing stockholders, including, without limitation, a brief
description of the business the stockholder proposes to bring before the
meeting, the reasons for conducting such business at such meeting, the name and
address of such stockholder, the class and number of shares of stock of
Allegiance beneficially owned by such stockholder, and any material interest of
such stockholder in the business so proposed. If the Chairman of the Board or
other officer presiding at a meeting
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determines that a person was not nominated, or other business was not brought
before the meeting, in accordance with the Stockholder Notice Procedure, such
person will not be eligible for election as a director, or such business will
not be conducted at such meeting, as the case may be.
By requiring advance notice of nominations by stockholders, the Stockholder
Notice Procedure will afford the Allegiance Board an opportunity to consider the
qualifications of the proposed nominees and, to the extent deemed necessary or
desirable by the Allegiance Board, to inform Stockholders about such
qualifications. By requiring advance notice of other proposed business, the
Stockholder Notice Procedure will also provide a more orderly procedure for
conducting annual meetings of stockholders and, to the extent deemed necessary
or desirable by the Allegiance Board, will provide the Allegiance Board with an
opportunity to inform stockholders, prior to such meetings, of any business
proposed to be conducted at such meetings, together with any recommendations as
to the Board's position regarding action to be taken with respect to such
business, so that stockholders can better decide whether to attend such a
meeting or to grant a proxy regarding the disposition of any such business.
Although the By-laws do not give the Allegiance Board any power to approve
or disapprove stockholder nominations for the election of directors or proposals
for action, they may have the effect of precluding a contest for the election of
directors or the consideration of stockholder proposals if the proper procedures
are not followed, and of discouraging or deterring a third party from conducting
a solicitation of proxies to elect its own slate of directors or to approve its
own proposal, without regard to whether consideration of such nominees or
proposals might be harmful or beneficial to Allegiance and its stockholders.
AMENDMENT OF CERTAIN PROVISIONS OF THE CERTIFICATE OF
INCORPORATION AND BY-LAWS
Under Delaware Law, the stockholders have the right to adopt, amend or
repeal the by-laws and, with the approval of the board of directors, the
certificate of incorporation of a corporation. In addition, under Delaware Law,
if the certificate of incorporation so provides, the by-laws may be adopted,
amended or repealed by the board of directors. The Certificate of Incorporation
provides that the affirmative vote of the holders of at least 66 2/3% of the
voting power of the outstanding shares of Voting Stock, voting together as a
single class, is required to amend provisions of the Certificate of
Incorporation relating to the prohibition of stockholder action without a
meeting; the number, election and term of Allegiance's directors; and the
issuance of rights. The By-laws may be amended by the Allegiance Board or by the
affirmative vote of the holders of at least 66 2/3% of the voting power of the
outstanding shares of Voting Stock, voting together as a single class. These
66 2/3% voting requirements will have the effect of making more difficult any
amendment by stockholders of the By-laws or of any of the provisions of the
Certificate of Incorporation described above, even if a majority of Allegiance's
stockholders believe that such amendment would be in their best interests.
STATE LAW
ANTITAKEOVER LEGISLATION
Section 203 of the Delaware Law provides that, subject to certain exceptions
specified therein, a corporation shall not engage in any business combination
with any interested stockholder for a three-year period following the date that
such stockholder becomes an interested stockholder unless (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding certain shares); or
(iii) on or subsequent to such date, the business combination is approved by the
board of directors of the corporation and by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. Except as specified in Section 203 of the Delaware Law, an
"interested stockholder" is defined to include (x) any person that is the owner
of 15% or more of the outstanding voting stock of the
65
<PAGE>
corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation, at any
time within three years immediately prior to the relevant date and (y) the
affiliates and associates of any such person.
Under certain circumstances, Section 203 of the Delaware Law makes it more
difficult for a person who would be an interested stockholder to effect various
business combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. The Certificate of Incorporation does not exclude Allegiance from
the restrictions imposed under Section 203 of the Delaware Law. It is
anticipated that the provisions of Section 203 of the Delaware Law may encourage
companies interested in acquiring Allegiance to negotiate in advance with the
Allegiance Board, since the stockholder approval requirement would be avoided if
a majority of the directors then in office approves either the business
combination or the transaction which results in the stockholder becoming an
interested stockholder.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
LIMITATION OF LIABILITY OF DIRECTORS
The Allegiance Certificate of Incorporation provides that a director of
Allegiance will not be personally liable to Allegiance or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to Allegiance or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware Law, which concerns unlawful payments of dividends, stock purchases
or redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit.
While the Certificate of Incorporation provides directors with protection
from awards for monetary damages for breaches of their duty of care, it does not
eliminate such duty. Accordingly, the Certificate of Incorporation will have no
effect on the availability of equitable remedies such as an injunction or
rescission based on a director's breach of his or her duty of care. The
provisions of the Certificate of Incorporation described above apply to an
officer of Allegiance only if he or she is a director of Allegiance and is
acting in his or her capacity as director, and do not apply to officers of
Allegiance who are not directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Allegiance Certificate of Incorporation provides that each person who is
or was or had agreed to become a director or officer of Allegiance, and each
person who serves or may have served at the request of Allegiance as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, will be indemnified by Allegiance to the fullest
extent permitted from time to time by Delaware law, as the same exists or may
hereafter be amended, except with respect to an action commenced by such
directors or officers against Allegiance or by such directors or officers as a
derivative action.
The Certificate of Incorporation provides that the right to indemnification
and the payment of expenses conferred in the Certificate of Incorporation will
not be exclusive of any other right which any person may have or may in the
future acquire under any agreement, vote of stockholders or disinterested
directors or otherwise. The Certificate of Incorporation permits Allegiance to
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of Allegiance, or is serving at the request of Allegiance as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any expense, liability or loss,
whether or not Allegiance would have the power to indemnify such person against
such liability under the Certificate of Incorporation or Delaware Law.
Allegiance intends to obtain directors and officers liability insurance
providing coverage to its directors and officers.
ADDITIONAL INFORMATION
There has not been in the past and there is not presently pending any
litigation or proceeding involving a director, officer, employee or agent of
Allegiance in which indemnification would be required or permitted by the
Certificate of Incorporation.
66
<PAGE>
ALLEGIANCE CORPORATION
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Combined Statements of Income.............................................................................. F-3
Combined Balance Sheets.................................................................................... F-4
Combined Statements of Cash Flows.......................................................................... F-5
Combined Statements of Equity.............................................................................. F-6
Notes to Combined Financial Statements..................................................................... F-7
Schedule II -- Valuation and Qualifying Accounts........................................................... F-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Baxter International Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of income, cash flows and equity present fairly, in all
material respects, the financial position of Allegiance Corporation at December
31, 1995 and 1994, and the results of its operations and its 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 Baxter International Inc.'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.
Our audits of the combined financial statements of Allegiance also included
an audit of Financial Statement Schedule II appearing on page F-19 of this Form
10. 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 combined financial statements.
Price Waterhouse LLP
Chicago, Illinois
June 26, 1996
F-2
<PAGE>
ALLEGIANCE CORPORATION
COMBINED STATEMENTS OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales..................................................... $ 2,201 $ 2,485 $ 4,922 $ 5,109 $ 5,019
Costs and expenses
Cost of goods sold.......................................... 1,746 1,940 3,878 3,731 3,613
Selling, general and administrative expenses................ 345 384 756 1,005 1,061
Restructuring charges....................................... -- -- 76 -- 484
Goodwill amortization....................................... 18 19 38 41 41
Other (income) expense...................................... (1) 2 (302) (6) (26)
--------- --------- --------- --------- ---------
Total costs and expenses.................................. 2,108 2,345 4,446 4,771 5,173
--------- --------- --------- --------- ---------
Income (loss) before income taxes............................. 93 140 476 338 (154)
Income tax expense (benefit).................................. 36 55 203 123 (86)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of accounting change... 57 85 273 215 (68)
Cumulative effect of change in accounting for other
postemployment benefits, net of income tax benefit of $3..... -- -- -- -- (5)
--------- --------- --------- --------- ---------
Net income (loss)......................................... $ 57 $ 85 $ 273 $ 215 $ (73)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE>
ALLEGIANCE CORPORATION
COMBINED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
JUNE 30, --------- ---------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets
Cash and equivalents.......................................................... $ 5 $ 1 $ 3
Accounts receivable, net of allowance for doubtful accounts of $27 at June 30,
1996, and $18 and $17 at December 31, 1995 and 1994, respectively............ 450 487 635
Notes and other current receivables........................................... 26 59 246
Inventories................................................................... 656 684 721
Short-term deferred income taxes.............................................. 119 129 145
Prepaid expenses.............................................................. 16 12 25
----------- --------- ---------
Total current assets........................................................ 1,272 1,372 1,775
----------- --------- ---------
Property, plant and equipment
Property, plant and equipment................................................. 1,523 1,307 1,330
Accumulated depreciation and amortization..................................... 663 429 410
----------- --------- ---------
Net property, plant and equipment............................................. 860 878 920
----------- --------- ---------
Other assets
Goodwill and other intangibles................................................ 1,096 1,116 1,214
Other......................................................................... 65 78 122
----------- --------- ---------
Total other assets.......................................................... 1,161 1,194 1,336
----------- --------- ---------
Total assets.............................................................. $ 3,293 $ 3,444 $ 4,031
----------- --------- ---------
----------- --------- ---------
Liabilities
Accounts payable and accrued liabilities...................................... $ 550 $ 692 $ 720
Long-term deferred income taxes............................................... 115 110 54
Other noncurrent liabilities.................................................. 68 64 188
----------- --------- ---------
Total liabilities......................................................... 733 866 962
----------- --------- ---------
Equity
Divisional retained earnings.................................................. 1,750 1,768 2,259
Equity investment of parent................................................... 810 810 810
----------- --------- ---------
Total equity................................................................ 2,560 2,578 3,069
----------- --------- ---------
Total liabilities and equity................................................ $ 3,293 $ 3,444 $ 4,031
----------- --------- ---------
----------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE>
ALLEGIANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30, YEARS ENDED DECEMBER 31,
------------------------ -------------------------------
1996 1995 1995 1994 1993
------------- --------- --------- --------- ---------
(UNAUDITED)
(BRACKETS DENOTE CASH OUTFLOWS)
<S> <C> <C> <C> <C> <C>
Cash flow provided by operations
Income (loss) before cumulative effect of accounting change... $ 57 $ 85 $ 273 $ 215 $ (68)
Adjustments
Depreciation and amortization............................... 73 83 165 223 221
Deferred income taxes....................................... 16 19 50 3 (199)
Gain on asset dispositions, net............................. -- 4 (263) (11) (36)
Restructuring charges....................................... -- -- 76 -- 484
Other....................................................... -- 2 5 2 11
Changes in balance sheet items
Accounts receivable......................................... 69 31 73 8 (6)
Inventories................................................. 24 (76) 29 86 (124)
Accounts payable and other current liabilities.............. (88) 14 (120) (43) 78
Restructuring program payments.............................. (21) (29) (62) (54) (18)
Other....................................................... 6 6 27 (7) (7)
--- --------- --------- --------- ---------
Cash flow provided by operations.............................. 136 139 253 422 336
--- --------- --------- --------- ---------
Investment transactions
Capital expenditures.......................................... (33) (48) (112) (122) (273)
Acquisitions (net of cash received)........................... (14) -- (5) (2) (14)
Proceeds from asset dispositions.............................. (10) 178 626 107 68
--- --------- --------- --------- ---------
Investment transactions, net.................................. (57) 130 509 (17) (219)
--- --------- --------- --------- ---------
Financing transactions
Payments to Baxter International Inc.......................... (75) (268) (764) (402) (119)
--- --------- --------- --------- ---------
Financing transactions, net................................... (75) (268) (764) (402) (119)
--- --------- --------- --------- ---------
Increase (decrease) in cash and equivalents..................... 4 1 (2) 3 (2)
Cash and equivalents at beginning of period..................... 1 3 3 -- 2
--- --------- --------- --------- ---------
Cash and equivalents at end of period........................... $ 5 $ 4 $ 1 $ 3 $ --
--- --------- --------- --------- ---------
--- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE>
ALLEGIANCE CORPORATION
COMBINED STATEMENTS OF EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
SIX MONTHS --------- --------- ---------
ENDED JUNE
30,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Divisional retained earnings
Beginning balance................................................. $ 1,768 $ 2,259 $ 2,446 $ 2,633
Net income........................................................ 57 273 215 (68)
Payments to Baxter International Inc.............................. (75) (764) (402) (119)
------------- --------- --------- ---------
Ending balance.................................................... 1,750 1,768 2,259 2,446
------------- --------- --------- ---------
Equity investment of parent......................................... 810 810 810 810
------------- --------- --------- ---------
Total equity.................................................... $ 2,560 $ 2,578 $ 3,069 $ 3,256
------------- --------- --------- ---------
------------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS
On November 27, 1995, the board of directors of Baxter International Inc.
("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.
Allegiance Corporation ("Allegiance" or the "company") operates in a single
industry segment as a leading provider of medical products and services that
help its health-care customers manage and reduce the total cost of providing
patient care. Through its nationwide distribution network, Allegiance
distributes a broad offering of medical, surgical and laboratory supplies,
including its own self-manufactured surgical and respiratory-therapy products,
to hospital and alternate-care customers. Allegiance also provides cost
management services to its health-care customers through inventory management
programs, customized packaging, and procedure and process consulting. The
delivery of such a broad array of product and service offerings requires focused
investments in cost management services, information systems and manufacturing
efficiencies.
The Distribution is expected to occur in late 1996 and will result in
Allegiance operating as an independent entity with publicly traded common stock.
Baxter will have no ownership interest in Allegiance after the spin-off but will
continue to conduct business as described in the Reorganization and other
agreements outlined in Note 8 to the Combined Financial Statements. However,
Baxter will, unless released by third parties, remain liable for certain lease,
guarantee and other obligations and liabilities that are transferred to and
assumed by Allegiance. Allegiance will be obligated by the Reorganization
agreement to indemnify Baxter against liabilities related to those transferred
obligations and liabilities.
Allegiance's historical results of operations in 1995, 1994 and 1993 include
revenues and expenses related to certain divested businesses. The Industrial and
Life Sciences division was sold in September 1995 and the diagnostics
manufacturing businesses were sold in December 1994. See Note 3 to the Combined
Financial Statements for additional information related to these divestitures.
The following table presents selected financial data for Allegiance
excluding the revenue and expenses associated with these divested businesses:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net sales..................................................... $ 2,201 $ 2,244 $ 4,575 $ 4,314 $ 4,249
Costs and expenses
Cost of goods sold.......................................... 1,746 1,770 3,625 3,311 3,245
Selling, general and administrative expenses................ 345 346 701 711 746
Restructuring charges....................................... -- -- -- -- 304
Goodwill amortization....................................... 18 18 37 37 37
Other (income) expense...................................... (1) 2 (33) (3) (44)
--------- --------- --------- --------- ---------
Total costs and expenses.................................. 2,108 2,136 4,330 4,056 4,288
--------- --------- --------- --------- ---------
Pretax income (loss).......................................... 93 108 245 258 (39)
Income tax expense (benefit).................................. 36 42 94 101 (13)
--------- --------- --------- --------- ---------
Income (loss)............................................. $ 57 $ 66 $ 151 $ 157 $ (26)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-7
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the combined 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 PRESENTATION
The accompanying combined financial statements include those assets,
liabilities, revenues and expenses directly attributable to Allegiance's
operations. These financial statements have been prepared as if Allegiance had
operated as a free-standing entity for all periods presented. Operations outside
the United States and Puerto Rico, which are not significant, are included in
the combined financial statements on the basis of fiscal years ending November
30.
The financial information included herein does not necessarily reflect what
the financial position and results of operations of Allegiance would have been
had it operated as a stand-alone entity during the periods covered, and may not
be indicative of future operations or financial position.
INTERIM FINANCIAL STATEMENTS
In the opinion of management, the interim combined financial statements
reflect all adjustments necessary for a fair presentation of the interim
periods. All such adjustments are of a normal, recurring nature. The results of
operations for the interim periods are not necessarily indicative of the results
of operations to be expected for the full year.
CASH AND EQUIVALENTS
Cash and equivalents include cash, cash investments and marketable
securities with original maturities of three months or less. Cash payments for
income taxes related to Allegiance's operations were made by Baxter.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Market for raw materials is based on replacement costs and for other
inventory classifications on net realizable value. Appropriate consideration is
given to deterioration, obsolescence and other factors in evaluating net
realizable value.
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
JUNE 30,
1996
-------------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Raw materials................................................... $ 63 $ 54 $ 64
Work in process................................................. 53 49 55
Finished products............................................... 540 581 602
----- --------- ---------
Total inventories........................................... $ 656 $ 684 $ 721
----- --------- ---------
----- --------- ---------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided for financial reporting purposes principally on the
straight-line method over the following estimated
F-8
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Land.................................................................. $ 102 $ 104
Buildings and leasehold improvements.................................. 396 386
Machinery and equipment............................................... 724 778
Equipment leased or rented to customers............................... 14 16
Construction in progress.............................................. 71 46
--------- ---------
Total property, plant and equipment, at cost........................ 1,307 1,330
Accumulated depreciation and amortization............................. (429) (410)
--------- ---------
Net property, plant and equipment................................. $ 878 $ 920
--------- ---------
--------- ---------
</TABLE>
Depreciation expense was $106, $154 and $156 million in 1995, 1994 and 1993,
respectively. Repairs and maintenance expense was $36 million in 1995, $30
million in 1994 and $33 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 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 $1,092 million and $1,170 million, respectively, net of
accumulated amortization of $369 million and $345 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
$24 million and $44 million, respectively, net of accumulated amortization of
$46 million and $38 million, respectively.
INCOME TAXES
Allegiance's operations were historically included in Baxter's consolidated
U.S. federal and state income tax returns and in the tax returns of certain
Baxter foreign subsidiaries. The provision for income taxes has been determined
as if Allegiance had filed separate tax returns under its existing structure for
the periods presented. Accordingly, the effective tax rate of Allegiance in
future years could vary from its historical effective rates depending on
Allegiance's future legal structure and tax elections. All income taxes are
settled with Baxter on a current basis through the "Divisional Retained
Earnings" account.
Provision has been made for income taxes in accordance with Financial
Accounting Standards Board ("FASB") Statement No. 109, "Accounting for Income
Taxes."
F-9
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
3. ACQUISITIONS, INVESTMENTS IN AFFILIATES AND DIVESTITURES
ACQUISITIONS
Allegiance invested $5 million in 1995, $2 million in 1994 and $14 million
in 1993 for acquisitions accounted for as purchase transactions and investments
in affiliated companies. 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 Allegiance's strategic direction and were made to acquire
technologies, broaden product lines and expand market coverage.
DIVESTITURES
In 1995, Allegiance disposed of several businesses or product lines which
resulted in a net gain of $141 million (net of $122 million in related income
tax expense). The majority of the net gain for 1995 related to the divestiture
of Allegiance's Industrial and Life Sciences Division ("Industrial") to VWR
Corporation for approximately $400 million in cash and $25 million in deferred
payments, resulting in a gain of $268 million. As part of the divestiture,
Allegiance will continue to supply its self-manufactured products and supplies
sold in non-health-care markets to VWR Corporation under a long-term
distribution agreement. Allegiance disposed of or discontinued several minor
non-strategic or unprofitable product lines or investments which resulted in a
net gain of $8 million (net of $3 million in related income tax expense) in 1994
and $22 million (net of $14 million in related income tax expense) in 1993. The
majority of these transactions resulted in the disposition of Allegiance's
entire interest in such product lines and investments.
Proceeds from divestitures were $626 million in 1995, $107 million in 1994
and $68 million in 1993. Proceeds in 1995 included approximately $400 million
for the Industrial divestiture discussed earlier. The divestiture of the
diagnostics manufacturing business discussed in Note 4 to the Combined Financial
Statements included proceeds of approximately $200 million in 1995 and $44
million in 1994.
4. RESTRUCTURING CHARGES
In November 1993, Baxter's board of directors approved a series of strategic
actions to improve shareholder value and reduce costs. The strategic actions of
the program were designed in part to make the Allegiance Business more efficient
and responsive in addressing the changes occurring in the U.S. health-care
system. In November 1993, a $484 million pretax provision was recorded to cover
costs associated with these restructuring initiatives. Since the announcement of
the 1993 restructuring program, Allegiance has implemented, or is in the process
of implementing, all of the major strategic actions associated with the
restructuring program, which is expected to be completed in 1997.
Included in the 1993 restructuring plan was the intent to divest the
diagnostics manufacturing businesses and a valuation allowance was established
as a component of the 1993 restructuring charge. In December 1994, subject to
certain settlement provisions, the divestiture of these businesses was completed
and net proceeds were received of approximately $44 million in cash, $200
million in
F-10
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. RESTRUCTURING CHARGES (CONTINUED)
installment notes (which were collected in cash during January 1995) and $40
million in face value of preferred stock. In addition, accounts receivable were
retained of approximately $85 million, which was collected from customers in the
normal course of business. Allegiance has retained the rights to distribute all
current diagnostics products in the U.S.
Throughout 1995, active discussions took place with the buyer of the
diagnostics businesses related to interpretations of and responsibility relative
to the settlement provisions contained in the purchase and sale and related
agreements. The divestiture was also significantly complicated by a dispute
between the diagnostics manufacturing businesses and one of its major suppliers,
which ultimately led to a lower than expected final valuation of the business.
This dispute has been settled. In the third quarter of 1995, settlement
negotiations were completed with the buyer of the diagnostics businesses and
adjustments to the purchase price were finalized along with a revision of cost
estimates to complete the divestiture. This resulted in an additional
restructuring charge of approximately $76 million.
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,
approximately 1,920 of the 2,860 positions that were originally expected to be
affected by the program have been eliminated. As process changes were
implemented in connection with the restructuring program, it became apparent
that, as certain management level positions were eliminated, other lower cost
positions were added. While this has generated savings levels consistent with
expectations, management has revised its targeted head count reduction to 2,230
net positions. The majority of the remaining reductions will occur in 1996 and
1997, as facility closures and consolidations are completed as planned.
Noncash restructuring reserve utilization with respect to divestitures and
asset write-downs of $160 million, $66 million and $21 million in 1994 and 1995,
and for the six months ended June 30, 1996, respectively, included $118 million,
$16 million and $3 million, respectively, relating to the divestiture of the
diagnostics manufacturing businesses. Also included was $42 million in 1994, $50
million in 1995 and $16 million for the six months ended June 30, 1996, relating
primarily to the closure of a manufacturing facility and consolidations or
certain distribution facilities. The utilization relating to the diagnostics
divestiture primarily represents the excess of the net assets of the businesses
sold over the proceeds received. The utilization relating to the manufacturing
facility closure and distribution facility consolidations primarily represents
fixed asset and inventory write-downs.
F-11
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. RESTRUCTURING CHARGES (CONTINUED)
The following table summarizes the 1993 restructuring program for Allegiance
businesses:
<TABLE>
<CAPTION>
DIVESTITURES
EMPLOYEE- AND ASSET OTHER
RELATED COSTS WRITE-DOWNS COSTS TOTAL
------------- ------------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Initial restructuring charge..................... $ 103 $ 278 $ 103 $ 484
Utilization:
Cash........................................... (31) (22) (23) (76)
Noncash........................................ -- (160) -- (160)
----- ------ --------- ---------
December 31, 1994................................ $ 72 $ 96 $ 80 $ 248
----- ------ --------- ---------
Utilization:
Cash........................................... (29) (43) (33) (105)
Noncash........................................ -- (66) -- (66)
Adjustment to reserve............................ -- 76 -- 76
----- ------ --------- ---------
December 31, 1995................................ $ 43 $ 63 $ 47 $ 153
----- ------ --------- ---------
Utilization:
Cash........................................... (11) (13) (10) (34)
Noncash........................................ -- (21) -- (21)
----- ------ --------- ---------
June 30, 1996.................................... $ 32 $ 29 $ 37 $ 98
----- ------ --------- ---------
----- ------ --------- ---------
</TABLE>
The 1995 restructuring reserve balance consisted of $89 million of current
and $64 million noncurrent liabilities. The balance in the 1994 reserves
consisted of $80 million of current and $168 million of non-current liabilities.
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
--------- ---------------
(IN MILLIONS)
<S> <C> <C>
Accounts payable, principally trade.................................... $ 378 $ 390
Employee compensation and withholdings................................. 88 109
Restructuring.......................................................... 89 80
Property, payroll and other taxes...................................... 40 37
Other.................................................................. 97 104
--------- -----
Accounts payable and accrued liabilities............................... $ 692 $ 720
--------- -----
--------- -----
</TABLE>
6. LEASE OBLIGATIONS
Certain facilities and equipment are leased under operating leases expiring
at various dates. Most of the operating leases contain renewal options. Total
expense for all operating leases was $26 million in 1995, $38 million in 1994
and $38 million in 1993.
F-12
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. LEASE OBLIGATIONS (CONTINUED)
Future minimum lease payments (including interest) under noncancelable
operating leases at December 31, 1995 were as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------------
(IN MILLIONS)
<S> <C>
1996................................................................... $ 20
1997................................................................... 15
1998................................................................... 11
1999................................................................... 6
2000................................................................... 4
Thereafter............................................................. 6
---
Total obligations and commitments...................................... $ 62
---
---
</TABLE>
7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
CONCENTRATIONS OF CREDIT RISK
Allegiance provides credit, in the normal course of business, to hospitals,
private and government institutions, health-care agencies, insurance agencies
and doctors' offices. Allegiance 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.
FINANCIAL INSTRUMENT USE
For all periods presented, Allegiance has been considered in Baxter's
overall risk management strategy. As part of this strategy, Baxter uses certain
financial instruments to reduce its exposure to adverse movements in foreign
exchange rates. These financial instruments are not used for trading purposes.
FOREIGN EXCHANGE RISK MANAGEMENT
As part of implementing its strategy, Baxter has allocated to Allegiance the
income and expense associated with certain option contracts used to hedge
anticipated cost of production expected to be denominated in foreign currencies.
The terms of these financial instruments were less than one year. Allocated net
expense and the related notional amounts for these options were immaterial in
all years presented. Subsequent to year-end 1995, Baxter entered into options to
reduce its foreign exchange exposures. Baxter allocated to Allegiance options
with a notional value of approximately $40 million to hedge anticipated costs of
production expected to be denominated in foreign currency.
FAIR VALUES OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
CARRYING AMOUNTS APPROXIMATE FAIR
VALUES
---------------------- ----------------------
AS OF DECEMBER 31 (IN MILLIONS) 1995 1994 1995 1994
- ------------------------------------------------------------ --------- ----- --------- -----
<S> <C> <C> <C> <C>
Investment in affiliates.................................... $ 15 $ 9 $ 15 $ 9
</TABLE>
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.
F-13
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTY TRANSACTIONS
Baxter has provided to Allegiance certain legal, treasury, insurance and
administrative services. Charges for these services are based on actual costs
incurred by Baxter. In addition, Allegiance is the primary distributor of
Baxter's intravenous solutions, cardiovascular devices and other products in the
United States and also provides other services to Baxter. Negotiated fees for
these distribution services have generally been under the same terms and
conditions granted to independent third parties. Additionally, these fees are
not materially different than the terms of the Distribution Agreement subsequent
to the Distribution. A summary of related party transactions, all of which are
with Baxter or Baxter affiliates, is shown in the table below (in millions):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Allegiance provided:
Distribution services to Baxter in the U.S......................... $ 214 $ 206 $ 201
Administrative services to Baxter.................................. $ 25 $ 24 $ 23
Allegiance received:
Administrative services from Baxter................................ $ 48 $ 46 $ 44
International distribution services from Baxter.................... $ 26 $ 25 $ 23
</TABLE>
Management believes that the basis used for allocating corporate services is
reasonable. However, the terms of these transactions may differ from those that
would result from transactions among unrelated parties.
Allegiance participates in a centralized cash management program
administered by Baxter. Short-term advances from Baxter or excess cash sent to
Baxter has been treated as an adjustment to the "Divisional Retained Earnings"
account through the Balance Sheet date. No interest is charged on this balance.
Effective on the Distribution Date, Baxter and Allegiance will enter into a
series of administrative services agreements pursuant to which Baxter and
Allegiance will continue to provide, for a specified period of time, certain
administrative services which each entity historically has provided to the
other. These agreements require both parties to pay to each other a fee which
approximates the actual costs of these services. Additionally, subsequent to the
spin-off, Allegiance will have continuing significant relationships with Baxter
as a distributor, customer and supplier for a wide array of health-care products
and services, and for specified transitional administrative support services.
See "Arrangements Between Baxter and Allegiance" included elsewhere in this
Information Statement, for detailed descriptions of the related agreements.
9. RETIREMENT AND OTHER BENEFIT PROGRAMS
Allegiance participated in Baxter-sponsored non-contributory, defined
benefit pension plans covering substantially all employees in the U.S. and
Puerto Rico. The benefits were based on years of service and the employee's
compensation during 5 of the last 10 years of employment as defined by the
plans. Plan assets, which are maintained in a trust administered by Baxter,
consist primarily of equity and fixed income securities. Baxter and Allegiance
have announced their intent to freeze benefits under these plans at the date of
the spin-off for Allegiance employees. Allegiance has also announced that it
will not have a defined benefit pension plan to replace the Baxter plan. The
pension liability related to Allegiance employees' service prior to the spin-off
date will remain with Baxter.
Pension expense associated with the Baxter-sponsored plans prior to its
being frozen was $17 million, $22 million and $28 million for 1995, 1994 and
1993, respectively. 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.
F-14
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. RETIREMENT AND OTHER BENEFIT PROGRAMS (CONTINUED)
In addition to pension benefits, Allegiance participated in Baxter-sponsored
contributory health-care and life insurance benefits for substantially all
domestic retired employees. Baxter and Allegiance have announced that they will
freeze benefits under these plans at the date of the spin-off for Allegiance
employees. Expense associated with these benefits prior to the date of the
spin-off were $9 million in 1995, $9 million in 1994 and $11 million in 1993.
Allegiance has announced its intention not to establish new health-care and life
insurance plans for employees retiring subsequent to the Distribution Date.
Effective, January 1, 1993, Allegiance 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 $5 million (net of $3 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
liability associated with these benefits was $14 million for 1995 and 1994.
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 Allegiance matches participants'
contributions, up to 3% of compensation. Matching contributions made by
Allegiance were $11 million in 1995, $14 million in 1994 and $14 million 1993.
10. OTHER (INCOME) EXPENSE
Components of other (income) expense are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Asset dispositions, net.............................................. $ (263) $ (11) $ (36)
Foreign exchange..................................................... -- 5 --
Other................................................................ (39) -- 10
--------- --- ---
Total other income................................................... $ (302) $ (6) $ (26)
--------- --- ---
--------- --- ---
</TABLE>
11. INCOME TAXES
Income (loss) before tax expense by category is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
U.S................................................................. $ 434 $ 292 $ (191)
International....................................................... 42 46 37
--------- --------- ---------
Income (loss) before income tax expense............................. $ 476 $ 338 $ (154)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-15
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
Income tax expense before cumulative effect of accounting change by category
and by income statement classification is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Current
U.S.
Federal......................................................... $ 124 $ 91 $ 79
State and local, including Puerto Rico.......................... 34 26 29
International..................................................... (5) 3 5
--------- --------- ---------
Current income tax expense........................................ 153 120 113
--------- --------- ---------
Deferred
U.S.
Federal......................................................... 38 (5) (164)
State and local, including Puerto Rico.......................... 8 4 (34)
International..................................................... 4 4 (1)
--------- --------- ---------
Deferred income tax expense (benefit)............................. 50 3 (199)
--------- --------- ---------
Income tax expense (benefit)........................................ $ 203 $ 123 $ (86)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The income tax expense shown above was calculated as if Allegiance were a
stand-alone entity.
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Deferred tax assets
Accrued expenses................................................... $ 70 $ 60 $ 60
Restructuring costs................................................ 57 77 111
Other.............................................................. -- -- 1
--------- --------- ---------
Total deferred tax assets........................................ 127 137 172
--------- --------- ---------
Deferred tax liabilities
Asset basis differences............................................ 107 46 70
Other.............................................................. 1 -- 8
--------- --------- ---------
Total deferred tax liabilities................................... 108 46 78
--------- --------- ---------
Net deferred tax assets.......................................... $ 19 $ 91 $ 94
--------- --------- ---------
--------- --------- ---------
</TABLE>
In 1995, $22 million of deferred tax assets were transferred to Baxter. The
deferred tax assets related to the asset basis difference associated with
preferred stock received in connection with the divestiture of the diagnostics
manufacturing businesses. Since agreements entered into with the buyer of the
diagnostics manufacturing businesses require that the preferred stock be
retained by Baxter for a prescribed period of time, the related deferred tax
assets were transferred to Baxter.
F-16
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
Income tax expense differs from income tax expense calculated by using the
U.S. federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate....................... $ 166 $ 118 $ (54)
Tax-exempt operations................................................ (17) (23) (37)
Non deductible goodwill.............................................. 28 14 14
State and local taxes................................................ 27 15 (12)
Foreign tax (benefit)................................................ (1) (2) (2)
Other................................................................ -- 1 5
--------- --------- ---------
Income tax expense (benefit)....................................... $ 203 $ 123 $ (86)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Allegiance has manufacturing operations outside the U.S. that benefit from
reductions in local tax rates under tax incentives that will continue at least
through 1998. U.S. federal income taxes, net of available foreign tax credits,
on unremitted earnings deemed permanently reinvested would not be material.
12. LEGAL PROCEEDINGS
Upon the Distribution, Allegiance will assume the defense of litigation
involving claims related to Allegiance Business, including certain claims of
alleged personal injuries as a result of exposure to natural rubber latex gloves
described below. Allegiance has not been named as a defendant in this litigation
but will be defending and indemnifying Baxter Healthcare Corporation ("BHC"), as
contemplated by the Reorganization Agreement, for all expenses and potential
liabilities associated with claims pertaining to this litigation. It is expected
that Allegiance will be named as a defendant in future litigation and may be
added as a defendant in existing litigation. (Information subsequent to June 26,
1996 is unaudited).
BHC was one of ten defendants named in a purported class action filed in
August 1993, on behalf of all medical and dental personnel in the state of
California who 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. On February 29, 1996, the
California Appellate Court upheld the trial court's ruling. 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. On July 1, 1996, the Company was
served with a similar purported class action, WOLF V. BAXTER HEALTHCARE CORP. ET
AL., Circuit Court, Wayne County, MI, 96-617844NP. The Company is the only named
defendant in that suit. As of August 19, 1996, 36 additional lawsuits have been
served on BHC containing similar allegations of senseitization to natural rubber
latex products. Allegiance intends to vigorously defend against these actions.
Since none of these cases has proceeded to a hearing on the merits, Allegiance
is unable to evaluate the extent of any potential liability, and unable to
estimate any potential loss.
Allegiance believes that a substantial portion of the liability and defense
costs related to natural rubber latex gloves cases and claims will be covered by
insurance, subject to self-insurance retentions,
F-17
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. LEGAL PROCEEDINGS (CONTINUED)
exclusions, conditions, coverage gaps, policy limits and insurer solvency. BHC
has notified its insurance companies that it believes that these cases and
claims are covered by BHC's insurance. Most of BHC'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. It is not expected that the outcome of these
matters will have a material adverse effect on Allegiance's business, cash flow,
results of operations or financial condition.
Under the U.S. Superfund statute and many state laws, generators of
hazardous waste which is sent to a disposal or recycling site are liable for
cleanup of the site if contaminants from that property later leak into the
environment. The law provides that potentially responsible parties may be held
jointly and severally liable for the costs of investigating and remediating a
site. This liability applies to the generator even if the waste was handled by a
contractor in full compliance with the law.
As of June 30, 1996, BHC has been named as a potentially responsible party
for cleanup costs at ten hazardous waste sites, for which Allegiance has assumed
responsibility. Allegiance's largest assumed exposure is at the Thermo-Chem site
in Muskegon, Michigan. Allegiance expects that the total cleanup costs for this
site will be between $44 million and $65 million, of which Allegiance's share
will be approximately $5 million. This amount, net of payments of approximately
$1 million, has been accrued and is reflected in Allegiance's combined financial
statements. The estimated exposure for the remaining nine sites is approximately
$4 million, which has been accrued and reflected in Allegiance's combined
financial statements.
BHC is a defendant in a number of other claims, investigations and lawsuits
for which Allegiance has assumed responsibility. 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
Allegiance's business, cash flow, results of operations or financial condition.
13. INDUSTRY INFORMATION
Allegiance operates in a single industry segment as a leading provider of
medical products and services that help its health-care customers manage and
reduce the total cost of providing patient care. Through its nationwide
distribution network, Allegiance distributes a broad offering of hospital
supplies, including its own self-manufactured surgical and respiratory-therapy
products, to hospital and alternate-care customers. Allegiance also provides
cost management services to its health-care customers through inventory
management programs, customized packaging, and procedure and process consulting.
International sales from self-manufactured products are primarily in Canada,
France and Germany. For surgical products, the majority of raw materials used
for the manufacture of latex gloves are located in Malaysia. None of these
geographic locations represent 10% or more of net sales or identifiable assets
of Allegiance.
For the last three years, sales to customers which are members of two large
hospital buying groups, Premier and VHA, Inc. ("VHA"), as a percentage of total
sales were 27% and 16%, respectively in 1995, 23% and 13%, respectively in 1994,
and 23% and 13%, respectively in 1993. Premier and VHA each are comprised of a
group of health-care organizations which benefit from the pricing and other
benefits available to members of the group. However, some members are free to
purchase from the vendors of their choice. The loss of the relationship with
either group would not necessarily mean the loss of sales attributable to all
members of such group.
F-18
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------------------------------------------------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND OTHER FROM AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (A) RESERVES PERIOD
- ---------------------------------------------------- ------------- --------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Accounts receivable............................... $ 17 $ 3 $ -- $ (2) $ 18
-- --
-- --
--- --- ---
--- --- ---
Year ended December 31, 1994:
Accounts receivable............................... $ 13 $ 7 $ 1 $ (4) $ 17
-- --
-- --
--- --- ---
--- --- ---
Year ended December 31, 1993:
Accounts receivable............................... $ 12 $ 3 $ -- $ (2) $ 13
-- --
-- --
--- --- ---
--- --- ---
</TABLE>
- ------------------------
(A) Valuation accounts of acquired or divested companies and foreign currency
translation adjustments. Reserves are deducted from assets to which they
apply.
F-19
<PAGE>
INFORMATION STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------------------------------------------- -----
<S> <C>
AVAILABLE INFORMATION.......................... 2
SUMMARY........................................ 3
SELECTED HISTORICAL FINANCIAL DATA............. 7
SUPPLEMENTARY FINANCIAL DATA................... 8
RISK FACTORS................................... 9
UNITED STATES HEALTH-CARE ENVIRONMENT........ 9
UNITED STATES COMPETITION.................... 9
REVENUES FROM CUSTOMERS PURCHASING THROUGH
BUYING GROUPS............................... 10
POTENTIAL TAXABILITY......................... 10
FINANCIAL LEVERAGE........................... 10
MUTUAL DISTRIBUTION ARRANGEMENTS............. 10
DEPENDENCE ON ADMINISTRATIVE SERVICES........ 10
NO OPERATING HISTORY AS AN INDEPENDENT
COMPANY..................................... 11
NO PRIOR MARKET FOR ALLEGIANCE COMMON
STOCK....................................... 11
ALLEGIANCE DIVIDEND POLICY................... 11
EFFECTS ON STOCK............................. 11
CERTAIN ANTI-TAKEOVER EFFECTS................ 11
PRODUCTS LIABILITY........................... 12
ENVIRONMENTAL CONTINGENCIES.................. 12
GOVERNMENT REGULATION........................ 12
INTERNATIONAL EXPANSION...................... 13
BACKGROUND..................................... 13
ALLEGIANCE..................................... 14
THE DISTRIBUTION............................... 15
REASONS FOR THE DISTRIBUTION................. 15
MANNER OF EFFECTING THE DISTRIBUTION......... 15
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF
THE DISTRIBUTION............................ 16
LISTING AND TRADING OF ALLEGIANCE COMMON
STOCK....................................... 17
FUTURE MANAGEMENT OF ALLEGIANCE.............. 17
OPINIONS OF FINANCIAL ADVISOR................ 17
ARRANGEMENTS BETWEEN BAXTER AND ALLEGIANCE..... 19
REORGANIZATION AGREEMENT..................... 19
TAX SHARING AGREEMENT........................ 21
AGENCY, SERVICES AND DISTRIBUTION
AGREEMENTS.................................. 21
SERVICES AGREEMENTS.......................... 22
ALLEGIANCE FINANCING........................... 23
ALLEGIANCE BUSINESS............................ 24
OVERVIEW..................................... 24
STRATEGIC PROFILE............................ 24
STRATEGIC PRIORITIES......................... 25
DISTRIBUTION SERVICES........................ 26
PRODUCT OFFERING............................. 27
COST-MANAGEMENT SERVICES..................... 29
CONTRACTUAL ARRANGEMENTS; BUYING GROUPS...... 30
SALES AND MARKETING.......................... 30
RAW MATERIALS SUPPLIERS...................... 30
PATENTS AND TRADEMARKS....................... 30
COMPETITION.................................. 30
<CAPTION>
DESCRIPTION PAGE
- ----------------------------------------------- -----
<S> <C>
QUALITY CONTROL.............................. 31
GOVERNMENT REGULATION........................ 31
EMPLOYEES.................................... 31
LEGAL PROCEEDINGS.............................. 31
PROPERTIES..................................... 32
ALLEGIANCE PRO FORMA FINANCIAL INFORMATION..... 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................... 38
OVERVIEW..................................... 38
RESULTS OF OPERATIONS........................ 38
LIQUIDITY AND CAPITAL RESOURCES.............. 42
ALLEGIANCE MANAGEMENT.......................... 46
BOARD OF DIRECTORS........................... 46
COMMITTEES OF THE BOARD OF DIRECTORS......... 47
THE AUDIT AND PUBLIC POLICY COMMITTEE........ 47
THE COMPENSATION AND NOMINATING COMMITTEE.... 47
COMPENSATION OF DIRECTORS.................... 48
EXECUTIVE OFFICERS........................... 48
1995 COMPENSATION OF EXECUTIVE OFFICERS...... 49
STOCK OPTION GRANTS.......................... 51
STOCK OPTION EXERCISES....................... 52
BAXTER PENSION PLAN.......................... 52
BAXTER STOCK HELD BY ALLEGIANCE EMPLOYEES.... 53
COMPENSATION OF EXECUTIVE OFFICERS........... 53
COMPENSATION PHILOSOPHY FOR EXECUTIVE
OFFICERS ................................... 53
COMPENSATION ELEMENTS........................ 54
1996 INCENTIVE COMPENSATION PROGRAM.......... 54
CHANGE OF CONTROL PLAN....................... 56
ALLEGIANCE RETIREMENT PLAN................... 56
COMPENSATION COMMITTEE INTERLOCKS DISCLOSURE
AND INSIDER PARTICIPATION................... 58
OWNERSHIP OF ALLEGIANCE COMMON STOCK BY CERTAIN
BENEFICIAL OWNERS............................. 59
DESCRIPTION OF ALLEGIANCE CAPITAL STOCK........ 60
AUTHORIZED CAPITAL STOCK..................... 60
ALLEGIANCE STOCK............................. 60
ALLEGIANCE PREFERRED STOCK................... 60
ALLEGIANCE RIGHTS AGREEMENT.................. 60
CERTAIN ANTI-TAKEOVER EFFECTS.................. 63
CERTIFICATE OF INCORPORATION AND BY-LAWS..... 63
STATE LAW.................................... 65
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS...................................... 66
LIMITATION OF LIABILITY OF DIRECTORS......... 66
INDEMNIFICATION OF DIRECTORS AND OFFICERS.... 66
INDEX TO COMBINED FINANCIAL STATEMENTS......... F-1
</TABLE>
<PAGE>
PART II
INFORMATION NOT INCLUDED IN INFORMATION STATEMENT
Confidential information appearing in Exhibit 10.6 has been omitted and
filed separately with the Securities and Exchange Commission in accordance
with Rule 406 promulgated under the Securities Act of 1933, as amended.
Omitted information has been replaced with asterisks.
E X H I B I T I N D E X
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
** 2 Form of Reorganization Agreement
** 3.1 Form of Amended and Restated Certificate of Incorporation
of Allegiance Corporation
** 3.2 Form of Amended and Restated Bylaws of Allegiance Corporation
*** 4.1 Form of Certificate of Common Stock of Allegiance Corporation
** 4.2 Form of Rights Agreement, by and between Allegiance
Corporation and the rights agent named therein
** 10.1 Form of Allegiance Corporation 1996 Outside Director Incentive
Compensation Plan
** 10.2 Form of Allegiance Corporation 1996 Incentive Compensation Plan
** 10.3 Form of Allegiance Change of Control Plan
** 10.4 Retention Agreement for Mr. Zollars
** 10.5 Retention Agreement for Ms. Gaumer
*** 10.6 Agency, Services and Distribution Agreement
** 22 Subsidiaries of Allegiance Corporation
** 23.1 Consent of CS First Boston
** 27 Financial Data Schedule
** 99.1 Form of Fairness Opinion of CS First Boston as to Baxter
** 99.2 Form of Viability Opinion of CS First Boston as to Baxter
** 99.3 Form of Viability Opinion of CS First Boston as to Allegiance
NOTE:
* To be filed by amendment
** Previously filed
*** Filed herewith
<PAGE>
PART II-1
S I G N A T U R E
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this amendment to its
registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized.
ALLEGIANCE CORPORATION
By: /s/ Lester B. Knight
--------------------------
Lester B. Knight
Chairman of the Board and
Chief Executive Officer
DATE: September 19, 1996
Page 2
<PAGE>
PART II-2
Confidential treatment appearing in Exhibit 10.6 has been omitted and
filed separately with the Securities and Exchange Commission in accordance
with Rule 406 promulgated under the Securities Act of 1933, as amended.
Omitted information has been replaced with asterisks.
I N D E X T O E X H I B I T S
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT PAGE
- -------------- ----------------------- ----
** 2 Form of Reorganization Agreement
** 3.1 Form of Amended and Restated Certificate of
Incorporation of Allegiance Corporation
** 3.2 Form of Amended and Restated Bylaws of
Allegiance Corporation
*** 4.1 Form of Certificate of Common Stock of
Allegiance Corporation
** 4.2 Form of Rights Agreement, by and between
Allegiance Corporation and the rights agent
named therein
** 10.1 Form of Allegiance Corporation 1996 Outside
Director Incentive Compensation Plan
** 10.2 Form of Allegiance Corporation 1996 Incentive
Compensation Plan
** 10.3 Form of Allegiance Change of Control Plan
** 10.4 Retention Agreement for Mr. Zollars
** 10.5 Retention Agreement for Ms. Gaumer
*** 10.6 Agency, Services and Distribution Agreement
** 22 Subsidiaries of Allegiance Corporation
** 23.1 Consent of CS First Boston
** 27 Financial Data Schedule
** 99.1 Form of Fairness Opinion of CS First Boston as
to Baxter
** 99.2 Form of Viability Opinion of CS First Boston as
to Baxter
** 99.3 Form of Viability Opinion of CS First Boston as
to Allegiance
NOTE:
* To be filed by amendment
** Previously filed
*** Filed herewith
Page 3
<PAGE>
COMMON STOCK
NUMBER [PHOTO] ALLEGIANCE SHARES
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 017475 10 4
ALLEGIANCE CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN THE CITY OF NEW YORK OR IN CHICAGO
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF THE PAR VALUE
OF ONE DOLLAR PER SHARE OF
CERTIFICATE OF STOCK
WITNESS THE SEAL OF THE CORPORATION AND THE FACSIMILE SIGNATURES OF ITS
DULY AUTHORIZED OFFICERS
DATED:
ALLEGIANCE
COUNTERSIGNED AND REGISTERED: CORPORATION
FIRST CHICAGO TRUST COMPANY CORPORATE /s/ Lester B. Knight
OF NEW YORK SEAL
TRANSFER AGENT DELAWARE
AND REGISTRAR CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
BY /s/ Joseph F. Sandifer
/s/ William L. Feather
AUTHORIZED SIGNATURE
SECRETARY
<PAGE>
ALLEGIANCE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO
SO REQUESTS A STATEMENT OF THE DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES
THEREOF WHICH IT IS AUTHORIZED TO ISSUE AND THE QUALIFICATIONS, LIMITATIONS OR
RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. ANY SUCH REQUEST IS TO BE
ADDRESSED TO THE SECRETARY OF ALLEGIANCE CORPORATION OR TO THE TRANSFER AGENT.
For value received, ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
____________________________________________
________________________________________________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS,
INCLUDING POSTAL ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint _________________________________________________________
________________________________________________________________________________
Attorney to transfer the said stock on the Books of the within-named Corporation
with full power of substitution in the premises.
Dated __________________________________
_______________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE
OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
<PAGE>
S & A D R A F T -- AUGUST 19, 1996
------------------------------------
I.V. SYSTEMS
CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE
406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. OMITTED
INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
AGENCY, SERVICES, AND DISTRIBUTION AGREEMENT
by and between
BAXTER HEALTHCARE CORPORATION
as Baxter
and
ALLEGIANCE HEALTHCARE CORPORATION
as Allegiance
<PAGE>
TABLE OF CONTENTS
Page
----
1. Definitions; Rules of Construction........................................1
2. Appointment and Commitment................................................6
3. Agency Model, Distributor Model, and BCS Kit Model........................7
4. Exclusivity...............................................................9
5. Term.....................................................................11
6. Prices and Fees..........................................................12
7. The Council..............................................................20
8. Invoicing and Payments...................................................21
9. Allegiance's Duties......................................................23
10. Baxter's Duties..........................................................23
11. Standard of Care.........................................................23
12. Alternative Acute Care Distribution......................................24
13. Transfer of Title and Risk of Loss.......................................24
14. Warranties...............................................................25
15. Trademarks...............................................................25
16. Termination..............................................................26
17. Indemnity................................................................30
18. Insurance................................................................34
19. Compliance with Laws.....................................................34
20. Force Majeure............................................................36
21. Confidentiality..........................................................37
22. Limitation of Liability and Remedy.......................................38
23. Miscellaneous Provisions.................................................40
i
<PAGE>
24. Dispute Resolution and Arbitration.......................................42
25. Assignment...............................................................43
26. Authority................................................................44
LIST OF EXHIBITS
Exhibit A I.V. Products
Exhibit B Nutrition Products
Exhibit C Allegiance's Duties
Exhibit D Baxter's Duties
Exhibit E Supplier Scoreboard
Exhibit F Interim Distributor Model
ii
<PAGE>
AGENCY, SERVICES, AND DISTRIBUTION AGREEMENT
This AGENCY, SERVICES, AND DISTRIBUTION AGREEMENT (this "Agreement"),
dated as of October 1, 1996, by and between BAXTER HEALTHCARE CORPORATION, a
Delaware corporation with its principal offices at One Baxter Parkway,
Deerfield, Illinois 60015 (hereinafter called "Baxter") and ALLEGIANCE
HEALTHCARE CORPORATION, a Delaware corporation with its principal offices at
1430 Waukegan Road, McGaw Park, Illinois 60085 (hereinafter called
"Allegiance").
RECITALS
Baxter and its parent corporation, Baxter International Inc. ("Baxter
International"), have spun-off various businesses by transferring those
businesses to Allegiance Corporation ("Allegiance Corporation") (or its
subsidiaries) and distributing all of the stock of Allegiance Corporation to the
stockholders of Baxter International as a dividend. As a result of the
distribution of that dividend, Baxter International and Allegiance Corporation,
and their respective subsidiaries, are separate and independent corporations.
As a consequence of the foregoing actions, Allegiance will acquire,
INTER ALIA, certain business units, including the U.S. Distribution business,
that have previously provided various sales and distribution services to
business units owned by Baxter.
Baxter and Allegiance recognize that it is advisable for Allegiance to
continue providing physical distribution and sales support and related services
to Baxter.
AGREEMENT
In consideration of the mutual undertakings contained herein, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Baxter and Allegiance agree as follows:
1. DEFINITIONS; RULES OF CONSTRUCTION.
1.1 DEFINITIONS. As used in this Agreement:
1.1.1 "Affiliate" shall mean any Person controlling, controlled by
or under direct or indirect common control with a party hereto. For the purpose
of this definition,
<PAGE>
the term "control" means the power to direct the management of an entity,
directly or indirectly, whether solely through the ownership of voting
securities (as in the case of a subsidiary), by contract, or otherwise; and the
term "controlled" has a meaning correlative to the foregoing. Allegiance
Corporation and Baxter International shall not be deemed to be Affiliates of
each other.
1.1.2 "Agreement" shall mean this Agency, Services, and Distribution
Agreement dated as of October 1, 1996, including all Exhibits and Schedules
attached hereto.
1.1.3 "Base Business Products" shall mean all I.V. Products on
Exhibit A that are not designated as Premium Products, as defined herein.
1.1.4 "Best Value Products" shall mean a select offering of
Allegiance-distributed and Allegiance-manufactured products * * *. Best Value
Products are specially promoted externally to Allegiance customers and
internally to Allegiance sales personnel through financial incentives. All Best
Value Products are required to meet the following specific criteria: * * *.
Notwithstanding the foregoing criteria, the Premium Products listed on Exhibit A
from time to time pursuant to Section 4.3 will be deemed Best Value Products;
provided, however, that * * * identified on Exhibit A will not be considered to
be Best Value Products solely on account of their being identified as Premium
Products.
1.1.5 "Competitor" shall mean (a) with respect to Baxter, any
Person (including an affiliate of such Person) that during its most recently
completed fiscal year has annual net revenues from sales of products competitive
with the Products greater than 20% of the total annual net revenues of Baxter
from Products during its most recently completed fiscal year; and (b) in the
case of Allegiance, any Person (including an affiliate of such Person) that
during its most recently completed fiscal year has annual net revenues from the
distribution of medical, surgical and laboratory products greater than 20% of
the total annual net revenues of Allegiance during its most recently completed
fiscal year.
1.1.6 "Cost Management" shall mean the dedication of resources by
Allegiance or its Affiliates to deliver cost improvement services to customers.
Cost Management services shall focus on activities including, without
limitation, reducing product consumption, improving utilization of assets,
improving logistics, and reducing or eliminating operating costs. Cost
Management transactions shall be those transactions performed by
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* * * CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
-2-
<PAGE>
Allegiance pursuant to any comprehensive Cost Management contract which permits
Allegiance to share with a customer the risk and reward of cost savings
generated by Cost Management as well as obligating the customer to purchase a
specified percentage of Best Value Products. As part of such Cost Management
transactions, Allegiance may also provide some or all of the following services:
(a) ValueLink (as defined herein); (b) PBDS (as defined herein); (c) consulting
services; (d) on-site clinical resources; (e) contract materials management; and
(f) consolidated service centers.
1.1.7 "Internal Use Sales" shall mean (a) Products transferred to
Baxter's Affiliates for internal use (including provision of perfusion
services); and (b) Products transferred to another Baxter Division for resale
under a distribution agreement with Allegiance.
1.1.8 "I.V. Products" shall mean the products and accessories
manufactured by or on behalf of Baxter and listed in Exhibit A hereto together
with the parts and components necessary for the repair and replacement thereof.
1.1.9 "Kit" shall mean an aggregation by Allegiance of Baxter,
Allegiance, and/or third-party products packaged together or repackaged for
specific uses and procedures including, without limitation, such aggregations
for programs known prior to the effective date of this Agreement as Baxter
Custom Sterile ("BCS"), Baxter Custom Products ("BCP"), and Procedure-Based
Delivery Systems ("PBDS").
1.1.10 "Line of Products" shall mean any specifically identified
group of related Products set forth in Exhibits A and B to this Agreement.
1.1.11 Net Sales.
1.1.11.1 "Agency Net Sales" shall mean Baxter's aggregate sales
of Products at the Agency Prices (or direct shipment prices) for such
Products less all applicable divisional and corporate bonuses and
discounts, returns, allowances, discounts available at time of purchase,
group purchasing organization fees, drug buy-back premiums, and amortized
contract procurement costs provided or recognized by Baxter. Agency Net
Sales includes all sales of the Products by Baxter in the Territory except
Distributor Net Sales, sales to Allegiance of Products, Internal Use Sales,
VWR Purchases, Drug Purchases, capital equipment lease extensions and re-
signs, or sales and leases of hardware and
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<PAGE>
related software and disposables to nonhealth-care retailers serving end-
user customers.
1.1.11.2 "Contract Net Sales" shall mean the sum of Agency Net
Sales and Distributor Net Sales. Contract Net Sales amounts shall be
recognized for calculation purposes in a manner consistent with Baxter's
historical revenue recognition policies and generally accepted accounting
principles.
1.1.11.3 "Distributor Net Sales" shall mean a calculation of net
sales for all transactions hereunder pursuant to the Distributor Model or
the Interim Distributor Model. Distributor Net Sales shall be based upon
the volumes of Products sold by Allegiance to customers and calculated as
if Baxter had sold such volumes to such customers at the Suggested Sales
Prices less all applicable corporate and divisional bonuses and discounts,
returns, allowances, discounts available at time of purchase, group
purchasing organization fees, drug buy-back premiums, and amortized
contract procurement costs provided or recognized by Baxter. Distributor
Net Sales shall not include sales to Allegiance of Products for use as
components of BCS Kits or sales of BCS Kits to customers.
1.1.12 "Notice" shall mean notice given in accordance with Section
23.1.
1.1.13 "Nutrition Products" shall mean the products and accessories
manufactured by or on behalf of Baxter and listed in Exhibit B hereto together
with the parts and components necessary for the repair and replacement thereof.
1.1.14 "Person" shall mean an individual, corporation, partnership,
limited liability company, unincorporated syndicate, unincorporated
organization, trust, trustee, executor, administrator or other legal
representative, governmental authority or agency, or any group of Persons acting
in concert.
1.1.15 "Premium Products" shall mean all I.V. Products on Exhibit A
that are designated as Premium Products.
1.1.16 "Products" shall mean all I.V. Products and all Nutrition
Products.
1.1.17 "Term" shall mean the period of time provided in Section 5
hereof, including any and all extensions thereof.
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<PAGE>
1.1.18 "Territory" shall mean the District of Columbia and the
fifty states comprising the United States of America.
1.1.19 "Transfer" shall mean any assignment, transfer, sale or
other disposition to a Person that is not an Affiliate of the Transferor,
including any Transfer by way of merger or consolidation or otherwise by
operation of law.
1.1.20 "ValueLink" shall mean the just-in-time inventory management
service known as ValueLink-Registered Trademark-.
1.2 OTHER TERMS. Terms defined in other Sections of this Agreement will
have the meanings therein provided.
1.3 RULES OF CONSTRUCTION.
1.3.1 In this Agreement, unless a clear contrary intention
appears:
1.3.1.1 the singular number includes the plural number and vice
versa;
1.3.1.2 reference to any Person includes such Person's
successors and assigns but, if applicable, only if such successors and
assigns are permitted by this Agreement;
1.3.1.3 reference to any gender includes the other gender;
1.3.1.4 reference to any Section or Exhibit means such Section
of this Agreement or such Exhibit to this Agreement, as the case may be,
and references in any Section or definition to any clause means such clause
of such Section or definition;
1.3.1.5 "herein", "hereunder", "hereof", "hereto", and words of
similar import shall be deemed references to this Agreement as a whole and
not to any particular Section or other provision hereof or thereof;
1.3.1.6 "including" (and with correlative meaning "include")
means including without limiting the generality of any description
preceding such term;
1.3.1.7 "distribute" and "distribution" shall be used
interchangeably to refer to Allegiance's duties under the Agency Model, the
Distributor Model, the Interim
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<PAGE>
Distributor Model, or the BCS Kit Model and shall not alone imply a legal
distributor relationship;
1.3.1.8 relative to the determination of any period of time,
"from" means "from and including", "to" means "to but excluding" and
"through" means "through and including";
1.3.1.9 reference to any law (including statutes and
ordinances) means such law as amended, modified, codified or reenacted, in
whole or in part, and in effect from time to time, including rules and
regulations promulgated thereunder;
1.3.1.10 accounting terms used herein shall have the meanings
historically attributed to them by Baxter and its subsidiaries based upon
Baxter's internal financial policies and procedures in effect prior to the
spin-off described in the recitals above;
1.3.1.11 in the event of any conflict between the provisions of
the body of this Agreement and the Exhibits hereto, the provisions of the
body of this Agreement shall control; and
1.3.1.12 the headings contained in this Agreement (except for
the Exhibits) have been inserted for convenience of reference only, and are
not to be used in construing this Agreement.
1.3.2 This Agreement was negotiated by the parties with the
benefit of legal representation, and any rule of construction or interpretation
otherwise requiring this Agreement to be construed or interpreted against either
party shall not apply to any construction or interpretation hereof.
2. APPOINTMENT AND COMMITMENT.
2.1 APPOINTMENT OF LIMITED AGENCY. Baxter hereby appoints Allegiance, and
Allegiance hereby accepts such appointment, as Baxter's exclusive limited agent
to provide under the Agency Model (as defined herein), (1) physical distribution
services and sales support services with respect to the Products sold by Baxter
to Baxter's customers in the Territory, and (2) sales representative services
for sales to surgery centers not affiliated with acute care hospitals (such
acute care hospitals as set forth in the then-current AMERICAN HOSPITAL
ASSOCIATION GUIDE), subject to the terms and conditions stated herein. Subject
to the terms of Section 4.2, Baxter, in its sole and
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<PAGE>
absolute discretion, shall select the customers to whom Allegiance distributes
as Baxter's agent under the Agency Model. Subject to the terms of Section 3,
all Products shall be sold under the Agency Model except for (a) Kits, and/or
(b) Cost Management, ValueLink, and other transactions in which the customer
demands that Allegiance issue an Allegiance invoice for Products and, in some
instances, Allegiance products; provided that Allegiance shall nevertheless
provide sales, sales support, customer service, and physical distribution
services for the transactions specified in clauses (a) and (b) of this Section
under the Distributor Model or BCS Kit Model, each as defined herein.
2.2 GRANT OF DISTRIBUTION RIGHTS. With respect to the transactions
specified in clauses (a) and (b) in Section 2.1, Baxter hereby grants to
Allegiance and Allegiance hereby accepts the right, which shall be exclusive
except as set forth in Section 4.2, to provide sales, sales support, customer
service, and physical distribution services, as specified in Section 9, to
customers in the Territory under the Distributor Model, the Interim Distributor
Model, and the BCS Kit Model, provided that Allegiance shall notify Baxter in
advance of the identity of each such customer.
2.3 EXCEPTIONS AND LIMITATIONS. Baxter reserves all rights not expressly
granted to Allegiance hereunder. Except as expressly provided herein with
respect to Subdistributors, Allegiance shall not grant to any subagents or
subdistributors any of its rights or obligations hereunder.
3. AGENCY MODEL, DISTRIBUTOR MODEL, AND BCS KIT MODEL.
3.1 GENERAL. The Products may be distributed pursuant to the Agency
Model, the Distributor Model, or the BCS Kit Model. Section 2.1 shall apply to
Products distributed pursuant to the Agency Model, and Section 2.2 shall apply
to Products distributed pursuant to the Distributor Model or the BCS Kit Model.
For the period beginning with the effective date of this Agreement and ending
upon the earlier of (a) mutual agreement of the parties or (b) September 30,
1997 (the "Interim Period"), all transactions that would otherwise be treated as
Distributor Model transactions under this Agreement will follow the Interim
Distributor Model as provided in Exhibit F. Based upon the parties' business
prior to the effective date of this Agreement, the parties believe that a
significant majority of Baxter's distribution of the Products shall be made by
Allegiance under the Agency Model.
3.2 AGENCY MODEL. Under the Agency Model, Baxter shall maintain the
principal contractual relationship with the customer
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<PAGE>
and shall be responsible for sales, sales support, customer invoicing, accounts
receivable, and customer service in connection with the sales of the Products,
and Allegiance shall act as Baxter's agent to facilitate physical distribution
of the Products from Baxter to the customer. Baxter shall have the sole right
and responsibility for negotiating and contracting with each customer the
delivered price from Baxter of the Products (the "Agency Price"). As provided
in Section 6, Baxter shall pay Allegiance a percentage of the Agency Net Sales
of the Products as a fee for Allegiance's services as set forth in Section 9.
3.3 DISTRIBUTOR MODEL. Under the Distributor Model, Allegiance shall
maintain the principal contractual relationship with the customer for sales,
sales support, customer invoicing, accounts receivable, and customer service in
connection with the supply of the Products in connection with the provision by
Allegiance of Kits and Cost Management, ValueLink, and other services
consolidated on an Allegiance invoice for Products and, in some instances,
Allegiance products (as required by the customer). Baxter shall use reasonable
efforts to cooperate with Allegiance and to facilitate Allegiance's fulfillment
of its obligations hereunder. Baxter shall provide to Allegiance a suggested
direct sale price including Standard Delivery (the "Suggested Sales Price") and
an effective Distributor Net Sales price applicable to each such Product in
connection with each Distributor Model transaction; provided, however, that
Allegiance shall have the sole right and responsibility for negotiating and
contracting with each customer the delivered price of the Products. If the
customer has a then-current contract with Baxter for such Products, the
Suggested Sales Price shall be the then-current contract price. If Baxter has
an agreement with any customer for Baxter's provision of Products to such
customer and such customer subsequently requests (a) Kits, and/or (b) Cost
Management, ValueLink, and other services consolidated on an Allegiance invoice
for such Products and, in some instances, Allegiance products, then all such
Distributor Model sales of Products to such customer shall apply to any minimum
purchase commitments or quantity discounts contained in Baxter's agreement with
such customer.
3.4 BCS KIT MODEL. Under the BCS Kit Model, Allegiance shall maintain the
principal contractual relationship with the customer for sales, sales support,
customer invoicing, accounts receivable, and customer service in connection with
the provision by Allegiance of BCS Kits. Baxter shall provide to Allegiance a
price for each Product that Allegiance orders from Baxter for use as a component
for a BCS Kit, and such price shall be Baxter's Agency Net Sales price for
Products from the * * * contract in effect on January 1 of the calendar year in
which the BCS Kit
- ---------------
* * * CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
-8-
<PAGE>
component sale takes place (the "BCS Component Price"). Allegiance shall have
the sole right and responsibility for negotiating and contracting with each
customer the delivered price of the BCS Kits. If Baxter has an agreement with
any customer for Baxter's provision of Products to such customer and such
customer subsequently requests BCS Kits, all such BCS Kit Model sales of
Products to such customer shall apply to any minimum purchase commitments or
quantity discounts contained in Baxter's agreement with such customer.
4. EXCLUSIVITY.
4.1 RESTRICTIONS ON ALLEGIANCE.
4.1.1 Unless specifically required by the end-user customer or as
permitted below for certain competitive Best Value Products, Allegiance, its
Affiliates, and any other Person acting on its or their behalf, shall not,
directly or indirectly, market or promote any product or solicit orders through
agents or otherwise, to or from any customer or any Affiliate of any customer
for any product that competes in the Territory with any Product or Products.
The taking by Allegiance of orders not solicited by Allegiance shall not be
deemed to be a breach of this Section. Without limiting the generality of the
foregoing and at all times subject to availability of the Products, Allegiance,
its Affiliates, and any other Person acting on its or their behalf, shall not,
directly or indirectly, market or promote any product that competes with any
Product or Products as Allegiance's (a) Best Value Product that competes with
the Products, (b) first-line substitute or for competitive comparison, or (c) as
a substitute for any other product competitive with any Product or Products;
except that Allegiance may market and promote as Best Value Products
endotracheal tubes, temperature probes, and heat and moisture exchangers
(whether with or without filters) and that such competitive Best Value Products
shall not be subject to clauses (b) and (c) of this sentence. Allegiance, its
Affiliates, and any other Person acting on its or their behalf, shall promote
the Premium Products [except for endotracheal tubes, temperature probes, and
heat and moisture exchangers (whether with or without filters)]. This Section
4.1.1 shall not apply if the applicable Products are unavailable, and such
unavailability is due substantially to Baxter's acts or omissions.
4.1.2 Allegiance, its Affiliates, and any other Person acting on
its or their behalf, shall not, directly or indirectly, develop or manufacture
any product that competes in the Territory with any Product or Products.
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<PAGE>
4.1.3 Allegiance, its Affiliates, and any other Person acting on
its or their behalf, shall not, directly or indirectly, market to or solicit
orders from, or distribute any Product through distributors, agents, or
otherwise, to or from any customer or any Affiliate of any customer located
outside of the Territory.
4.2 RESTRICTIONS ON BAXTER. Baxter, its Affiliates, and any other Person
acting on its or their behalf, shall not, directly or indirectly, provide or
engage any Person other than Allegiance to provide physical distribution
services or to act as agent or distributor for Baxter in the Territory with
respect to the sales and distribution of the Products, provided that Baxter
shall have the right to:
4.2.1 distribute the Products in the Territory directly to
customers from Baxter manufacturing facilities and/or Baxter's replenishment
centers in order to facilitate cost reduction plans;
4.2.2 distribute any Product to any customer in the Territory to
the extent necessitated by Baxter's inability to assign to Allegiance any
contract or agreement whether pursuant to the Restructuring Agreements or at a
later date in connection with a future acquisition;
4.2.3 distribute the Products directly to Baxter's Affiliates or
directly to other Baxter Divisions, where such distribution is made in
connection with Internal Use Sales;
4.2.4 continue to sell and distribute Products directly to VWR
Corporation for resale to industrial customers (all such Products actually sold
and distributed to VWR Corporation to be referred to herein as "VWR Purchases");
4.2.5 continue to distribute directly from Baxter manufacturing
facilities any Product sold directly to drug manufacturers (all such Products
actually sold and distributed to drug manufacturers to be referred to herein as
"Drug Purchases");
4.2.6 distribute Products to customers within the Territory other
than through Allegiance (and Baxter shall be relieved of its obligation to pay
fees pursuant to Section 6.3) if and to the extent Allegiance is unable to so
distribute the Products due to (a) regulatory requirements; (b) Allegiance's
material failure to meet agreed-upon performance standards; or (c) Allegiance
being otherwise prohibited or prevented from selling and/or distributing the
Products or refusing or being
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<PAGE>
unable to sell and/or distribute the Products to any customer or class of
customers other than by customer decision;
4.2.7 direct Allegiance to distribute the Products to third-party
distributors ("Subdistributors"), provided that Baxter shall not have the right
to direct Allegiance to distribute the Products to acute care hospitals (such
acute care hospitals as set forth in the then-current AMERICAN HOSPITAL
ASSOCIATION GUIDE) through Subdistributors unless specifically required by the
end-user customer;
4.2.8 sell and distribute products which are not Products, as
defined herein, through relationships that do not include Allegiance; and
4.2.9 distribute, sell and lease hardware and related software and
disposables to nonhealth-care retailers serving end-user customers.
This Agreement shall in no way limit the right of Baxter and its Affiliates to
market, sell, or otherwise distribute the Products outside the Territory.
4.3 PRODUCT EXCLUSIVITY. Baxter shall: (a) add Products to Exhibits A
and B which are new products (including all modifications of, improvements of,
substitutes for, and line extensions of the Products) developed or acquired by
Baxter that are of the same type and have similar distribution characteristics
as the Products set forth in Exhibits A and B as of the effective date of this
Agreement; and (b) delete from Exhibits A and B and this Agreement any Product,
the manufacture and sale of which has been generally discontinued by Baxter.
Exhibits A and B shall be deemed to be amended to reflect any such Product
additions and deletions without any further act by any party hereto.
Notwithstanding clause (a) above, Baxter shall have the right, but not the
obligation, to add newly developed or acquired products to Exhibits A and B
pursuant to clause (a) above if such products are part of a new product line or
a new line of business, subject to agreement by Allegiance. Baxter shall use
commercially reasonable efforts to provide at least 30 days prior written notice
to Allegiance of each such addition or deletion. Exhibits A and B, as amended
and supplemented from time to time, are incorporated by reference herein and
form part of this Agreement.
5. TERM. The initial Term of this Agreement shall begin on the effective date
of this Agreement and, except as otherwise provided in this Agreement, end at
the end of the day on December 31, 2001. The Term may be extended for
successive additional
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<PAGE>
periods, subject to the parties agreeing upon the terms and conditions of such
an extension. Beginning no later than July 1, 2000, the parties shall negotiate
in good faith regarding the terms and conditions of an extension of this
Agreement beyond its expiration on December 31, 2001. Each party may in its
absolute discretion determine whether or not the terms of any such proposed
extension are acceptable and may refuse to agree to any such extension for any
reason whatsoever.
6. PRICES AND FEES. Allegiance and Baxter will keep confidential all amounts
paid by either party to the other.
6.1 DISTRIBUTOR MODEL. Baxter shall pay to Allegiance a service fee equal
to the applicable percentages (pursuant to Section 6.4) of the Distributor Net
Sales of such Products.
6.2 BCS KIT MODEL. Allegiance shall pay to Baxter as the purchase price
of the Products purchased by Allegiance pursuant to the BCS Kit Model an amount
equal to the aggregate BCS Component Prices of all such Products.
6.3 AGENCY MODEL, DIRECT SALES AND OTHER. Baxter shall pay to Allegiance
an agency services fee equal to the applicable percentages (pursuant to Section
6.4) of the Agency Net Sales of all Products sold by Baxter to customers.
However, sales to Allegiance of Products, Internal Use Sales, VWR Purchases,
Drug Purchases, capital equipment lease extensions and re-signs, and sales and
leases of hardware and related software and disposables to nonhealth-care
retailers serving end-user customers are excluded from Agency Net Sales.
6.4 APPLICABLE PERCENTAGES.
6.4.1 For all transactions under Sections 6.1 and 6.3 during the
period beginning October 1, 1996, and continuing through December 31, 1996, the
applicable percentage shall be * * * and shall be calculated in the same manner
as the internal profit split between Baxter's business units was calculated from
January 1, 1996, through September 30, 1996.
6.4.2 The following percentages shall apply to Agency Net Sales
and Distributor Net Sales during calendar year 1997 and thereafter unless
otherwise agreed to by the parties in accordance with Section 6.4.2.3:
6.4.2.1 * * * during such calendar year for all Nutrition
Products and Base Business Products and Premium Products which are excluded
from Best Value Products except for sales of such I.V. Products within the
scope of Section
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* * * CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
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6.4.2.2, and * * * during such calendar year for all Premium Products
(except Premium Products which are excluded from Best Value Products);
6.4.2.2 Notwithstanding the above, the percentage applicable to
Agency Net Sales and Distributor Net Sales of I.V. Products shall be * * *
for sales by Allegiance of such I.V. Products (i) in connection with the
provision of cost management services in which Allegiance shares the risk
and reward of achieving customer cost savings through shared risk and
shared savings agreements which obligate the customer to purchase a
specified percentage of Best Value Products or comprehensive cost
management agreements which require Allegiance to provide clinical and
operational services that reduce the customer's operational costs and which
obligate the customer to (A) purchase a specified percentage of Best Value
Products, and (B) share the operating cost reductions achieved through
specified fees and/or shared savings paid to Allegiance, and the customer
has switched to the Base Business Products under a long-term agreement with
Baxter on or after the date of the Allegiance/customer agreement and such
switch is not as a result of a requirement of a contract between Baxter and
a third party; or (ii) when Baxter has agreed that Allegiance's efforts in
promoting the I.V. Products warrants the higher percentage. This
percentage shall apply for the period ending upon the earliest termination
or expiration of the following: (a) this Agreement; (b) the Allegiance/
customer agreement; and (c) the Baxter/customer agreement.
6.4.2.3 Following the completion of Baxter's sales plan for and
prior to January 1 of an upcoming calendar year, Baxter will calculate an
amount equal to * * * of Baxter's aggregate sales plan for Contract Net
Sales of I.V. Products. Baxter will then apportion this amount between
proposed base business products and proposed premium products and will then
develop a proposed base percentage and a proposed premium percentage such
that the sum of the proposed percentages when multiplied by the respective
sales plan targets for proposed base business products and proposed premium
products will produce an amount equal to * * * of Baxter's aggregate sales
plan for Contract Net Sales of I.V. Products. Baxter and Allegiance will
then negotiate and mutually agree to any changes in Base Business Products,
Premium Products, and the applicable percentages with an expectation, but
with no commitment, that achievement of Baxter's sales plan as to both Base
Business Products and Premium Products will yield Allegiance an amount of
earned
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* * * CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
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fees which will aggregate to * * * of Baxter's sales plan for Contract Net
Sales of I.V. Products.
6.4.2.4 If the parties' business information systems and/or
data processing systems are unable to accommodate the applicable
percentages set forth in this Section 6.4.2, the parties shall agree upon a
procedure for monthly payment with a quarterly adjustment to achieve the
effects of the percentage fees set forth herein based upon the then-current
percentages as applied to Agency Net Sales and Distributor Net Sales for
each Product category.
6.5 MINIMUM FEE TO ALLEGIANCE FOR CALENDAR YEAR 1997. For calendar year
1997, Baxter shall pay to Allegiance a minimum dollar amount (the "Minimum Fee")
calculated by multiplying the actual Contract Net Sales of I.V. Products in
calendar year 1996 by * * *. If (a) the agency services fees paid by Baxter to
Allegiance in calendar year 1997 pursuant to Section 6.3 for I.V. Products, plus
(b) the service fees paid by Baxter to Allegiance pursuant to Section 6.1 in
connection with its sales of I.V. Products, is less than (c) the Minimum Fee,
then Baxter shall pay the difference to Allegiance on or before January 30,
1998. This Section 6.5 shall not apply if prior to December 31, 1997, Baxter
fails to retain, replace, or renew Baxter's contract with any of the following
national group purchasing organizations for the purchase of Base Business
Products by such organization's members: * * *.
6.6 ADJUSTMENTS FOR ALTERNATE SITE DISTRIBUTORS.
6.6.1 ALTERNATE SITE DISTRIBUTION FEE. Baxter shall pay to Allegiance
a minimum dollar amount (the "Alternate Site Distribution Fee") calculated by
multiplying * * * by the actual Contract Net Sales to resellers and
subdistributors of I.V. Products reselling to entities other than acute care
hospitals (such acute care hospitals as set forth in the then-current AMERICAN
HOSPITAL ASSOCIATION GUIDE) (such resellers and subdistributors collectively
referred to as "Alternate Site Distributors"). If for any calendar year, the
sum of (a) the agency services fees paid by Baxter to Allegiance pursuant to
Section 6.3 for sales of I.V. Products to Alternate Site Distributors, plus (b)
the service fees paid by Baxter to Allegiance pursuant to Section 6.1 for sales
of I.V. Products to Alternate Site Distributors, is less than (c) the Alternate
Site Distribution Fee, then Baxter shall pay the shortfall to Allegiance on or
before January 30 of the subsequent calendar year.
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* * * CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
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6.6.2 ALTERNATE SITE DISTRIBUTOR BONUS PROGRAMS. If Allegiance wishes
(1) to provide financial incentives to its Alternate Site Distributors to reward
such Alternate Site Distributors for achievement of growth in purchases of
Products above a predetermined amount, and (2) for Baxter to fund such
incentives by payments to Allegiance for such Alternate Site Distributors in
addition to those payments otherwise specified in this Agreement, then Baxter
must approve the amount of such funding, the purchase requirements applicable to
such Alternate Site Distributors, payment criteria to be used by Allegiance, and
applicable reporting requirements. During the Term of this Agreement,
Allegiance may continue its existing premier bonus program for Alternate Site
Distributors with respect to Products, subject to Baxter's right to approve in
advance the purchase requirements applicable to such Alternate Site
Distributors, payment criteria to be used by Allegiance, and applicable
reporting requirements. For each calendar year beginning on or after January 1,
1997, during the Term of this Agreement, in addition to those payments otherwise
specified in this Agreement, Baxter will reimburse Allegiance for amounts
incurred under such premier bonus program, up to a maximum of * * *. Baxter's
reimbursement obligation under this Section 6.6.2 shall be calculated with
respect to total sales (rather than incremental sales) by Allegiance to
Alternate Site Distributors participating in the premier bonus program.
6.7 DRUG WHOLESALER SUPPORT. Allegiance shall supply the equivalent of
one full-time employee who shall possess the requisite level of skill,
experience, and/or training to perform drug wholesaler support services as
directed by Baxter. Baxter shall pay to Allegiance * * * per month in advance
for such services, provided that Baxter may terminate such services at any time
upon 30 days advance written notice without any further liability whatsoever to
Allegiance in connection therewith.
6.8 TELEPHONE SALES. Allegiance shall supply the equivalent of one full-
time employee who shall possess the requisite level of skill, experience, and/or
training to perform telephone sales services to doctors and clinics as directed
by Baxter. Baxter shall pay to Allegiance * * * per month in advance for such
services, provided that Baxter may terminate such services at any time upon 30
days advance written notice without any further liability whatsoever to
Allegiance in connection therewith.
6.9 INBOUND FREIGHT.
6.9.1 INBOUND FREIGHT EXPENSES. Within thirty days after receipt
by Baxter of a monthly invoice from Allegiance
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FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
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detailing Allegiance's expenses, Baxter shall reimburse Allegiance for its
actual out-of-pocket expenses incurred in connection with freight expenses for
Products (a) received by Allegiance at its Ontario, California replenishment
center and its distribution centers from Baxter manufacturing plants; and (b)
received by Allegiance at its distribution centers from Baxter's or Allegiance's
replenishment centers.
6.9.2 ALLEGIANCE INBOUND FREIGHT ADMINISTRATIVE SERVICES. Baxter
will pay Allegiance a fee for continuing inbound freight administrative services
provided in accordance with the first two sentences of Section 1.5.2 of Exhibit
C. Baxter will also pay Allegiance any additional fees agreed upon for any
additional inbound freight administrative services provided pursuant to the last
sentence of Section 1.5.2 of Exhibit C.
6.10 EXPENSES OF REBALANCING INVENTORY. Beginning January 1, 1997, and
continuing for the remainder of the Term, Baxter shall reimburse Allegiance for
its actual out-of-pocket expenses incurred in connection with moving Products at
Baxter's request between distribution centers for purposes of re-balancing
stocks, to the extent that such rebalancing expenses exceeded the actual costs
so incurred in calendar year 1996. Baxter shall reimburse Allegiance for such
rebalancing expenses within 30 days after receipt by Baxter of a monthly invoice
from Allegiance detailing its expenses during the preceding month. During the
first calendar quarter following the close of each calendar year during the
Term, the parties will determine the actual amounts due under this Section 6.10
for the such calendar year and settle any amounts owed.
6.11 OUTBOUND FREIGHT.
6.11.1 GENERAL RULE. Allegiance is responsible for all costs
incurred in delivering Products from Allegiance facilities to customers, subject
to the following provisions regarding sharing of costs and savings for Standard
Delivery and Premium Delivery.
6.11.2 SHARING OF COSTS AND SAVINGS FOR STANDARD DELIVERY. For
1998 and each subsequent calendar year during the Term, the parties will agree
in the Council prior to such calendar year upon a target range for costs that
are expected to be incurred by Allegiance in providing Standard Delivery (as
that term is defined in Section 2.4.1.1 of Exhibit C) for the Products during
such calendar year. If during any such calendar year, the actual costs so
incurred by Allegiance fall outside such target range (using a consistent
methodology for such comparison), then
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Baxter and Allegiance will share the excess costs or savings on an equal basis.
6.11.3 SHARING OF COSTS AND SAVINGS FOR UNCOLLECTED PREMIUM
DELIVERY.
6.11.3.1 For 1997 and each subsequent calendar year during the
Term, the parties will agree in the Council prior to such calendar year
upon a target range for costs that are expected (1) to be incurred by
Allegiance in providing Premium Delivery (as that term is defined in
Section 2.4.1.2 of Exhibit C) of Products and (2) not to be collected from
customers. (Hereinafter, such costs are referred to as "Uncollected Premium
Delivery Costs"). If during any such calendar year, the actual Uncollected
Premium Delivery Costs for Products fall outside such target range (using a
consistent methodology for such comparison), the parties will share such
excess costs or savings as follows: Baxter will reimburse Allegiance * * *
of any excess costs; and Allegiance shall pay Baxter * * * of any savings.
6.11.3.2 For 1997, the target range shall be the actual amount of
Uncollected Premium Delivery Costs for Products incurred by Baxter in 1995,
plus and minus * * *. For all subsequent years, the target range shall be
determined by the parties by mutual agreement in the Council, taking into
account the percentage change in Agency Net Sales since 1995.
6.11.3.3 Allegiance will report its actual Uncollected Premium
Delivery Costs to Baxter on a quarterly basis. During the first calendar
quarter following the close of each calendar year during the Term, the
parties will determine the actual amounts due under this Section 6.11.3 for
such calendar year and settle any amounts owed.
6.11.4 INCREMENTAL DELIVERIES. Baxter will pay Allegiance any
amounts agreed upon in respect of Incremental Deliveries pursuant to Section
2.4.1 of Exhibit C.
6.11.5 ALLEGIANCE OUTBOUND FREIGHT ADMINISTRATIVE SERVICES. Baxter
will pay Allegiance any additional fees agreed upon for any additional outbound
freight administrative services provided pursuant to the last sentence of
Section 2.4.3 of Exhibit C.
6.12 CUSTOMER SERVICE REIMBURSEMENT. Beginning January 1, 1997, and
continuing for the Term, Allegiance will pay to Baxter
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FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
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monthly the sum of * * *, in order to compensate Baxter for Baxter's increased
customer service costs during such period. For the fourth calendar quarter of
1996, Allegiance will pay to Baxter an amount equal to * * * per person per
month, for all activated Baxter customer service personnel providing customer
service relating to the Products during that month or any preceding month during
such calendar quarter. For purposes of this Section 6.12, Baxter customer
service personnel are activated when they have received appropriate customer
service training relating to the Products and actually begin providing customer
service relating to the Products on a full-time basis. Baxter shall bill
Allegiance monthly for any amounts due under this Section and Allegiance shall
pay any such invoice net 15 days from the end of the applicable month.
6.13 BCS KIT FUNDING.
6.13.1 PAYMENT OBLIGATION. Beginning on the effective date of this
Agreement and continuing for the Term, for all Products sold under the BCS Kit
Model, Baxter will pay Allegiance an amount equal to the excess of the BCS
Component Prices over the transfer prices that the applicable Baxter business
units charged each other for such Products prior to the effective date of this
Agreement. Notwithstanding the immediately preceding sentence, Baxter's total
payment obligation to Allegiance under this Section shall not exceed * * * for
any calendar year during the Term and shall not exceed * * * for calendar year
1996.
6.13.2 SETTLEMENT PROCEDURE. The parties will settle any amounts owed
under Section 6.13.1 as follows: For each month during the Term, Baxter will
make payments to Allegiance in the estimated amount of * * * per month, net
fifteen days from the end of the applicable month. During the first calendar
quarter following the close of each calendar year during the Term, the parties
will determine the actual amounts due under Section 6.13.1 for such calendar
year and settle any amounts owed within 15 days of such determination. The
settlement for the fourth calendar quarter of 1996 will take place during the
first calendar quarter of 1997.
6.14 ADJUSTMENTS FOR CHANGES IN APPLICABLE STORAGE REQUIREMENTS.
6.14.1 BAXTER CHANGES IN APPLICABLE STORAGE REQUIREMENTS. The fees
set forth in Sections 6.1 and 6.3 are subject to renegotiation if Baxter
redefines applicable storage requirements in a way that has a material adverse
impact on Allegiance's costs.
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* * * CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
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6.14.2 LEGAL CHANGES IN APPLICABLE STORAGE REQUIREMENTS. If
applicable storage requirements change as a result of changes in laws,
regulations, or interpretations or enforcement actions by governmental
authorities with jurisdiction over the Products or the subject matter of this
Agreement, the otherwise applicable fees set forth in Sections 6.1 and 6.3 may
be adjusted, if appropriate, pursuant to the process described in Section 19.3
of this Agreement.
6.15 DEALER MANAGEMENT GROUP FUNDING. If changes in Baxter's business
requirements (including, without limitation, increased sales volumes through
Allegiance's dealer management group or increased complexity in the sales and/or
distribution process through Allegiance's dealer management group) directly
cause significant increases in Allegiance's dealer management group operational
headcount, Baxter shall pay Allegiance for such increases in Allegiance's
operational headcount. The parties shall meet at least twice per year to review
the status of Allegiance's dealer management group operations and shall agree
upon Allegiance's need, if any, for increases in operational headcount, the
cause of such need, and Baxter's payment, if any, for any increases in
operational headcount.
6.16 FCA FEES AND EXPENSES.
6.16.1 In addition to the other fees and charges set forth in this
Section 6, in 1997 and subsequent years Baxter will pay Allegiance an annual fee
equal to (a) * * * times (b) the total number of Product lines affected by FCAs
in such year in excess of * * * (the total number of Product lines affected by
FCAs in 1995). For purposes of this Section, any FCAs caused by Allegiance's
negligence shall be excluded. In addition, for each catalog number affected by
an FCA, the total "lines" shall be an amount equal to the sum of (a) the number
of notification processing responses completed by Allegiance facilities for that
FCA, plus (b) the number of dispositions completed by Allegiance facilities for
that FCA. Baxter shall not owe Allegiance any FCA fee under this Section, nor
shall Baxter be entitled to any fee or credit from Allegiance, if in 1997 or any
subsequent year, the total number of lines affected by FCAs does not exceed
* * *. For 1996, the FCA fee will be computed based on the excess of total
Product lines affected by FCAs in the last three months of 1996 over the
average quarterly total of Product lines affected by FCAs in calendar year 1995.
6.16.2 ADDITIONAL FCA SERVICES. Baxter shall pay Allegiance the
fees agreed upon for any additional FCA services requested and approved by
Baxter and provided by Allegiance pursuant to Section 1.7.2 of Exhibit C.
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* * * CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
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6.16.3 THIRD-PARTY INVOICES. Baxter shall reimburse Allegiance for
all third-party invoices relating to additional FCA services requested and
approved by Baxter and actually paid by Allegiance, pursuant to Section 1.7.2 of
Exhibit C.
6.17 PACKAGING FAILURE. Baxter shall reimburse Allegiance for Allegiance's
actual expenses incurred in respect of failure of shipping cartons for Products
(including, without limitation, repackaging and return of Product). Such
reimbursement shall be paid quarterly and shall be due within 30 days after
receipt of Allegiance's invoice therefor together with full supporting
documentation.
6.18 COMPENSATION FOR PRODUCT DAMAGE, THEFT OR LOSS. If any Products
are damaged, lost or stolen while in an Allegiance-owned replenishment center or
distribution center, and Allegiance is responsible under this Agreement for such
damage, theft or loss, Allegiance shall compensate Baxter. In addition, if
Allegiance is unable to furnish proof of delivery with respect to Products
shipped on Allegiance's private fleet, Allegiance shall compensate Baxter for
such undelivered Products. For purposes of this Section 6.18, the basis for
compensation shall be an amount equal to Baxter's standard costs for such
Products as stated in Baxter's inventory valuation reports together with all
amounts owed by Baxter to third parties in respect of such Products. Payment
shall be due within 30 days after Baxter's request for compensation hereunder.
During the Interim Period, in the event of any conflicts between the provisions
of this Section 6.18 and the provisions of Exhibit F of this Agreement with
respect to transactions under Interim Distributor Model, the provisions of
Exhibit F shall control.
7. THE COUNCIL.
7.1 A Baxter/Allegiance Distribution/Materials Management/Transportation
Council (the "Council") will be formed to ensure open communication between
Allegiance and each of the Baxter divisions, and to provide problem/dispute
identification and resolution in the areas of materials management,
distribution, and transportation and logistics. Without limitation to the
foregoing, the Council will provide a forum for the parties (1) to review
jointly their performance in relation to their responsibilities identified in
Appendices C and D of this Agreement, (2) to agree upon eligible carriers for
Product shipments and to review jointly freight charges and transportation
modes, (3) to agree upon target ranges and compensation for Standard Delivery,
Premium Delivery and Incremental Deliveries under Section 6.11, and (4) to
develop joint recommendations for the parties' respective business
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executives regarding the management of freight costs and other issues arising
under this Agreement.
7.2 Baxter and Allegiance will agree upon the membership of the Council
and its procedures.
7.3 The Council will meet at least once per calendar quarter during the
Term of this Agreement. Baxter and Allegiance may identify a Steering Committee
consisting of fewer than all of the Council members with authority to address
issues requiring resolution prior to such quarterly meetings.
8. INVOICING AND PAYMENTS.
8.1 GENERAL.
8.1.1 On or before the fifth business day of each calendar month
during the Term, Baxter shall report to Allegiance its Agency Net Sales for the
previous calendar month, and shall also provide to Allegiance a service fee
report in a format to be agreed upon, showing the service fees payable for
Products sold under the Agency Model. Each business day during the Term,
Allegiance shall report to Baxter its aggregate sales and returns of Products
for the previous business day by code and by customer for Distributor Model and
BCS Kit Model transactions, and such reports shall also include, with respect to
Distributor Model transactions, the Suggested Sales Price and Allegiance's
actual purchase price of the Products.
8.1.2 Allegiance shall make payment to Baxter for its aggregate
purchases of Products sold by Allegiance under the Distributor Model, net 30
days from the date of shipment of the Product by Allegiance to the customer.
Baxter shall make payment to Allegiance of applicable service fees in connection
with sales of Products under the Distributor Model, net 30 days from the date of
shipment of the Product by Allegiance to the customer.
8.1.3 For sales other than those made under the Distributor Model,
Allegiance shall bill Baxter for any fees due hereunder. Baxter shall pay any
such invoice net 15 days from the end of the applicable month.
8.1.4 For sales to Allegiance of Products for use as components of
BCS Kits, Baxter shall bill Allegiance for the BCS Component Prices for the
Products. Allegiance shall pay any such invoice net 60 days from the date of
such invoice.
8.1.5 If any amounts due hereunder have not been received by the
due date, such overdue amounts shall bear
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interest from the due date at the rate of * * * per month, or portion thereof,
until received. If payment is delayed because a report required by Section
8.1.1 has not been received, interest will not accrue until 30 days after
receipt of such report.
8.2 ADDITIONAL SERVICES. Allegiance may provide services ("Additional
Services") to customers in connection with Agency Model transactions over and
above Allegiance's duties set forth in Exhibit C, provided that such Additional
Services are not Cost Management services. Allegiance shall have the right to
bill customers directly for the Additional Services. Upon Allegiance's written
request, Baxter shall cooperate with Allegiance by performing billing and
collection services for Allegiance in connection with the Additional Services as
directed by Allegiance. Within 30 days after receipt from the customers, Baxter
shall forward to Allegiance any payments received from customers in connection
with the Additional Services.
8.3 DISPUTED PAYMENTS. Either party shall have the right to withhold any
amounts due hereunder if such party in good faith disputes the amount claimed by
the other party to be due hereunder and such party notifies the other party of
such dispute within 60 days after the date of each applicable statement from the
other party hereunder. The foregoing right to withhold payment of disputed
amounts shall be limited to the amounts disputed in good faith, and interest
will accrue and be payable on the net amount determined to be payable.
8.4 SUSPENSION OF SERVICE. In addition to any other rights available to
it at law or in equity, upon ten days Notice to Baxter, Allegiance may suspend
the provision of any services for which an undisputed statement for provision of
services hereunder from Allegiance (or one of its Affiliates) has not been
satisfied within 30 days of its due date until such statement has been
satisfied.
8.5 AUDIT. Allegiance may audit Baxter's books and records and Baxter may
audit Allegiance's books and records for the purpose of determining compliance
with the terms of this Agreement. The party requesting the audit may use
independent auditors, who may participate fully in such audit. In the event
that an audit is proposed with respect to information which the party to be
audited wishes not to disclose to the other party ("Restricted Information"),
then on the written demand of the party to be audited, the individuals
conducting the audit with respect to Restricted Information will be limited to
the independent auditors of the party requesting the audit. In such event, the
party to be audited shall pay the costs of the independent auditors conducting
such audit, but only with respect
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* * * CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
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to that portion of the audit relating to the Restricted Information. Such
independent auditors shall enter into an agreement with the parties hereto, on
terms that are agreeable to both parties hereto, under which such independent
auditors shall agree to maintain the confidentiality of the information obtained
during the course of such audit and establishing what information such auditors
will be permitted to disclose to report the results of any audit of Restricted
Information to the party requesting the audit. Any such audit shall be
conducted during regular business hours, in a manner that does not interfere
unreasonably with the operations of the party being audited. Such audits shall
be conducted not more than once in any one year period unless the next preceding
audit disclosed a failure to conform to the terms of this Agreement. Subject to
the foregoing limitations, any such audit shall be conducted when requested by
Notice given not less than 30 days prior to the commencement of the audit.
8.6 RIGHT OF OFFSET. At any time during the Term or after termination or
expiration of this Agreement, either party may offset any and all amounts which
the other party owes it hereunder against any and all amounts which it owes the
other party hereunder.
8.7 INTERIM PERIOD. During the Interim Period, in the event of any
conflicts between the provisions of this Section 8 and the provisions of Exhibit
F of this Agreement with respect to transactions under Interim Distributor
Model, the provisions of Exhibit F shall control.
9. ALLEGIANCE'S DUTIES. During the Term, Allegiance shall maintain the
facilities and personnel necessary to provide the physical distribution services
and related services in connection with its appointment and grant hereunder
including, without limitation, the facilities and personnel necessary to fulfill
Allegiance's duties as set forth in Exhibit C attached hereto and made a part
hereof. Allegiance will use all reasonable efforts to meet the levels of
service specified in Exhibit C.
10. BAXTER'S DUTIES. During the Term, Baxter shall maintain the facilities and
personnel necessary to manufacture and distribute the Products as provided for
hereunder including, without limitation, the facilities and personnel necessary
to fulfill Baxter's duties as set forth in Exhibit D attached hereto and made a
part hereof. Baxter will use all reasonable efforts to meet the commitments
specified in Exhibit C.
11. STANDARD OF CARE. Each party will use (and will cause its Affiliates to
use) commercially reasonable efforts in the
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performance of its obligations and will do so with the same degree of care,
skill and prudence customarily exercised when engaged in similar activities for
itself and its Affiliates. Subject to the provisions of Section 22, if a
party's performance is inaccurate, incomplete or untimely, such party shall, if
practical, promptly perform or reperform such obligations. In performing its
responsibilities hereunder, each party shall accord the other party and its
Affiliates the same priority as it provides itself and its Affiliates under
comparable circumstances. Without limiting the generality of the foregoing, in
the provision of services under comparable circumstances, a party will not
discriminate against the other party or any of its Affiliates solely because the
other party or one of its Affiliates is the recipient of such services. The
parties agree to consult with each other with respect to performance of their
obligations hereunder. Each party shall give due consideration to any
suggestion by the other to improve performance.
11.1 UNIFORM COMMERCIAL CODE. The parties agree that the provisions of
Section 2-306(2) of the Uniform Commercial Code ("U.C.C.") shall not apply to
services or any other activities or obligations of either of the parties
hereunder.
12. ALTERNATIVE ACUTE CARE DISTRIBUTION. If, for any calendar year during the
Term of this Agreement after 1996, Agency Net Sales of Products to nonacute care
customers for delivery to acute care hospitals (such acute care hospitals as set
forth in the then-current AMERICAN HOSPITAL ASSOCIATION GUIDE) ("Alternative
Acute Care Distributors") * * *. If, for any calendar year, Agency Net Sales of
Products to Alternative Acute Care * * *. Notwithstanding the preceding
provisions of this Section, * * *. If in any calendar year, Agency Net Sales of
Products to * * *. * * * the parties will negotiate this Section. * * *.
13. TRANSFER OF TITLE AND RISK OF LOSS.
13.1 GENERAL. Title and risk of loss with respect to Products sold
pursuant to the Agency Model shall pass from Baxter directly to the customer or
Subdistributor when such customer or Subdistributor receives the Products from
Allegiance whether delivered by Allegiance or a third-party carrier. Prior to
such time, title and risk of loss shall remain with Baxter regardless of whether
or not Allegiance shall have physical possession and/or control of such
Products. Title and risk of loss with respect to Products sold pursuant to the
Distributor Model shall pass from Baxter to Allegiance and immediately on to the
customer at the time of Allegiance's shipment of the Products to the customer.
Title and risk of loss with respect to Products sold to Allegiance for use as
components of BCS Kits shall pass from
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* * * CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
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Baxter to Allegiance at the time that Allegiance receives such Products from
Baxter. Notwithstanding the foregoing, Allegiance shall be solely responsible
for any damage to the Products arising from Allegiance's mishandling of such
Products or theft or shrinkage while in Allegiance's possession.
13.2 INTERIM PERIOD. During the Interim Period, in the event of any
conflicts between the provisions of this Section 13 and the provisions of
Exhibit F of this Agreement with respect to transactions under Interim
Distributor Model, the provisions of Exhibit F shall control.
14. WARRANTIES.
14.1 PRODUCT WARRANTY. Baxter warrants to Allegiance that, at the time of
delivery to Allegiance: (a) the Products shall not be adulterated or misbranded
within the meaning of the Federal Food, Drug and Cosmetic Act, as amended and
the regulations issued thereunder, or products that may not under the provisions
of Sections 404, 505, 514 or 515 of said Act be introduced into interstate
commerce, or banned devices under Section 516 of said Act; and (b) Baxter shall
have good and marketable title to all such Products free and clear of all liens
or encumbrances (other than any created by Allegiance).
14.2 DISCLAIMER. THE FOREGOING WARRANTY IS EXCLUSIVE AND IN LIEU OF ALL
OTHER WARRANTIES OF ANY KIND, WHETHER STATUTORY, WRITTEN, ORAL, EXPRESS OR
IMPLIED, INCLUDING ANY WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE AND
MERCHANTABILITY. IN NO EVENT, WHETHER AS A RESULT OF BREACH OF CONTRACT, TORT
LIABILITY (INCLUDING NEGLIGENCE) OR OTHERWISE, SHALL BAXTER BE LIABLE TO
ALLEGIANCE FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES.
14.3 LIMITATION OF LIABILITY. ANY LIABILITY OF BAXTER TO ALLEGIANCE UNDER
THE WARRANTY CONTAINED IN THIS SECTION 14 SHALL BE LIMITED TO THE TOTAL PRICE
PAID BY ALLEGIANCE FOR THE PRODUCTS WHICH ARE THE SUBJECT OF SUCH LIABILITY PLUS
ALL COSTS FOR TRANSPORTATION AND OTHER DIRECT EXPENSES INCURRED BY ALLEGIANCE
WITH RESPECT TO SUCH PRODUCTS.
15. TRADEMARKS.
15.1 OWNERSHIP. Allegiance acknowledges that Baxter is the owner or
licensee of the trademarks and trade names which Baxter uses in the promotion
and sale of the Products hereunder, and that Allegiance has no right or interest
in such trademarks or trade names. Before commencing any use of the trademarks
or trade names connoting Baxter in connection with any catalog,
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promotional, packaging, or other materials, which use has not been previously
approved in writing by Baxter, Allegiance agrees to provide Baxter with proposed
specimens of use of such trademarks or trade names and to obtain Baxter's
written approval of such proposed use.
15.2 INFRINGEMENT. Allegiance shall notify Baxter promptly of any and all
infringements or improper use by any third party of the trademarks and trade
names connoting Baxter should Allegiance discover reasonable cause for believing
that such infringement or improper use is taking place and shall provide to
Baxter all information which Allegiance has available thereon. Baxter shall
have sole discretion and control with regard to any proceedings relating to
infringement or improper use of its trademarks and trade names. Allegiance may
choose to be represented by its own counsel in any such proceedings but such
representation shall be solely at Allegiance's expense.
15.3 EQUITABLE REMEDIES. Allegiance acknowledges that Baxter would not
have any adequate remedy at law for the breach by the other party of any one or
more of the covenants contained in this Section 15 and agrees that, in the event
of such breach, Baxter may, in addition to the other remedies which may be
available to it, file a suit in equity to enjoin Allegiance from any further
breach of any of the terms of this Section 15.
16. TERMINATION.
16.1 CHANGE IN CONTROL.
16.1.1 GENERAL. In the event of a Change in Control of either party
hereto or any Affiliate thereof to which any of the rights or obligations
hereunder have been assigned as permitted by Section 25, the party (the
"Affected Party") with respect to which the Change in Control has occurred,
either directly or with respect to one of its Affiliates shall give Notice to
the other party (the "Non-Affected Party") within 30 days of the occurrence of
such Change in Control. The Non-Affected Party may terminate this Agreement, in
whole but not in part, in the event of any such Change in Control with respect
to the Affected Party by giving Notice of such termination to the Affected Party
as provided below. In the event of a Change in Control of an Affiliate of the
Affected Party to which any of the rights or obligations hereunder have been
assigned as permitted by Section 25, the Non-Affected Party may terminate this
Agreement with respect to such Affiliate by giving Notice to the Affected Party
as provided below. The Non-Affected Party may exercise the rights of
termination described in the two preceding sentences by giving a notice of
termination, specifying the date
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of termination, to the Affected Party at any time prior to the end of the 60th
day following the receipt by the Non-Affected Party of the applicable Notice of
Change in Control given by the Affected Party pursuant to the first sentence of
this Section. In the event that the applicable Change in Control involves a
Competitor of the Non-Affected Party, the date of termination specified by the
Non-Affected Party in the notice of termination shall be the last day of a
calendar month which is not earlier than the sixth full calendar month following
the date of the Notice of termination and not later than the twelfth full
calendar month following the date of the Notice of Termination. In the event
that the applicable Change in Control does not involve a Competitor of the Non-
Affected Party, the date of termination specified by the Non-Affected Party in
the notice of termination shall be the later of (i) the last day of the twelfth
full calendar month following the date of the notice of termination and (ii)
December 31, 1998.
16.1.2 DEFINITIONS. For purposes hereof, "Change in Control" shall
mean (i) the acquisition, directly or indirectly, by any Person or Persons of
more than 30% of the voting stock of either party to this Agreement or any
Affiliate thereof, (ii) any merger or consolidation involving the Affected Party
or any Affiliate of the Affected Party that requires a vote of the stockholders
of the Ultimate Parent of the Affected Party, (iii) the acquisition by the
Affected Party or any Affiliate of the Affected Party of any Person that (a) is
a Rival of the Non-Affected Party and (b) after such acquisition, constitutes a
"significant subsidiary" of the Affected Party within the meaning of Rule
1-02(w) of Regulation S-X of the Regulations of the Securities and Exchange
Commission, substituting * * * for 10 percent in the tests used therein to
determine significant subsidiary, and (iv) only in the case of an Affiliate of
the Affected Party, the Transfer of all or substantially all of the business and
assets of such Affiliate. For the purposes hereof, "Rival" shall mean (a) with
respect to Baxter, any Person (including an Affiliate of such Person) that
during its most recently completed fiscal year has annual net revenues greater
than * * * of the total annual net revenues of Baxter International during its
most recently completed fiscal year; and (b) with respect to Allegiance, any
Person (including an Affiliate of such Person) that during its most recently
completed fiscal year has annual net revenues greater than * * * of the total
annual net revenues of Allegiance Corporation during the most recently completed
fiscal year. For the purposes hereof, "Ultimate Parent" means Baxter
International in the case of Baxter and Allegiance Corporation in the case of
Allegiance.
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* * * CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
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<PAGE>
16.1.3 TRANSFERS BY BAXTER. In the event that Baxter or any of its
Affiliates shall Transfer all or substantially all of the business and assets
relating to any Line of Products as permitted by Section 25, Allegiance may
terminate this Agreement with respect to such Line of Products in the same
manner as provided in Section 16.1.1. In the event that Baxter or any of its
Affiliates shall Transfer all or substantially all of the business and assets
relating to the Products as permitted by Section 25, Allegiance may terminate
this Agreement in its entirety in the same manner as provided in Section 16.1.1.
16.1.4 TRANSFERS BY ALLEGIANCE. In the event that Allegiance or any
of its Affiliates shall Transfer any portion of its business and assets
relating to Allegiance's distribution network as permitted by Section 25,
which portion accounted for net sales during the most recently completed
fiscal year in excess of $250 million, Baxter may terminate this Agreement
with respect to the Transferred portion of the distribution network in the
same manner as provided in Section 16.1.1.
16.1.5 OBLIGATION TO NEGOTIATE. If demanded in writing by the Non-
Affected Party, the Affected Party shall be obligated, during the period
following a Notice of termination from the Non-Affected Party, to negotiate in
good faith to establish terms and conditions that are acceptable to the Non-
Affected Party for an extension of the Term beyond the date of termination
specified in the Notice of termination in light of the Change in Control,
provided, however, the Non-Affected Party may in its absolute discretion
determine whether any proposed terms and conditions are acceptable and may
refuse to agree to any such terms and conditions for any reason whatsoever.
16.1.6 CONFIDENTIAL INFORMATION During the period commencing with any
such Change in Control and continuing through the end of the Term (and
thereafter, if appropriate), the Affected Party shall take any and all action
reasonably requested by the Non-Affected Party to protect any confidential
information of the Non-Affected Party from disclosure to or use by any Affiliate
of the Affected Party other than a Person that, immediately prior to the
occurrence of the Change in Control, was an Affiliate of the Affected Party that
regularly accessed such confidential information for a reasonable business
purpose.
16.2 OTHER TERMINATIONS. Each Party shall have the right to terminate this
Agreement effective upon delivery of Notice to the other party if the other
party: (a) makes an assignment for the benefit of creditors, or becomes
bankrupt or insolvent, or is petitioned into bankruptcy, or takes advantage of
any state, federal or foreign bankruptcy or insolvency act, or if a receiver
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or receiver/manager is appointed for all or any substantial part of its property
and business and such receiver or receiver/manager remains undischarged for a
period of 30 days, (b) has its corporate existence terminated by voluntary or
involuntary dissolution; or (c) materially defaults in the performance of any of
its covenants or obligations contained in this Agreement and such default is not
remedied to the nondefaulting party's reasonable satisfaction within 30 days
after Notice to the defaulting party of such default, or if such default is not
capable of rectification within 30 days, if the defaulting party has not
promptly commenced to rectify the default within such 30 day period and is not
proceeding diligently to rectify the default.
16.3 PROCEDURES ON TERMINATION. In the event of any termination of this
Agreement and if and when requested by Allegiance, Baxter will promptly remove
all inventory of Products owned by Baxter from facilities of Allegiance or any
of its Affiliates. Such removal will be effected during normal business hours
after reasonable advance Notice to Allegiance and will be done in a manner that
will not unreasonably disrupt the normal business operations of Allegiance or
Baxter.
Except as otherwise required pursuant to Sections 21 and 23.9, each party
shall destroy or return to the other party all records made or obtained in the
course of performance hereunder containing information regarding the other party
or its customers that is protected from disclosure under Section 21. In the
event that any party shall elect to destroy any records as permitted above, such
party shall provide the other party with written confirmation of any such
destruction.
16.4 CONTINUED SERVICE. In the event that this Agreement is terminated
pursuant to this Section 16, Baxter and Allegiance shall comply fully with this
Agreement and use reasonable efforts to service adequately existing customers of
the Products until such termination becomes effective.
16.5 PENDING ORDERS. On the expiration or termination of this Agreement
for any reason, Allegiance shall continue to honor customer's orders for
Products placed up to the date of expiration or termination, and Baxter shall
pay the fees due to Allegiance on the terms and conditions set forth in this
Agreement. Any consideration due hereunder that is calculated based upon a
specified time period shall be prorated for any partial period of time between
the end of the last such period and the date of expiration or termination. In
the event that Allegiance has elected to terminate this Agreement because of the
failure of Baxter to pay amounts due hereunder, Allegiance shall be obligated to
perform under the first sentence of this Section
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16.5 only after Baxter shall have paid all amounts due and owing to Allegiance
hereunder.
16.6 SELL-OFF. Notwithstanding any provision of this Agreement or any
other agreement between Baxter, Allegiance, and/or their respective Affiliates,
the parties acknowledge that Allegiance and its Affiliates shall be entitled to
continue to sell or otherwise dispose of the Products within the Territory from
and after the effective date of the expiration or termination of this Agreement
if such Products were owned by Allegiance on the date of termination.
16.7 TRUE-UP. No later than 12 months after expiration or termination of
this Agreement, Baxter shall report to Allegiance all discounts and bonuses
accrued but not earned and/or earned but not accrued on sales made hereunder,
and Baxter shall submit either a payment or an invoice for the net of such
amounts.
17. INDEMNITY.
17.1 BAXTER'S OBLIGATION. Baxter agrees to indemnify and hold Allegiance
and the Allegiance Indemnified Parties harmless from and against, and in respect
of, any and all claims by, and liabilities to, third parties ("Third-Party
Claims") asserted against or incurred by, and any and all expenses (including
all fees and expenses of counsel, travel costs and other out-of-pocket costs) in
connection with pending or threatened litigation or other proceedings regarding
such Third-Party Claims ("Expenses") incurred by, Allegiance or any of the
Allegiance Indemnified Parties (as hereinafter defined) which arise out of or
relate to:
17.1.1 any actual or alleged patent, copyright or trademark
infringement, or violation of any other proprietary right, arising out of the
purchase, sale or use of Products pursuant to this Agreement;
17.1.2 any tort claim, including claims for personal injury,
wrongful death or property damage, to the extent such claims are based upon any
wrongful or negligent act or omission by Baxter (or its employees or agents) in
the course of its performance of this Agreement;
17.1.3 defects in Products;
17.1.4 any actual or alleged breach of warranty or obligation, if
any, accompanying the Product or Products, subject to the limitations in Section
14 to the extent provided therein; and
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17.1.5 any claim for personal injury, wrongful death or property
damage arising out of the use of a Product;
PROVIDED that this Section 17.1 shall not apply to any Third-Party Claim or
Expense to the extent that the parties agree, or it is finally determined
pursuant to Section 17.4 that the Third-Party Claim or Expense is within the
scope of Allegiance's indemnity obligation set forth in Sections 17.2.1 and
17.2.2 below.
The Allegiance Indemnified Parties shall mean and include (A) Allegiance's
Affiliates (B) the respective directors, officers, agents and employees of and
counsel to Allegiance and its Affiliates, (C) each other person, if any,
controlling Allegiance or any of its Affiliates, and (D) the successors,
assigns, heirs and personal representatives of any of the foregoing. Expenses
shall be reimbursed or advanced when and as incurred promptly upon submission by
Allegiance or any Allegiance Indemnified Party of statements to Baxter.
17.2 ALLEGIANCE'S OBLIGATION. Allegiance agrees to indemnify and hold
Baxter and the Baxter Indemnified Parties harmless from and against, and in
respect of, any and all Third-Party Claims asserted against or incurred by, and
any and all Expenses incurred by, Baxter or any of the Baxter Indemnified
Parties (as hereinafter defined) which arise out of or relate to:
17.2.1 any tort claim, including claims for personal injury,
wrongful death or property damage, to the extent such claims are based upon any
wrongful or negligent act or omission by Allegiance (or its employees or other
agents) in the course of its performance of this Agreement including, but not
limited to, any Third-Party Claims or Expenses caused by any such wrongful or
negligent act or omission constituting a representation concerning the
characteristics or method of usage of Products, or relating to the storage,
handling, or delivery of Products or selection of Products for inclusion in
Kits; and
17.2.2 any actual or alleged patent, copyright or trademark
infringement, or violation of any other proprietary right, arising out of any
act or omission of Allegiance or any of its Affiliates in connection with the
sale of Kits or relating to any intellectual property owned by Allegiance or any
of its Affiliates and used in connection with the sale of Kits.
The Baxter Indemnified Parties shall mean and include (A) Baxter's Affiliates,
(B) the respective directors, officers, agents and employees of and counsel to
Baxter and its Affiliates, (C) each other person, if any, controlling Baxter or
any of its
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Affiliates, and (D) the successors, assigns, heirs and personal representatives
of any of the foregoing. Expenses shall be reimbursed or advanced when and as
incurred promptly upon submission by Baxter or any Baxter Indemnified Party of
statements to Allegiance.
17.3 THIRD-PARTY CLAIMS. If any third party shall make any claim or
commence any arbitration proceeding or suit against any one or more of the
Baxter Indemnified Parties or the Allegiance Indemnified Parties (hereafter,
"Indemnified Persons") with respect to which an Indemnified Person intends to
make any claim for indemnification against Allegiance under Section 17.2 or
against Baxter under Section 17.1 (as the case may be, the "Indemnifying
Party"), such Indemnified Persons shall promptly give written notice to the
Indemnifying Party of such third party claim, arbitration proceeding or suit and
the following provisions shall apply.
17.4 CONTROL OF PROCEEDINGS.
17.4.1 The Indemnifying Party shall have 20 business days after
receipt of the notice referred to in Section 17.3 to notify the Indemnified
Party that it elects to conduct and control the defense of such claim,
proceeding or suit. If the Indemnifying Party does not give the foregoing
notice, the Indemnified Party shall have the right to defend, contest, settle or
compromise such claim, proceeding or suit in the exercise of its exclusive
discretion subject to the provisions of Section 17.5, and the Indemnifying Party
shall, upon request from any of the Indemnified Persons, promptly pay to such
Indemnified Persons in accordance with the other terms of this Section the
amount of any Third-Party Claim resulting from their liability to the third
party claimant and all related Expense.
17.4.2 If the Indemnifying Party gives the foregoing notice, the
Indemnifying Party shall have the right to undertake, conduct and control,
through counsel reasonably acceptable to the Indemnified Party, and at its sole
expense, the conduct and settlement of such claim, proceeding or suit, and the
Indemnified Party shall cooperate with the Indemnifying Party in connection
therewith, provided that (i) the Indemnifying Party shall not thereby permit any
lien, encumbrance or other adverse charge to thereafter attach to any asset of
any Indemnified Person; (ii) the Indemnifying Party shall not thereby permit any
injunction against any Indemnified Person; (iii) the Indemnifying Party shall
permit the Indemnified Person and counsel chosen by the Indemnified Person and
reasonably acceptable to the Indemnifying Party to monitor such conduct or
settlement and shall provide the Indemnified Person and such counsel with such
information
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regarding such claim, proceeding or suit as either of them may reasonably
request (which request may be general or specific), but the fees and expenses of
such counsel shall be borne by the Indemnified Person unless (1) the
Indemnifying Party and the Indemnified Person shall have mutually agreed to the
retention of such counsel or (2) the named parties to any such claim, proceeding
or suit include the Indemnified Person and the Indemnifying Party and in the
reasonable opinion of counsel to the Indemnified Person representation of both
parties by the same counsel would be inappropriate due to actual or likely
conflicts of interest between them, in either of which cases the reasonable fees
and disbursements of counsel for such Indemnified Person shall be reimbursed by
the Indemnifying Party to the Indemnified Person; and (iv) the Indemnifying
Party shall agree promptly to reimburse to the extent required under this
Section the Indemnified Person for the full amount of any Third-Party Claim
resulting from such claim, proceeding or suit and all related Expense incurred
by the Indemnified Person.
17.4.3 In no event shall the Indemnifying Party without the prior
written consent of the Indemnified Person, settle or comprise any claim or
consent to the entry of any judgment that does not include as an unconditional
term thereof the giving by the claimant or the plaintiff to the Indemnified
Person a release from all liability in respect of such claim.
17.4.4 If the Indemnifying Party shall not have undertaken the conduct
and control of the defense of any claim, suit or proceeding as provided above,
the Indemnifying Party shall nevertheless be entitled through counsel chosen by
the Indemnifying Party and reasonably acceptable to the Indemnified Person to
monitor the conduct or settlement of such claim by the Indemnified Person, and
the Indemnified Person shall provide the Indemnifying Party and such counsel
with such information regarding such action or suit as either of them may
reasonably request (which request may be general or specific), but all costs and
expenses incurred in connection with such monitoring shall be borne by the
Indemnifying Party.
17.5 SETTLEMENT OF THIRD-PARTY CLAIMS BY THE INDEMNIFIED PERSON. So long
as the Indemnifying Party is contesting any such claim, suit or proceeding in
good faith, the Indemnified Person shall not pay or settle any such claim,
proceeding or suit. Notwithstanding the foregoing, the Indemnified Person shall
have the right to pay or settle any such claim, proceeding or suit, provided
that in such event the Indemnified Person shall waive any right to indemnity
therefor by the Indemnifying Party, and no amount in respect thereof shall be
claimed as Third-Party Claim or Expense under this Section 17.
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If the Indemnifying Party shall not have undertaken the conduct and control
of the defense of any claim, suit or proceeding as provided above, the
Indemnified Person, on not less than 30 days' prior written Notice to the
Indemnifying Party, may make settlement (including payment in full) of such
claim and such settlement shall be binding upon the parties hereto for the
purposes hereof, unless within said 30-day period the Indemnifying Party shall
have requested the Indemnified Person to contest such claim at the expense of
the Indemnifying Party. In such event, the Indemnified Person shall promptly
comply with such request and the Indemnifying Party shall have the right to
direct the defense of such claim or any litigation based thereon subject to all
of the conditions of Section 17.4. Anything in this Section 17 to the contrary
notwithstanding, if the Indemnified Person advises the Indemnifying Party that
it has determined to make settlement of a claim, the Indemnified Person shall
have the right to do so at its own cost and expense, without any requirement to
contest such claim at the request of the Indemnifying Party, but without any
right under the provisions of this Section 17 for indemnification by the
Indemnifying Party.
18. INSURANCE.
Each party is responsible for carrying any insurance desired by it in its
sole discretion, including comprehensive general liability insurance, insurance
to cover its facilities, products liability insurance and business interruption
insurance.
19. COMPLIANCE WITH LAWS.
19.1 ALLEGIANCE COMPLIANCE. Allegiance shall, to the extent material to
Allegiance and its Affiliates taken as a whole, comply (or cause compliance)
with all existing and future federal, state and other laws and regulations in
the Territory applicable to the conduct of Allegiance's business or the
possession of Products pursuant to this Agreement including, without limitation,
the following:
19.1.1 giving prompt written notice to Baxter if Allegiance should
become aware of any actual defect or condition which may alter the quality of
the Products in any material respect or may render any of the Products in
violation of any applicable law or regulation of the Territory including,
without limitation, any violation which could require any alteration of the
specifications of any Product, affect the sale of any Product, cause revocation
of any regulatory approval with respect to any Product or its sale hereunder, or
give rise to a claim against Baxter by any person, and Allegiance shall promptly
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notify Baxter upon becoming aware of any changes in any laws or regulations in
the Territory applicable to the manufacture, sale, packaging, labeling,
possession or use of the Products;
19.1.2 keeping appropriate records of all lot coded and serial
numbered Products shipped to customers; and
19.1.3 making prompt return of any and all Products affected by
holds or recalls if so requested by Baxter.
To the extent applicable to the subject matter of this Agreement, and pursuant
to the requirements of 42 CFR 420.300 et. seq., Allegiance hereby agrees to make
available to the Secretary of Health and Human Services ("HHS"), the Comptroller
of the General Accounting Office ("GAO"), or their authorized representatives,
all contracts, books, documents and records relating to the nature and extent of
costs hereunder for a period of four (4) years after the furnishing of services
hereunder. In addition, if any part of any service is to be provided by
subcontract, Allegiance hereby agrees to require by contract that such
subcontractor make available to the HHS and GAO, or their authorized
representatives, all contracts, books, documents and records relating to the
nature and costs thereunder for a period of four (4) years after the furnishing
of services thereunder.
19.2 BAXTER COMPLIANCE. Baxter shall, to the extent material to Baxter and
its Affiliates taken as a whole, comply (or cause compliance) with all existing
and future laws and regulations in the Territory applicable to the conduct of
Baxter's business or the manufacture, packaging, labeling and sale to Allegiance
of Products pursuant to this Agreement, including, without limitation, the
following:
19.2.1 giving prompt written notice to Allegiance if Baxter should
become aware of any actual defect or condition which may alter the quality of
the Products in any material respect or may render any of the Products in
violation of any applicable law or regulation of the Territory, including,
without limitation, any violation which could require any alteration of the
specifications of any Product, affect the sale of any Product, cause revocation
of any federal, state or other regulatory approval with respect to any Product
or its sale hereunder or give rise to a claim against Allegiance by any person;
and
19.2.2 giving prompt written notice to Allegiance of any and all
Products affected by holds or recalls and, if Baxter requests Allegiance to
return any of such Products to Baxter, promptly reimburse Allegiance for the
price of such returned
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Products paid by Allegiance under this Agreement and the direct cost of
returning such Products to Baxter.
The services provided hereunder will not be provided in violation of any
applicable Equal Employment Opportunity requirements including those set forth
in Section 202 of Executive Order 11246, as amended.
19.3 CONSULTATION. If applicable storage requirements change during the
Term of this Agreement as a result of changes in laws, regulations, or
interpretations or enforcement actions by governmental authorities with
jurisdiction over the Products or the subject matter of this Agreement, the
parties will confer regarding the need for and funding of any such changes, in
accordance with the following process. The need for any change in storage
requirements will be reviewed by senior executives of the parties who are
directly responsible for regulatory compliance, who will forward their
recommendation for specific change(s) to the Council. The Council will develop a
proposal for resolution that will include scope, funding needed, alternatives
and its recommendation. The Council will then forward its proposal to a working
group of business executives designated by Baxter and Allegiance that will have
the authority: (a) to adopt or modify the proposal; (b) to determine the funding
method; and (c) if appropriate, to allocate the costs of such resolution between
the Parties.
20. FORCE MAJEURE. The obligations of either party to perform under this
Agreement shall be excused during each period of delay caused by matters (not
including lack of funds or other financial causes) such as strikes, supplier
delays, shortages of raw materials, government orders or acts of God, which are
reasonably beyond the control of the party obligated to perform; provided that
nothing contained in this Agreement shall affect either party's ability or
discretion with respect to any strike or other employee dispute or disturbance
and all such strikes, disputes or disturbances shall be deemed to be beyond the
control of such party. A condition of force majeure shall be deemed to continue
only so long as the affected party shall be taking all reasonable actions
necessary to overcome such condition. In the event that either party hereto
shall be affected by a condition of force majeure, such party shall give the
other party prompt Notice thereof, which Notice shall contain the affected
party's estimate of the duration of such condition and a description of the
steps being taken or proposed to be taken to overcome such condition of force
majeure. Any delay occasioned by any such cause shall not constitute a default
under this Agreement, and the obligations of the parties shall be suspended
during the period of delay so occasioned. During any period of force majeure,
the party that
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is not directly affected by such condition of force majeure shall be entitled to
take any reasonable action necessary to mitigate the effects of such condition
of force majeure, and the provisions of Section 4 shall be suspended to the
extent necessary to permit any such action.
21. CONFIDENTIALITY.
21.1 ALLEGIANCE INFORMATION. Baxter agrees to hold, and to use reasonable
efforts to cause its employees and representatives to hold, in confidence all
marketing and pricing information of a confidential nature pertaining to the
Territory, and all information relating to Allegiance's standard costs,
received by Baxter from Allegiance after the Effective Date or obtained from
Allegiance in the course of an audit pursuant to Section 8.5, in a manner
consistent with Baxter's treatment of its own confidential information. Baxter
shall not use such information for any purpose other than as contemplated under
this Agreement or verifying compliance with this Agreement, without Allegiance's
prior written consent.
21.2 BAXTER INFORMATION. Allegiance agrees to hold, and to use reasonable
efforts to cause its employees and representatives to hold, in confidence all
information of a confidential nature concerning Baxter or its customers
(including all marketing and pricing information relating to Baxter and all
standard cost information relating to the Products) in the possession of
Allegiance as of the Effective Date or furnished to or obtained by Allegiance
after the Effective Date, in a manner consistent with Allegiance's treatment of
its own confidential information. Allegiance shall not use such information for
any purpose other than as contemplated under this Agreement, without Baxter's
prior written consent.
21.3 GENERAL. The obligations of confidentiality and non-disclosure
imposed under this Section 21 shall not apply to data and information that the
recipient can demonstrate:
21.3.1 is published or is or otherwise becomes available to the
general public as part of the public domain without breach of this Agreement;
21.3.2 has been furnished or made known to the recipient without
any obligation to keep it confidential by a third party under circumstances
which are not known to the recipient to involve a breach of the third party's
obligations to a party hereto;
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21.3.3 was developed independently of information furnished to the
recipient under this Agreement; or
21.3.4 was known to the recipient at the time of receipt thereof
from the other party, is not otherwise subject to (a) the confidentiality
restrictions contained in the Reorganization Agreement dated as of September 30,
1996 between Baxter International and Allegiance Corporation, or (b) any other
obligation to keep it confidential and was not obtained from a third party under
circumstances which were known to the recipient to involve a breach of the third
party's obligations to a party hereto.
21.4 EQUITABLE RELIEF. Each party (the "first party") acknowledges that
the other party would not have an adequate remedy at law for the breach by the
first party of any one or more of the covenants contained in this Section 21 and
agrees that, in the event of such breach, the other party may, in addition to
the other remedies which may be available to it, apply to a court for an
injunction to prevent breaches of this Section 21 and to enforce specifically
the terms and provisions of this Section.
21.5 REQUIRED DISCLOSURES. The provisions of this Section shall not
preclude disclosures required by law; provided, however, that each party will
use reasonable efforts to notify the other, prior to making any such disclosure,
and permit the other to take such steps as it deems appropriate, including
obtaining a protective order, consistent with applicable law, to minimize any
loss of confidentiality.
21.6 SECURITY. Each party shall be responsible for preventing unauthorized
remote access by such party's own agents and employees to data transferred to or
otherwise made available to the other party under this Agreement.
22. LIMITATION OF LIABILITY AND REMEDY.
22.1 DAMAGES. In no event, whether based on contract, indemnity, warranty,
tort (including negligence), strict liability or otherwise, shall either party
or any of its directors, officers, employees or agents, be liable for special,
exemplary, or punitive damages. The foregoing limitation and disclaimer shall
apply irrespective of whether the possibility of such special, exemplary, or
punitive damages had been disclosed in advance or could have reasonably been
foreseen.
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The limitations and disclaimers of obligations and liabilities contained in
this Section 22 are intended to apply to the fullest extent permitted by law;
provided that such limitations and disclaimers shall not limit amounts payable
with respect to any express indemnity provided for in this Agreement.
22.2 EXCLUSIVE REMEDIES.
22.2.1 BAXTER'S EXCLUSIVE REMEDIES. Except in the case of the gross
negligence or willful misconduct of Allegiance or its Affiliates, Baxter's
exclusive remedies against Allegiance for any breach of, or other act or
omission arising out of or relating to, this Agreement shall be:
22.2.1.1 the right to receive payment of amounts owed under
Sections 6 and 8 hereof;
22.2.1.2 the right to require reperformance of any service to
the extent required pursuant to Section 11;
22.2.1.3 the right to indemnification as provided in Section 17;
22.2.1.4 the right to injunction, specific performance or other
equitable non-monetary relief when available under applicable law;
22.2.1.5 the right to terminate this Agreement for material
breach as set forth in Section 16; and
22.2.1.6 the right to actual damages for breach of Section 21.
22.2.2 ALLEGIANCE'S EXCLUSIVE REMEDIES. Except in the case of the
gross negligence or willful misconduct of Baxter or its Affiliates, Allegiance's
exclusive remedies against Baxter for any breach of, or other act or omission
arising out of or relating to, this Agreement shall be:
22.2.2.1 the right to receive payment of amounts owed under
Sections 6 and 8 hereof;
22.2.2.2 with respect to Interim Distributor Model transactions
only, the right to require Baxter to repair or replace (at Baxter's option
and expense) any Product that proves not to be in conformity with
applicable labeling or specifications, and Baxter shall pay the
transportation and other costs incurred by Allegiance with respect to any
Products returned to Baxter for repair or
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replacement under this Section 22.2.2.2, or at Baxter's option, reimburse
Allegiance for any such costs;
22.2.2.3 the right to indemnification as provided in Section 17;
22.2.2.4 the right to injunction, specific performance or other
equitable non-monetary relief when available under applicable law;
22.2.2.5 the right to terminate this Agreement for material
breach as set forth in Section 16; and
22.2.2.6 the right to actual damages for breach of Section 21.
23. MISCELLANEOUS PROVISIONS.
23.1 NOTICES. All notices and other communications required under this
Agreement shall be in writing and shall be deemed to have been given if
delivered by hand, or sent by courier or facsimile transmission (provided that
in the case of facsimile transmission, a confirmation copy of the notice shall
be delivered by hand or sent by courier within 2 days of transmission),
addressed:
To Baxter:
Baxter Healthcare Corporation
One Baxter Parkway
Deerfield, Illinois 60015
Attention: General Counsel
with copies to:
Baxter Healthcare Corporation
Route 120 and Wilson Road
Round Lake, Illinois 60073
Attention: President--I.V. Systems Division
if to Allegiance to:
Allegiance Healthcare Corporation
McGaw Park Building A/B
1620 Waukegan Road
McGaw Park, Illinois 60085
Attention: General Counsel
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with a copy to:
Allegiance Healthcare Corporation
McGaw Park Building A/B
1620 Waukegan Road
McGaw Park, Illinois 60085
Attention: President--Distribution
until notice of a change in address or addressee is given as provided in this
Section. All notices given in accordance with this Section shall be effective,
if delivered by hand or by courier, at the time of delivery, and, if
communicated by facsimile transmission, at the time of transmission.
23.2 ENTIRE AGREEMENT. This Agreement is the entire agreement between the
parties hereto with respect to the subject matter hereof, there being no prior
written or oral promises or representations not incorporated herein.
23.3 CHOICE OF LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Illinois and the federal
laws of the United States of America applicable therein, as though all acts and
omissions related hereto occurred in Illinois. Any lawsuit arising from or
related to this Agreement shall only be brought in the United States District
Court for the Northern District of Illinois or the Circuit Court of Lake County,
Illinois. To the extent permissible by law, the parties hereby consent to the
jurisdiction and venue of such courts. Each party hereby waives, releases and
agrees not to assert, and agrees to cause its Affiliates to waive, release and
not assert, any rights such party or its Affiliates may have under any foreign
law or regulation that would be inconsistent with the terms of this Agreement as
governed by Illinois law.
23.4 AMENDMENT; WAIVER. No amendment or modification of the terms of this
Agreement shall be binding on either party unless reduced to writing and signed
by an authorized representative of the party to be bound. The waiver by either
party of any particular default by the other party shall not affect or impair
the rights of the party so waiving with respect to any subsequent default of the
same or a different kind; nor shall any delay or omission by either party to
exercise any right arising from any default by the other affect or impair any
rights which the nondefaulting party may have with respect to the same or any
future default.
23.5 SEVERABILITY. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall be
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ineffective in such jurisdiction to the extent of such prohibition or
unenforceability without affecting, impairing or invalidating the remaining
provisions or the enforceability of this Agreement.
23.6 RELATIONSHIP OF THE PARTIES. By virtue of this Agreement, neither
party constitutes the other as its agent (except as otherwise expressly
provided), partner, joint venturer, or legal representative and neither party
has express or implied authority to bind the other in any manner whatsoever.
23.7 SURVIVAL. The rights and obligations of the parties under Sections
8.5, 8.6, 11, 13.1, 14, 16.3, 16.4, 16.5, 16.6, 16.7, 17, 19.1, 19.2, 20, 21,
22, 23, and 24 as well as all rights and obligations with respect to any amounts
that remain unpaid under Sections 6 and 8 hereof as of the date of termination,
shall survive any termination of this Agreement.
23.8 COUNTERPARTS. For convenience of the parties hereto, this Agreement
may be executed in one or more counterparts, each of which shall be deemed an
original for all purposes.
23.9 RECORDS RETENTION. Each party will retain all information obtained or
created in the course of performance hereunder in accordance with the records
retention policy of the other party existing from time to time. Each party has
advised the other of its respective policy as in effect on the Effective Date
and will advise the other party of any subsequent changes therein.
23.10 BENEFICIARIES. Except for the provisions of Section 17 hereof,
which are also for the benefit of the other Persons indemnified, this Agreement
is solely for the benefit of the parties hereto and their respective Affiliates,
successors and permitted assigns and shall not confer upon any other Person any
remedy, claim, liability, reimbursement or other right in excess of those
existing without reference to this Agreement.
24. DISPUTE RESOLUTION AND ARBITRATION.
24.1 ESCALATION. The parties agree that they will attempt to settle any
claim or controversy arising out of this Agreement through good faith
negotiations in the spirit of mutual cooperation between business executives
with authority to resolve the controversy. Prior to taking action as provided
in Section 24.2, the parties shall first submit such claim or controversy to the
appropriate Divisional Presidents of each party for resolution, and if such
Divisional Presidents are unable to resolve such claim or controversy, either
party may request that
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their respective chief executive officers, or their respective delegees, attempt
to resolve the dispute. The officers or delegees to whom any such claim or
controversy is submitted as provided above shall attempt to resolve the dispute
through good faith negotiations over a reasonable period, not to exceed 30 days
in the aggregate unless otherwise agreed. Such 30 day period shall be deemed to
commence on the date of a Notice from either party describing the particular
claim or controversy.
24.2 ARBITRATION. Any dispute that is not resolved by negotiations
pursuant to Section 24.1 will, upon the written request of either party, be
resolved by binding arbitration conducted in accordance with the Rules of the
CPR Institute for Dispute Resolution by a sole arbitrator who is a former
federal judge or other mutually agreed upon individual. Such arbitrator shall
set a schedule for determination of such dispute that is reasonable under the
circumstances. Such arbitrator shall determine the dispute in accordance with
this Agreement and the substantive rules of law (but not the rules of procedure)
that would be applied by a federal court sitting in Illinois. The arbitration
shall take place in Lake County, Illinois. The arbitration will be governed by
the United States Arbitration Act, 9 U.S.C. Sections 1-16 and the Patent
Arbitration Act, 35 U.S.C. Section 294. Judgment upon the award rendered by the
arbitrator may be entered by any court having jurisdiction. Where this
Agreement provides for future agreement by the parties, failure to reach such
agreement shall not constitute a dispute subject to the provisions of this
Section 24 except as expressly provided otherwise.
24.3 INJUNCTIVE RELIEF. Nothing contained in this Section 24 shall prevent
either party from resorting to judicial process if injunctive or other equitable
relief from a court is necessary to prevent serious and irreparable injury to
one Party or to others. The use of arbitration procedures will not be construed
under the doctrine of laches, waiver or estoppel to affect adversely either
party's right to assert any claim or defense.
25. ASSIGNMENT.
25.1 GENERAL. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns, provided, however, that, except as provided below, neither party may
Transfer its interest in the Agreement, including Transfers by operation of law
such as by way of merger or consolidation, without the prior written consent of
the other party, which consent may not be unreasonably withheld.
Notwithstanding the foregoing sentence, either party may Transfer its rights and
obligations under this Agreement to any
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corporation or other entity that shall acquire all or substantially all of such
party's business and assets and assume in writing all of such party's
obligations hereunder and deliver a signed copy of such assumption instrument to
the other party; and, upon the other party's receipt of such assumption
instrument, the assigning party shall be fully released and discharged from its
obligations under this Agreement. In the event of such a Transfer, the Non-
Affected Party shall have the right to terminate this Agreement as provided in
Section 16.1.
25.2 CERTAIN OTHER TRANSFERS BY BAXTER. Notwithstanding the foregoing
provisions of this Section, to the extent that (a) any Person that is not a
Competitor of Allegiance shall acquire all or substantially all of Baxter's
business and assets relating to any Line of Products, or (b) any Person shall
acquire all or substantially all of Baxter's business and assets relating to the
Products; then Baxter may Transfer the portion of its rights hereunder relating
to such Line of Products or all of its rights hereunder, respectively, to such
acquiring Person, provided that any such acquiring Person shall assume in
writing all of Baxter's obligations hereunder which correspond to the portion of
rights Transferred, and shall deliver a signed copy of such assumption
instrument to Allegiance. Baxter shall remain liable for all of the obligations
under this Agreement notwithstanding any such Transfer. In the event of any
Transfer described in this paragraph, Allegiance shall have the right to
terminate the portion of this Agreement relating to such Line of Products as
provided in Section 16.1.
25.3 CERTAIN OTHER TRANSFERS BY ALLEGIANCE. Notwithstanding the foregoing
provisions of this Section, to the extent that any Person shall acquire all or
any portion of Allegiance's business and assets relating to the Allegiance's
distribution network, Allegiance may Transfer the portion of its rights
hereunder relating to such portion of its distribution network to such acquiring
Person, provided that any such acquiring Person shall assume in writing the
portion of Allegiance's obligations hereunder relating to the portion of the
distribution network so Transferred, and shall deliver a signed copy of such
assumption instrument to Baxter. Allegiance shall remain liable for all of the
obligations under this Agreement notwithstanding any such Transfer. In the event
of any Transfer described in this paragraph, Baxter shall have the right to
terminate this Agreement as provided in Section 16.1.
26. AUTHORITY. Each party represents and warrants that, as of the effective
date of this Agreement, the terms of this Agreement do not violate any existing
obligations or contracts of, or any law, rule, regulation, judgment or order
binding on, such party.
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Each party shall indemnify and hold harmless the other party from and against
any and all liabilities, damages, losses and expenses (including reasonable
attorney's fees) resulting from any third party claim, arbitration proceeding or
suit which is hereafter made or brought against the other party and which
alleges any such violation, all as provided in Section 17 herein with respect to
the indemnification provided in Section 17.1 and Section 17.2.
* * * * * *
IN WITNESS WHEREOF, the parties have by their duly authorized officers
executed this Agreement as of the date first above written.
BAXTER: ALLEGIANCE:
BAXTER HEALTHCARE CORPORATION ALLEGIANCE HEALTHCARE CORPORATION
By: By:
---------------------------- -----------------------------
Name: Name:
Title: Title:
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AGENCY, SERVICES, AND DISTRIBUTION AGREEMENT
EXHIBIT A
I.V. PRODUCTS
[PREMIUM PRODUCTS SHALL NOT INCLUDE * * *.]
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* * * CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
A-1
<PAGE>
AGENCY, SERVICES, AND DISTRIBUTION AGREEMENT
EXHIBIT B
NUTRITION PRODUCTS
B-1
<PAGE>
AGENCY, SERVICES, AND DISTRIBUTION AGREEMENT
EXHIBIT C
ALLEGIANCE'S DUTIES
1. GENERAL DUTIES UNDER AGENCY MODEL, DISTRIBUTOR MODEL AND BCS KITS MODEL.
1.1 CORPORATE AGREEMENT BONUS PROGRAM. Allegiance shall participate in
the corporate agreement bonus program for the Products as follows:
1.1.1 EXISTING AGREEMENTS.
1.1.1.1 The "Existing Corporate Agreements" shall mean Baxter's
agreements with stand-alone hospitals and regional and national health
systems with effective dates prior to September 30, 1996, which provide for
annual bonus or discount payments based upon the quantity of Baxter-
manufactured products purchased by the customer.
1.1.1.2 Allegiance will accept assignment of the Existing
Corporate Agreements and will administer the Existing Corporate Agreements
on behalf of itself and Baxter.
1.1.1.3 Allegiance shall honor and administer each Existing
Corporate Agreement through its expiration or earlier termination pursuant
to its terms.
1.1.1.4 The corporate agreement bonus funding process will be
the same as prior to October 1, 1996, i.e., the corporate agreement bonuses
will be funded by Baxter and Allegiance, the allocation will be made based
on the estimated total year-end payout and actual May year-to-date sales
and gross profit recognized from the applicable customers, the bonus
allocation will be invoiced by Allegiance to Baxter on a monthly basis
(terms of payment will be net 30 days), and on or before May 31 of each
year, any over-accrual or under-accrual will be allocated to Allegiance or
Baxter based upon the foregoing allocation for the applicable year.
1.1.1.5 Allegiance shall prepare and present the corporate
agreement bonus payments to the customers, and Baxter shall have the right
to have Baxter representatives present.
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1.1.2 FUTURE AGREEMENTS. For any corporate bonus agreements
entered into on or after the effective date of this Agreement with stand-alone
hospitals and regional and national health systems, Allegiance shall meet in
advance with each Baxter business unit to determine whether such Baxter business
unit desires to participate in any such agreements.
1.2 SALES SUPPORT. Allegiance shall use commercially reasonable efforts
to support sales of the Products in accordance with the following and such
efforts are in lieu of any standard of performance implied by Section 2-306(2)
of the U.C.C.:
1.2.1 Allegiance field service representatives (customer service
representatives in the field) or other Allegiance customer service
representatives shall direct customer inquiries regarding the Products to
Baxter's customer service support organization for resolution.
1.2.2 If Allegiance receives a request for proposal or request for
bid relating to the Products, Allegiance will advise Baxter of such receipt, and
will also advise Baxter whether the customer appears interested in purchasing
the Products under the Agency Model or the Distributor Model.
1.2.3 Allegiance account managers shall: (a) provide Baxter with
access to the customer decision-makers; (b) generate sales interest in the
Products; (c) actively support the joint customer satisfaction strategy between
Allegiance and Baxter; and (d) work with Baxter (in a manner similar to that
prior to the effective date of this Agreement) relative to account segmentation
rating of Baxter customers. Allegiance segmentation of customers for the
Products shall not affect Allegiance's obligations under the Agency Model.
1.2.4 Allegiance will use commercially reasonable efforts to
monitor critical business indicators in the areas of customer service, materials
management, distribution services, pricing/billing, and compliance with all
specific service requirements set forth in this Exhibit C. Without limitation
to the foregoing sentence, Allegiance will use commercially reasonable efforts
to measure and assess customer satisfaction for Allegiance sales processes and
sales representatives, to the extent Allegiance provides such sales-related
functions under this Agreement.
1.2.5 Allegiance shall participate with Baxter in a semi-annual
review of regional account segmentation, performance to critical business
indicators, and regional sales to be conducted between the leaders of their
respective regional sales
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organizations. Allegiance and Baxter will work together in good faith to develop
action plans to improve customer satisfaction in areas that are mutually
identified as key factors for customer growth and retention, or areas where
Baxter's performance is significantly (statistically defined) below that of its
competitors.
1.2.6 Allegiance's sales generalist sales force shall continue to
promote sales of the Products in the same manner as prior to the effective date
of this Agreement.
1.2.7 Allegiance will provide telephone sales services for
deployment purposes or strategic account management, at Baxter's request, for an
additional fee to be agreed upon.
1.2.8 Allegiance shall make available to Baxter its electronic
catalog listing each party's products.
1.2.9 Upon termination or expiration of any pre-existing customer
contract with a third-party supplier for products that compete with any Product
or Products, except for permitted competitive Best Value Products, Allegiance
shall encourage and facilitate use of the Products (rather than any product
competing with any Product or Products) through appropriate means including, but
not limited to, use of Best Value Product incentives, Allegiance customer
contract provisions, and/or sales representative incentives.
1.2.10 TRANSITION. During the period beginning with the effective
date of this Agreement and ending on December 31, 1996, Allegiance will continue
to use reasonable business efforts to provide substantially the same level of
customer service relating to the Products through substantially the same
personnel as Baxter's U.S. Distribution business provided as of July 1, 1996.
Allegiance's responsibilities under the preceding sentence shall end as and to
the extent that Baxter customer service personnel are activated. Baxter will
use reasonable efforts to meet the agreed-upon transition schedule.
1.3 MARKETING SUPPORT. Allegiance shall use commercially reasonable
efforts to support marketing of the Products in accordance with the following,
and such efforts are in lieu of any standard of performance implied by Section
2-306(2) of the U.C.C.:
1.3.1 Allegiance shall provide marketing services (other than
product management services which will be provided by Baxter) to Surgery Centers
and to Alternate Site Distributors.
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1.3.2 Allegiance shall maintain its own communications resources
and shall coordinate the communications messages with Baxter when appropriate.
1.3.3 Allegiance shall attempt whenever possible to share with
Baxter expenses for convention fees, industry organizations, and industry
databases when and where appropriate.
1.3.4 Prior to publication, Allegiance shall submit to Baxter for
Baxter's approval all Allegiance promotional/communication endeavors
specifically referencing the Products or any Baxter services.
1.3.5 Either as part of the promotion of Best Value Products or as
part of a general promotion, Allegiance shall represent the Products fully and
prominently in Allegiance's product and service literature or any other media,
including field sales support tools.
1.3.6 Allegiance shall include Baxter sales volume by Product
category on Allegiance's sales reports in a similar format as provided by
Allegiance prior to the effective date of this Agreement.
1.3.7 For a fee to be agreed upon from time to time, Allegiance
shall provide literature distribution services to Baxter.
1.4 NATIONAL SAMPLE CENTER. From the effective date of this Agreement
through the period ending December 31, 1997, Allegiance shall provide the
following services in connection with the National Sample Center:
1.4.1 Allegiance shall maintain the Sample Center for the
Products.
1.4.2 Allegiance shall order the Products to be stocked in the
Sample Center which shall remain owned by Baxter.
1.4.3 Allegiance shall maintain the MAS90 system for the Sample
Center inventory.
1.4.4 Allegiance shall provide to Baxter a monthly spreadsheet
with the Product-related activity for the month, I.E., rep name, cost center,
product ordered, and service charge.
1.4.5 Allegiance shall charge Baxter a handling charge of
* * */order to cover the overhead associated with receiving, storing, and
shipping the Products.
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* * * CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
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1.4.6 Allegiance shall apply special handling charges to priority
shipments as follows: (a) next day shipments will be charged an additional * *
*; and (b) second day air shipments will be charged an additional * * *.
1.4.7 Allegiance shall bill Baxter monthly for applicable charges.
1.4.8 Allegiance shall conduct an annual inventory and/or routine
cycle counting to maintain inventory integrity in the National Sample Center.
1.4.9 Allegiance shall continue to provide the same customer
service functions to the sales representatives as was provided prior to the
effective date of this Agreement.
1.4.10 Allegiance shall continue to check expiration dates on all
Sample Center Products.
1.4.11 Allegiance shall maintain contact with Baxter's finance
personnel regarding inventory status and financial transactions.
1.4.12 Allegiance shall send monthly reports to Baxter providing
inventory levels.
1.5 MATERIALS MANAGEMENT. Allegiance and Baxter shall use commercially
reasonable efforts to make the supply chain as efficient as possible for both
parties. Future opportunities to improve efficiency include, but are not
limited to, EDI, bar coding, custom palletization, network channels and the use
of returnable totes. Both parties agree to work in good faith to achieve this
goal.
1.5.1 FINISHED GOODS REQUIREMENTS PLANNING.
1.5.1.1 Both parties agree that the echeloning of products
based on line item usage generally makes sense. Assuming there are no
significant customer contractual issues or financial impacts to Baxter,
Baxter agrees to the parameters set forth by the rationalized supply chain.
If after the appropriate review there are significant customer contractual
issues or financial impacts to Baxter, 1995 will be used as the baseline
for where products are stocked and the number of low velocity SKU's will
not exceed 1995 levels.
1.5.1.2 Allegiance will not be required to carry more than 1995
average Days Inventory On Hand.
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* * * CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
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1.5.2 ALLEGIANCE INBOUND FREIGHT ADMINISTRATIVE SERVICES.
Allegiance shall continue to provide the following administrative services for
all inbound freight shipments (i.e., shipments of Products from manufacturing
plants to replenishment centers and distribution centers or from replenishment
centers to distribution centers) to the extent that such services were normally
being provided by Baxter's U.S. Distribution business to Baxter's I.V. Division
prior to the effective date of this Agreement: (a) freight payments, (b) audit
of freight payments, (c) transportation cost reporting, and (d) logistics
analysis/distribution technology to include network planning and replenishment
center sourcing. Allegiance's compensation for such services shall be
determined in accordance with the methodology used by Baxter prior to the
effective date of this Agreement. For an additional fee to be agreed upon,
Allegiance may agree to provide to Baxter additional inbound freight
administrative services beyond the scope of the services normally being
furnished by Baxter's U.S. Distribution business to Baxter's I.V. Division prior
to the effective date of this Agreement.
1.6 DISTRIBUTION.
1.6.1 RECEIVING (NOTIFICATION AND PLANNING).
1.6.1.1 Product will be system received within one and one-half
business days of arrival at Allegiance's replenishment center or
distribution center.
1.6.1.2 Allegiance will coordinate with Baxter to schedule
receiving appointments for Products coming from manufacturing facilities
and replenishment centers, and in unloading Products. Allegiance will
follow Bill of Lading (BOL) instructions regarding receipt unless late
arrival prevents Allegiance from doing so, and alternative arrangements
have not been made.
1.6.1.3 Allegiance will receive products at distribution
centers using Baxter's and Allegiance's computer systems or an Allegiance
warehouse management system that will upload to such computer systems.
1.6.2 WAREHOUSE MANAGEMENT.
1.6.2.1 Allegiance will be responsible for the management of
its replenishment centers and distribution centers.
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1.6.2.2 Allegiance will hold Baxter inventory in Allegiance's
replenishment center or its distribution centers.
1.6.2.3 Except as otherwise agreed, Allegiance will adhere to
existing storage, shipping and receiving practices, including practices
regarding time-sensitive Products.
1.6.2.4 Allegiance will measure and report to Baxter on a monthly
basis Product damage or loss that occurs at Allegiance facilities.
Allegiance shall compensate Baxter pursuant to Section 6.18 of this
Agreement for any damage or loss that is Allegiance's responsibility under
this Agreement.
1.6.2.5 Allegiance will measure and report to Baxter on a
monthly basis Product damage that occurs prior to arrival at Allegiance's
distribution centers or its replenishment center.
1.6.3 CYCLE COUNTS AND PHYSICAL INVENTORIES.
1.6.3.1 Allegiance will continue to perform counts of Baxter's
Product inventory in all Allegiance facilities through annual physical
inventories or cycle counts, following substantially the same practices as
employed by Baxter and Baxter's U.S. Distribution business prior to the
effective date of this Agreement, at no additional cost to Baxter.
1.6.3.2 Allegiance facilities that performed cycle counts for
the Products prior to the effective date of this Agreement will continue to
do so consistent with practices utilized prior to the date hereof.
1.6.3.3 Allegiance shall provide Baxter with the results of its
cycle counts by the tenth business day after the count was taken.
1.6.3.4 Baxter personnel and external auditors for Baxter shall
have the right to audit an Allegiance cycle count of the Products at any
time up to 90 days after the end of the month in which the cycle count is
conducted.
1.6.3.5 Baxter personnel and external auditors for Baxter shall
have the right to audit Product inventory in Allegiance facilities at any
mutually-acceptable time upon not more than five business days advance
notice.
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1.6.3.6 Allegiance facilities that performed annual physical
inventories prior to the effective date of this Agreement will continue to
do so during the Term of this Agreement. The annual physical inventory
will take place in October of each year during the Term of this Agreement.
Baxter will select a day in October acceptable to Allegiance on which the
physical inventory will take place.
1.6.3.7 Allegiance will have 20 business days from the day of
the physical inventory to reconcile, system enter, and report the physical
inventory results to Baxter.
1.6.3.8 Each Allegiance facility participating in the physical
inventory must demonstrate a gross variance of the dollar value of the
Product inventory on TOPS within a range of -5% to +5%. Baxter may require
Allegiance facilities that do not meet this standard to perform another
physical inventory in April of the following calendar year. If the gross
variance is outside of the range of -1.5% to +1.5%, Baxter may require
Allegiance to perform specified Product physical inventory counts.
1.6.3.9 To the extent practicable, Baxter and Allegiance shall
record any annual physical inventory adjustments into their respective
accounting records at the same time.
1.6.3.10 Baxter shall have the right to have Baxter personnel
and external auditors present at Allegiance facilities on the day that the
physical inventory is conducted. In addition, Baxter shall have the right
to audit Allegiance's annual physical inventory results at any time up to 3
months after the date on which Allegiance records its annual inventory
adjustments into its accounting records.
1.6.4 ORDER FULFILLMENT. When customer orders are released
through Baxter's computer system to Allegiance's computer system, Allegiance
personnel will pick, pack, load and stage and ship-verify the customer order for
delivery within the Allegiance distribution center. For Agency Model
transactions, Allegiance personnel will continue to provide problem resolution
for electronic data interchange (EDI) orders to the same extent as provided by
Baxter's U.S. Distribution business to Baxter's I.V. Division immediately prior
to the effective date of this Agreement, at no additional charge to Baxter.
1.6.5 OUTBOUND SHIPMENT.
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1.6.5.1 Allegiance personnel will be responsible for the
selection and routing, private fleet or commercial carrier, of the Baxter
customer order.
1.6.5.2 Allegiance shipments will be based on BOL instructions.
If no specific instruction appears on the in BOL, shipments will occur on
the next scheduled delivery or within a maximum of two business days (if no
scheduled delivery).
1.6.6 FREIGHT CLAIMS.
1.6.6.1 Allegiance will be responsible for filing freight
claims and resolving product shortages and overages, including providing
proof of delivery, with respect to all Product shipments.
1.6.6.2 If Allegiance is unable to furnish proof of delivery
with respect to Products shipped on Allegiance's private fleet within a
reasonable period of time thereafter, it shall compensate Baxter for such
undelivered Product in accordance with Section 6.18 of this Agreement.
1.6.7 LOT TRACKING. Allegiance shall provide lot tracking
capabilities as provided by Baxter for the Products prior to the effective date
of this Agreement.
1.6.8 RETURN GOODS MANAGEMENT.
1.6.8.1 Allegiance shall arrange for and pick up, process and
dispose of returned Products at Baxter's request.
1.6.8.2 In the event of returned Products, a return goods
authorization will be issued by Baxter Customer Service and Allegiance will
arrange for and pick up such Products within 5 business days. However, if
the customer is located in a remote area where pick-up within 5 business
days would be impracticable, Allegiance will use commercially reasonable
efforts to pick up the returned Products at the next scheduled delivery,
but in no event later than 30 days after its receipt of such return goods
authorization.
1.6.8.3 Allegiance will continue practices existing immediately
prior to the effective date of this Agreement regarding returned goods
processing, including unloading, segregation, inspection, product
disposition (restocking, disposal, or transport for restocking),
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documentation, and forwarding paperwork for Baxter to administer credit.
1.6.8.4 Return goods processing time (receipt date at
distribution center to paperwork receipt at Baxter) will not exceed 30
days.
1.6.8.5 Allegiance shall use commercially reasonable efforts to
dispose of returned Products in a cost-effective manner, subject to
Baxter's instructions.
1.7 PRODUCT FIELD CORRECTIVE ACTIONS.
1.7.1 Allegiance shall perform field corrective action ("FCA")
services in a manner consistent with the quality systems, procedures and
specifications as of the effective date of this Agreement. Allegiance shall
provide the following FCA services for the fee stated in Section 6.16.1:
a. FCA notification processing;
b. FCA disposition processing;
c. storage of Products affected by an FCA inside an Allegiance
distribution center for up to six months from the date of
initiation of the FCA;
d. transportation of all Products affected by the FCA to
Baxter, freight collect;
e. rework or inspections of Products by Allegiance employees;
f. discard and destruction of Products utilizing nonhazardous
waste disposal methods;
g. delivery of recall report information to Baxter;
h. incoming inspection of all Baxter Products for open FCAs for
twelve months from the date of initiation of the FCA;
i. third-party invoices for any of the services listed above;
and
j. third-party invoices for any services in addition to those
listed above as performed in 1996.
1.7.2 At Baxter's request and with Baxter's approval, Allegiance shall
perform FCA services not included in Section 1.7.1 for additional compensation
to be agreed upon. Baxter will be invoiced separately for such additional
services pursuant to Section 6.16.2 of this Agreement. Examples of additional
FCA services addressed by this Section 1.7.2 include:
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a. all third-party invoices related to expenses incurred by
Allegiance (except expenses related to the discard and
destruction of non-hazardous Products) that arise out of the
need for Baxter to issue an FCA for Products;
b. computer system upgrades requested by Baxter or Baxter for
Allegiance FCA systems;
c. storage of Products affected by an FCA for periods longer
than six months or storage of such Products in rented
trailers; and
d. incoming inspection of all Products for open FCAs for
periods longer than 12 months from the date of initiation of
the initiation of the FCA.
1.7.3 For purposes of the subsequent provisions of this
Section 1.7, Allegiance shall use commercially reasonable efforts to accomplish
the FCA tasks identified within the time periods indicated. If extraordinary
volume or other circumstances make such time periods impracticable, Baxter and
Allegiance will make adjustments by extending time periods, setting priorities
or otherwise.
1.7.4 Allegiance shall perform FCA notification to Allegiance's
distribution centers and replenishment center based upon priorities. Priority A
notification requires extraordinary and immediate action. Priority B
notification requires notification to all Allegiance distribution centers and
its replenishment center within one business day. Priorities will be based on
the urgency of the FCA as determined primarily by Baxter.
1.7.5 For FCAs involving Products sold under the Distributor
Model, Allegiance shall provide customer lists to Baxter the next business day
for requests received before 1:00 p.m. Central Standard Time.
1.7.6 Allegiance shall perform stock checks based upon priorities.
Priority A requires extraordinary and immediate action. Priority B requires
processing and reporting on the same day. Priority C will be negotiated based
upon needs but generally requires processing and reporting in 2 to 5 business
days. Priorities will be based on the urgency of the FCA as determined
primarily by Baxter.
1.7.7 Initial inventory reports shall be issued in 5 business days
from initial FCA notification to Allegiance's distribution centers or
replenishment center unless otherwise requested.
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1.7.8 Subject to local restrictions regarding discard of the
products, routine dispositions (as designated by Baxter) shall be issued to
Allegiance's distribution centers and replenishment center in 5 business days.
Allegiance's distribution centers and replenishment center shall then have 5
business days to process the disposition.
1.7.9 Subject to local restrictions regarding discard of the
Products, expedited dispositions (as designated by Baxter) shall be issued to
Allegiance's distribution centers and replenishment center within 1 business
day. Allegiance's distribution centers and replenishment center shall then have
five business days to process the expedited disposition.
1.7.10 Subject to local restrictions regarding discard of the
Products, extraordinary dispositions (as designated by Baxter) shall be issued
within 1 business day. Allegiance's distribution centers and replenishment
center shall then have one business day to process the expedited disposition.
1.7.11 Reconciled disposition reports for quantity variance shall be
negotiated between Allegiance and Baxter at the time of disposition.
1.7.12 The necessity for and content of sampling plans and protocols
shall be negotiated at the time of the FCA.
1.7.13 Allegiance shall cooperate with Baxter in performing any FCA
by identifying affected Products and customers, developing an action-specific
management plan detailing specific responsibilities, and notifying customers of
any such action. Allegiance shall encourage customers to follow instructions
related to any hold or recall situation.
1.7.14 FCAS FOR KITS. Allegiance shall implement and report, as
necessary, any Product FCAs for Kits, following, to the extent commercially
reasonable, the same instructions and priorities provided for Products sold
pursuant to the Agency Model or the Distributor Model. Allegiance shall provide
to Baxter a customer list for specialized distribution such as ValueLink and
other low unit of measure ("LUM") programs. Allegiance shall implement the FCA
for such specialized distribution. Allegiance shall reconcile the Kit portion
of any recall and provide Baxter with all required recall data.
1.8 DIVISIONAL BONUS PROGRAM.
1.8.1 Allegiance shall participate in the Baxter divisional bonus
programs for the Products if and to the extent
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that such programs include Allegiance products and such programs are in
existence as of the effective date of this Agreement.
1.8.2 Allegiance shall continue to bill the customer for sales of
Allegiance products and promptly provide to Baxter information related to such
sales necessary to calculate the divisional bonus. Baxter will invoice the
bonus allocation to Allegiance.
1.8.3 Baxter shall prepare and present the divisional bonus
payments to customers, and Allegiance shall have the right to have Allegiance
representatives present at the presentation.
1.8.4 Allegiance shall use commercially reasonable efforts to
cooperate with Baxter in the event customers request that divisional bonus
payments be made by alternative means, for example, through credits on
Allegiance statements of account.
1.8.5 [BEGINNING WITH CALENDAR YEAR 1997, ALLEGIANCE SHALL PAY TO
BAXTER ALLEGIANCE'S SHARE OF OPERATIONS AND SYSTEMS EXPENSES REQUIRED TO SUPPORT
THE ADMINISTRATION OF THE DIVISIONAL BONUS PROGRAM BASED UPON ALLEGIANCE'S SHARE
OF THE DIVISIONAL BONUS AS A PERCENTAGE OF THE TOTAL DIVISIONAL BONUS.
NOTWITHSTANDING THE PRECEDING SENTENCE, ALLEGIANCE'S SHARE OF SUCH OPERATIONS
AND SYSTEMS EXPENSES SHALL NOT EXCEED * * *.]
1.9 PRIOR NOTICE. To the extent practicable, Allegiance shall provide at
least six months prior written notice to Baxter before making any change in its
business operations that is likely to impact materially Baxter's business
operations, revenues or costs. Such changes include, but are not limited to,
Allegiance's closure of one or more of its distribution centers.
2. AGENCY MODEL.
2.1 GENERAL.
2.1.1 Allegiance will system receive the Products into Baxter's
computer system.
2.1.2 Allegiance will receive the shipping documentation from
Baxter's computer system and pick-up information by facsimile.
2.1.3 Allegiance will perform shipment verification on Baxter's
computer system.
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* * * CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
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2.2 CUSTOMER SERVICE. Allegiance shall provide customer service support
and order entry as follows for Products sold to Subdistributors (except for EIS
customers and anaesthesia dealers, for whom Baxter will provide all dealer
management services):
2.2.1 When utilizing the dealer management group as an agent to
service Alternate Site Distributors and Alternative Acute Care Distributors:
2.2.1.1 Allegiance's dealer management group will act as
Baxter's agent in negotiating agreements with Alternate Site Distributors
and Alternative Acute Care Distributors as designated by Baxter for
Products and will act as the primary interface with such Alternate Site
Distributors and Alternative Acute Care Distributors.
2.2.1.2 Allegiance shall seek Baxter's approval which must be
obtained by the Allegiance dealer management group prior to setting up any
accounts for Alternate Site Distributors or Alternative Acute Care
Distributors.
2.2.1.3 Baxter will establish sales strategies, selling terms,
ordering policies, and pricing for sales to Alternate Site Distributors and
Alternative Acute Care Distributors.
2.2.1.4 Allegiance shall provide operational support including
order entry/customer service, billing/contract and pricing administration,
collection, dealer rebates, trace sales, return processing, accounts
receivable dispute resolution, system support, and new account set-up.
2.3 PRICING/BILLING.
2.3.1 When utilizing the dealer management group as an agent to
sell and service Alternate Site Distributors and Alternative Acute Care
Distributors:
2.3.1.1 Allegiance's dealer management group must seek approval
from Baxter which must be obtained prior to any agreement with an Alternate
Site Distributor or an Alternative Acute Care Distributor to fund margin or
pay sales tracing fees.
2.3.1.2 Allegiance's dealer management group will perform the
billing function for Baxter using Baxter's computer system.
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2.3.2 When Allegiance's surgery center sales force is promoting
Baxter's sale of the Products to surgery centers, Allegiance's sales force shall
operate within the price guidelines set by Baxter.
2.3.3 ADDITIONAL CUSTOMER-REQUESTED SERVICES. In conjunction with
the Agency Model, if a customer requests Product-related services from
Allegiance that are in addition to the services that Allegiance has agreed to
provide under the foregoing provisions of Exhibit C, Allegiance will provide to
Baxter a description of the additional services requested and its associated
fees for such services. Baxter will conduct all preliminary negotiations with
the customer relative to such additional services. Based on these negotiations,
Baxter will advise Allegiance as to whether (a) Baxter will contract directly
with Allegiance for provision of such additional services, or (b) Allegiance
should contract directly with the customer for provision of such services.
2.4 DISTRIBUTION.
2.4.1 OUTBOUND SHIPMENT.
2.4.1.1 Allegiance shall provide the following standard
delivery services ("Standard Delivery"): (a) with respect to customer
contracts in connection with new relationships beginning after September
30, 1996, Allegiance shall provide delivery of carton quantities,
palletized, delivered to the customer's receiving area (loading dock) at
least two days per week (or three days per week for shipments to alternate
site customers); or (b) with respect to all other transactions, delivery
services consistent with Allegiance's performance at the customer level
immediately preceding the effective date of this Agreement. Allegiance
will share with Baxter the costs and savings associated with Standard
Delivery as set forth in Section 6.11.
2.4.1.2 Allegiance shall deliver Products by air freight or by
messenger ("Premium Delivery") when requested by Baxter. Allegiance will
share with Baxter the costs and savings associated with Uncollected Premium
Delivery Costs as set forth in Section 6.11 of this Agreement.
2.4.1.3 Allegiance shall make deliveries of Products in
addition to Standard Delivery ("Incremental Deliveries") when requested by
Baxter. For calendar year 1997 Allegiance will be compensated by Baxter
for providing such Incremental Deliveries in an amount equal to * * * of
the amount, if any, that Baxter invoices to its customers
- ---------------
* * * CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
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for such Incremental Deliveries. For 1998 and subsequent calendar years
during the Term, the parties will agree in Council prior to the beginning
of each year upon Allegiance's compensation for providing such Incremental
Deliveries.
2.4.1.4 During calendar year 1997, Allegiance will review with
Baxter on a quarterly basis in the Council the operational and financial
effects of the terms of this Agreement regarding Incremental Deliveries,
and will renegotiate such terms for 1997 if necessary to keep both parties
financially whole. Without limiting the foregoing sentence, the parties
will renegotiate such terms for 1997 if (a) the total number of Incremental
Deliveries of Products increase substantially more rapidly than Agency Net
Sales, and (b) Allegiance's costs incurred in providing such Incremental
Deliveries (net of freight and net of any reimbursement by Baxter pursuant
to Exhibit D, Section 1.5.4), increase substantially.
2.4.1.5 Allegiance shall provide enhanced delivery services
(e.g., custom palletization, inside delivery, etc.) that are outside the
basic agreements ("Enhanced Delivery"), when requested by Baxter, for
compensation to be agreed upon in accordance with Section 2.3.3 of this
Exhibit C (Additional Services).
2.4.1.6 Allegiance will ship-verify shipments of Products to
customers by private fleet or commercial carriers within one business day.
2.4.2 FREIGHT CLAIMS. Allegiance will pay to Baxter any amounts
recovered with respect to freight claims filed on behalf of Baxter within 30
days of receipt, except that (1) Allegiance may set-off against such payments
any amounts that it has previously paid to Baxter with respect to the same
claim; and (2) during the Interim Period, the provisions of Exhibit F shall
control with respect to payment of any amounts recovered with respect to such
freight claims for Products shipped to customers under the Interim Distributor
Model.
2.4.3 ALLEGIANCE OUTBOUND FREIGHT ADMINISTRATIVE SERVICES.
Allegiance shall continue to provide the following administrative services for
all outbound freight shipments (i.e., shipments of Products from Allegiance
facilities to customers) to the extent such services were normally being
provided by Baxter's U.S. Distribution business to Baxter's I.V. Division prior
to the effective date of this Agreement: (a) freight payments, (b) audit of
freight payments, (c) transportation cost reporting, and
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(d) logistics analysis/distribution technology to include network planning and
replenishment center sourcing, at no additional cost to Baxter. For an
additional fee to be agreed upon, Allegiance may agree to provide to Baxter
additional outbound freight services beyond the scope of the services normally
being furnished by Baxter's U.S. Distribution business to Baxter's I.V. Division
prior to the effective date of this Agreement.
3. DISTRIBUTOR MODEL AND BCS KIT MODEL.
3.1 GENERAL.
3.1.1 Allegiance system receives the Products into its computer
system.
3.1.2 Each business day during the Term, Allegiance shall report
to Baxter its aggregate sales of Products for the previous business day by code
and by customer for Distributor Model transactions and BCS Kits, and such
reports shall also include, with respect to Distributor Model transactions, the
Suggested Sales Price, Allegiance's actual purchase price of the Products, and
sufficient information regarding customer discounts, returns, allowances and all
other applicable customer debits and credits to permit Baxter to calculate
Distributor Net Sales.
3.1.3 For all transactions under the Distributor Model, Allegiance
will provide Baxter each business day with customer Product demand information
by product code to support Baxter's finished goods requirements planning.
3.2 CUSTOMER SERVICE. Allegiance shall provide customer service support
and order entry as follows for all Products sold under the Distributor Model and
the BCS Kits Model:
3.2.1 PRE-SALES SERVICES. Allegiance shall perform the following
pre-sales services:
3.2.1.1 PRODUCT/SERVICE SPECIFICATIONS - Allegiance shall
forward to Baxter any requests for Product information not available on
Allegiance systems.
3.2.1.2 PRICING/CONTRACTING INFORMATION - Allegiance shall
develop and maintain contract information for all contracts, and such
information shall be accessible to Allegiance via its computer system.
3.2.1.3 PRODUCT AVAILABILITY - Allegiance shall provide fill
rate and product availability information from
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Allegiance and Baxter computer systems to all Allegiance customer service
personnel.
3.2.1.4 COMPETITIVE PRODUCT CROSS-REFERENCING - Allegiance
shall update information cross-referencing Products and competitive
products on a consistent time frame and provide it to its service personnel
via Allegiance's computer system.
3.2.1.5 SALES REPRESENTATIVE INFORMATION - Allegiance shall
provide Allegiance sales representative identification to the customer.
This information will reside in the Allegiance customer master file and be
updated as needed.
3.2.1.6 HARDWARE SALES - Specific questions regarding hardware
sales should be referred to Baxter's hardware order entry personnel.
3.2.1.7 NEW CUSTOMER SET-UP - Allegiance customer service
personnel will ensure effective and efficient coding of all new customers
into the customer master files.
3.2.2 ORDER FULFILLMENT/SALES PROCESS.
3.2.2.1 ORDER PLACEMENT - Allegiance customer service personnel
will be the initial access point for customer into Allegiance and will
handle inquiries and order placement efficiently and effectively. The
order entry activity will function on Allegiance's computer system.
3.2.2.2 ORDER TRACKING - Allegiance shall maintain the ability
to identify to customers the location of Products in the order process.
3.2.2.3 SPECIAL REQUEST PROCESSING - Allegiance customer
service personnel will be required to process special handling requests by
customer such as drop shipping, alternate shipping, special handling, lot
holding, etc., and will work within contract guidelines and procedural
boundaries to service the customer.
3.2.2.4 INVOICING - Allegiance will perform billing for the
Products via appropriate computer systems.
3.2.2.5 CUSTOMER SATISFACTION - Allegiance's service personnel
are accountable for the customer's satisfaction regarding the service
provided. Allegiance
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will conduct annual surveys of customer satisfaction levels and manage
improvement plans.
3.2.3 POST-SALES SERVICE.
3.2.3.1 DISCOUNTS - Allegiance will pass all appropriate sales
information to Baxter which will calculate discounts and incentives for all
customers.
3.2.3.2 CREDIT AND COLLECTION - Allegiance is responsible for
collecting on outstanding invoices. Allegiance shall have the sole
authority to issue credits.
3.2.3.3 CREDITS FOR RETURNED GOODS, SHORTAGES, DAMAGES, AND
MISDELIVERIES - Allegiance shall be responsible for issuing credits and
resolving customer issues relating to returned goods, shortages, damages
and misdeliveries. Allegiance shall use commercially reasonable efforts to
advise Baxter of all Product-related credits and any other customer
resolutions likely to affect Baxter's relationship with the customer.
3.2.3.4 PRICING DISPUTES - Pricing disputes will be handled by
Allegiance.
3.2.3.5 BACK ORDER STATUS AND RESOLUTION - Allegiance will be
accountable for managing customer communications of back orders to provide
accurate and timely information on resolution. Allegiance will communicate
appropriate product substitution information to the customer.
3.2.3.6 PRODUCT COMPLAINT - Initial customer Product complaints
will be logged by Allegiance customer service. Such complaints may be
escalated for resolution.
3.3 PRICING/BILLING.
3.3.1 Allegiance will negotiate the delivered price for the
Products.
3.3.2 Allegiance will quote the Allegiance price to the customer
in response to market conditions but may quote as its price the Suggested Sales
Price, plus any markup or less any markdown it feels is appropriate, including
any markup for added services.
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3.3.3 Each customer will sign a bid or contract with Allegiance
and an addendum or new contract with Baxter that states that such customer has
reached agreement with Allegiance on the final price such customer will pay.
The customer must comply with the purchase requirements of the bilateral
contract with Baxter, and such bilateral contract shall continue to constitute a
binding commitment of the customer to Baxter. Shortfall charges and
cancellation fees, if any, under such bilateral contract will be calculated
using the Suggested Sales Price and will be administered by Baxter.
3.3.4 Allegiance shall process all billing to the customer on its
computer system.
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<PAGE>
AGENCY, SERVICES, AND DISTRIBUTION AGREEMENT
EXHIBIT D
BAXTER'S DUTIES
1. GENERAL DUTIES UNDER AGENCY MODEL, DISTRIBUTOR MODEL, AND BCS KITS MODEL.
1.1 CORPORATE AGREEMENT BONUS PROGRAM. Baxter shall participate in the
Existing Corporate Agreements bonus program as follows:
1.1.1 Baxter shall provide to Allegiance comparable sales and
gross profit data as it provided prior to October 1, 1996, for each applicable
customer participating in the Existing Corporate Agreements Bonus Program.
1.1.2 [BEGINNING WITH CALENDAR YEAR 1997, BAXTER SHALL PAY TO
ALLEGIANCE BAXTER'S SHARE OF OPERATIONS AND SYSTEMS EXPENSES REQUIRED TO SUPPORT
THE ADMINISTRATION OF THE EXISTING CORPORATE AGREEMENTS BONUS PLAN BASED UPON
BAXTER'S SHARE OF THE CORPORATE AGREEMENT BONUS AS A PERCENTAGE OF THE TOTAL
CORPORATE AGREEMENT BONUS. NOTWITHSTANDING THE PRECEDING SENTENCE, BAXTER'S
SHARE OF SUCH OPERATIONS AND SYSTEMS EXPENSES SHALL NOT EXCEED * * *.]
1.1.3 Baxter may have a representative(s) present when Allegiance
presents each bonus check to each customer.
1.2 SALES.
1.2.1 Baxter will use commercially reasonable efforts to monitor
critical business indicators in the areas of customer service, materials
management, distribution services, pricing/billing and compliance with all
specific service requirements set forth in this Exhibit D. Without limitation
to the foregoing sentence, Baxter will use commercially reasonable efforts to
measure and assess customer satisfaction for Baxter sales processes and sales
representatives, to the extent Baxter provides such sales-related functions
under this Agreement. Baxter will also use commercially reasonable efforts to
measure and assess critical business indicators relating to other customer-
related services provided by Baxter under this Agreement (e.g., customer fill
rate, pricing accuracy).
1.2.2 Baxter shall participate with Allegiance in a semi-annual
review of regional account segmentation, performance
- ---------------
* * * CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
D-1
<PAGE>
to critical business indicators, and regional sales to be conducted between the
leaders of their respective regional sales organizations. Allegiance and Baxter
will work together in good faith to develop action plans to improve customer
satisfaction in areas that are mutually identified as key factors for customer
growth and retention, or areas where Baxter's performance is significantly
(statistically defined) below that of its competitors.
1.2.3 COMPETITIVE PRODUCT SUBSTITUTIONS - Baxter shall update
competitive product substitution information on a consistent time frame and
provide it to Allegiance customer service personnel via Baxter's system.
1.3 MARKETING. Baxter shall use commercially reasonable efforts to market
the Products in accordance with the following:
1.3.1 During the Term of this Agreement, Baxter shall continue to
devote substantially the same degree of effort to marketing and promoting the
Products (such effort to be judged in the aggregate) as it did prior to the
effective date of this Agreement.
1.3.2 Baxter shall provide product management services to surgery
centers and to Alternate Site Distributors.
1.3.3 Baxter shall provide marketing services to the Long
Term/Subacute and Homecare customers.
1.3.4 Baxter shall provide product and service development in the
same manner as provided by Baxter prior to the effective date of this Agreement.
1.3.5 Baxter shall maintain its own communications resources and
will coordinate communications messages with Allegiance where appropriate.
1.3.6 Baxter shall attempt whenever possible to share with
Allegiance expenses for convention fees, industry organizations, and industry
databases where appropriate, and convention assets originally purchased by
Baxter shall remain Baxter's.
1.3.7 Baxter shall provide sales volumes by Product category for
inclusion on Allegiance sales reports as provided by Baxter prior to the
effective date of this Agreement.
1.4 NATIONAL SAMPLE CENTER. Baxter shall own the Products stocked in the
Sample Center.
D-2
<PAGE>
1.5 MATERIALS MANAGEMENT. Allegiance and Baxter shall use commercially
reasonable efforts to make the supply chain as efficient as possible for both
parties. Future opportunities to improve efficiency include, but are not
limited to, EDI, bar coding, custom palletization, new work channels and the use
of returnable totes. Both parties shall work in good faith to achieve this
goal.
1.5.1 FINISHED GOODS REQUIREMENTS PLANNING.
1.5.1.1 Baxter manufacturing planning will evaluate all
pipeline segments for domestic customers.
1.5.1.2 Baxter will establish appropriate stocking levels for
all product codes of Products to meet required customer service
commitments.
1.5.1.3 Baxter shall not require Allegiance to carry more than
1995 average Days Inventory On Hand. Stocking levels should be consistent
with Baxter's planned turn improvement for the Products.
1.5.1.4 Both parties agree that the echeloning of products
based on line item usage generally makes sense. Assuming there are no
significant customer contractual issues or financial impacts to Baxter,
Baxter agrees to the parameters set forth by the rationalized supply chain.
If after the appropriate review there are significant customer contractual
issues or financial impacts to Baxter, 1995 will be used as the baseline
for where products are stocked and the number of low velocity SKU's will
not exceed 1995 levels.
1.5.2 PIPELINE VISIBILITY. Baxter will provide to Allegiance
visibility to actual inventory levels for all Baxter segments of the Product
pipeline.
1.5.3 INBOUND FREIGHT SHIPMENTS.
1.5.3.1 Baxter will ship all products to appropriate Baxter or
Allegiance replenishment centers as directed by the replenishment center
sourcing model.
1.5.3.2 Product will move on carriers agreed upon by the
parties in the Council.
1.5.3.3 The physical replenishment of Products from
replenishment centers to distribution centers will use
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the following process: (a) variable review, (b) load build, and (c) pick,
pack, schedule delivery, load and ship.
1.5.3.4 Baxter will coordinate with Allegiance to schedule
receiving appointments for Products shipped to Allegiance facilities from
manufacturing facilities and replenishment centers, and in unloading
Products. Baxter will provide Bill of Lading (BOL) instructions regarding
receipt, where appropriate.
1.5.3.5 Baxter is ultimately responsible for freight charges
for shipments of Products from Baxter manufacturing facilities to Baxter or
Allegiance replenishment centers and from Baxter and Allegiance
replenishment centers to Allegiance distribution centers.
1.5.4 OUTBOUND SHIPMENT
1.5.4.1 Standard Delivery -- Baxter shall use commercially
reasonable efforts to implement Standard Delivery when negotiating new
customer agreements or renegotiating expiring customer agreements, with the
goal of reducing Allegiance's overall number of Product deliveries and its
related delivery costs. Baxter will share with Allegiance the costs and
savings associated with Standard Delivery as set forth in Section 6.11 of
this Agreement.
1.5.4.2 Premium Delivery -- When Baxter's customers are
required to pay for Premium Delivery of Products, Baxter will collect such
amounts from the customers and pay the amounts collected to Allegiance on a
quarterly basis in accordance with Section 6.11 of this Agreement. Baxter
will share with Allegiance the costs and savings associated with
Uncollected Premium Delivery Costs as set forth in Section 6.11 of this
Agreement.
1.5.4.3 Incremental Deliveries -- For calendar year 1997,
Baxter will pay Allegiance an amount equal to * * * of the amount, if any,
that Baxter invoices to its customers for Incremental Deliveries of
Products. Such payments shall be made on a quarterly basis in accordance
with Section 6.11 of this Agreement. For 1998 and subsequent calendar
years during the Term, the parties will agree in Council upon Allegiance's
compensation for providing such Incremental Deliveries, prior to the
beginning of each year.
1.5.4.4 For calendar year 1997, Baxter shall review with
Allegiance in the Council on a quarterly basis
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* * * CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN
ACCORDANCE WITH RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS.
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the operational and financial effects of the terms of this Agreement
regarding Incremental Deliveries of Products, and agrees to renegotiate
such terms for 1997 if necessary to keep both parties financially whole.
Without limiting the preceding sentence, Baxter shall renegotiate such
terms with Allegiance if (a) the total number of Incremental Deliveries of
Products increase substantially more rapidly than Agency Net Sales, and (b)
Allegiance's costs (net of freight) incurred in providing such Incremental
Deliveries, net of any payments by Baxter under this Section, increase
substantially.
1.5.5 FREIGHT CLAIMS. Baxter will use commercially reasonable
efforts to assist Allegiance in carrying out its responsibilities under this
Agreement regarding filing freight claims and resolving product shortages and
overages, including proof of delivery.
1.5.6 PACKAGING QUALITY AND LOAD BUILD CONFIGURATION. Quality of
packaging and load build configuration will conform to uniform distribution
standards (E.G., palletized, etc.) as agreed by the parties in the Council.
1.5.7 WAREHOUSE INVENTORY MANAGEMENT.
1.5.7.1 Baxter will specify storage requirements for the
Products.
1.5.7.2 Baxter will manage inventory levels for Baxter products
within the replenishment centers utilizing the "Compass" inventory system
or equivalent system.
1.5.8 CYCLE COUNTS AND PHYSICAL INVENTORIES.
1.5.8.1 Baxter will provide at least 5 days advance notice
prior to conducting inventory counts at any Allegiance locations.
1.5.8.2 Baxter shall not audit Allegiance cycle counts more
than 90 days after the month in which such cycle count was conducted.
1.5.8.3 For each year during the Term of this Agreement, Baxter
shall agree with Allegiance upon the day in October on which the annual
physical inventory will take place.
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1.5.8.4 To the extent practicable, Baxter and Allegiance shall
record any annual physical inventory adjustments into their respective
accounting records at the same time.
1.5.8.5 Baxter may audit Allegiance's physical inventory
results at any time up to 3 months after the date on which Allegiance
records its annual inventory adjustments into its accounting records.
1.5.8.6 Baxter shall be solely responsible for determining (a)
the gross variance of the dollar value of the Product inventory on TOPS for
each Allegiance facility participating in the physical inventory, and (b)
whether each such variance is within the permitted range.
1.6 PRODUCT FCAs.
1.6.1 Baxter shall provide to Allegiance in a format to be agreed upon
by the parties all information reasonably required by Allegiance to perform
Allegiance's duties in connection with Product FCAs. Such information shall
include, without limitation, product identifiers, reason priority, and any
information related to disposition plans.
1.6.2 Baxter shall have sole authority to initiate any FCA. If Baxter
is required to initiate an FCA for any Product, Baxter's Vice President of
Quality Management (or such person's designee) shall notify Allegiance's Vice
President of Quality Management (or such person's designee).
1.6.3 Baxter shall cooperate with Allegiance in performing any FCA by
identifying affected Products and customers, developing an action-specific
management plan detailing specific responsibilities, and notifying customers of
any such action. Baxter and Allegiance shall encourage customers to follow
instructions related to any FCA situation.
1.6.4 Baxter shall be solely responsible for all communications with
the U.S. Food and Drug Administration in connection with the Products.
1.7 DIVISIONAL BONUS PROGRAM.
1.7.1 Baxter shall be responsible for administering the divisional
bonus program. The divisional bonus allocation will be based on actual calendar
year-end payments and actual calendar year-end sales to applicable customers.
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1.7.2 Baxter shall prepare and present the divisional bonus
payments to customers, and Allegiance shall have the right to have Allegiance
representatives present at the presentation.
1.7.3 Baxter shall use commercially reasonable efforts to
cooperate with Allegiance in the event customers request that divisional bonus
payments be made by alternative means, for example, through credits on
Allegiance statements of account.
2. AGENCY MODEL AND DIRECT SALES.
2.1 CUSTOMER SERVICE. Baxter shall be responsible for order entry,
pricing and invoicing for all Products sold under the Agency Model or sold
directly to customers. Beginning January 1, 1997, Baxter shall be responsible
for all customer service support for all Products sold under the Agency Model or
sold directly to customers.
2.1.1 PRE-SALES SERVICES. Baxter shall perform the following pre-
sales services:
2.1.1.1 PRODUCT/SERVICE SPECIFICATIONS - Baxter shall provide
Product information as resident on Baxter systems. Additional information
shall be provided through the Product Information Center or as requested by
Allegiance Customer Service. (Requests for Product information not
available on Allegiance systems shall be forwarded to Baxter customer
service).
2.1.1.2 PRODUCT AVAILABILITY - Baxter shall provide fill rate
and product availability information to all service personnel and regions,
and such information shall reside in Allegiance and Baxter systems.
2.1.2 ORDER FULFILLMENT/SALES PROCESS.
2.1.2.1 ORDER TRACKING - Baxter shall maintain the ability to
identify to customers the location of Products in the order process.
2.1.2.2 SPECIAL REQUEST PROCESSING - Baxter customer service
personnel will be required to identify special handling requests by
customer such as drop shipping, alternate shipping, special handling, lot
holding, etc., and will work within contract guidelines and procedural
boundaries to service the customer.
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2.1.3 POST-SALES SERVICE.
2.1.3.1 CREDIT AND COLLECTION - Baxter is responsible for
collecting on outstanding invoices. Baxter shall use commercially
reasonable efforts to advise Allegiance of any significant customer credit
problems.
2.1.3.2 CREDITS FOR RETURNED GOODS, SHORTAGES, DAMAGES, AND
MISDELIVERIES - Baxter shall be responsible for issuing all credits to
customers and resolving customer issues relating to returned goods,
shortages, damages and misdeliveries. Baxter shall use commercially
reasonable efforts to advise Allegiance of any Product-related credits or
other customer resolutions likely to affect Allegiance's relationship with
the customer.
2.1.3.3 RETURN GOODS MANAGEMENT - In the event of returned
Products, a return goods authorization will be issued by Baxter. Baxter
shall resolve the returned Products problem (issue credit, deliver
substitute, etc.).
2.1.3.4 BACK ORDER STATUS AND RESOLUTION - Baxter will be
accountable for managing customer communication of back orders to provide
accurate and timely information on resolution. Baxter will communicate
appropriate product substitution information to customers.
2.1.3.5 PRODUCT COMPLAINT - Initial customer Product complaints
will be logged by Baxter customer service. Such complaints may be
escalated for resolution.
2.1.3.6 TECHNICAL SUPPORT- Basic Product -related information
as resident on Baxter's computer system will be provided. Additional
information including technical letters and clinical information will be
provided by Baxter's product information center.
2.1.3.7 TECHNICAL SERVICE, PARTS AND REPAIR - Parts information
as provided in Baxter's computer system or Product file will be shared with
customer by Baxter customer service. Baxter will also provide, as
appropriate, additional transfer or access to specialist.
2.1.4 OTHER ISSUES/SERVICES.
2.1.4.1 TELEMARKETING - Telemarketing can be provided by
Allegiance or Baxter as needed for deployment
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purposes and strategic account management. Fees to be determined as
needed.
2.2 PRICING/BILLING.
2.2.1 Pricing will be solely Baxter's responsibility. Baxter will
negotiate the delivered product price with the customer. Baxter will submit all
requests for bids, bilaterals, quotes, etc., to the customer.
2.2.2 Baxter will contract directly with the customer at a product
price which includes Standard Delivery. Should a customer require services in
excess of Standard Delivery, Baxter will discuss with Allegiance the method of
reimbursing Allegiance for additional delivery services. Baxter will determine
the method of charging the customer therefor.
2.2.3 Baxter will bill the customer on its computer system.
2.2.4 When utilizing the dealer management group as an agent to
service Alternate Site Distributors and Alternate Acute Care Distributors:
2.2.4.1 Baxter will set pricing including guidelines for the
Allegiance dealer management group for pricing to Alternate Site
Distributors and Alternate Acute Care Distributors;
2.2.4.2 Baxter will work with the customer to obtain the
appropriate two-party contract signed between the customer and Baxter to
adjust Baxter's obligations under any existing bilateral agreement;
2.2.4.3 Baxter will be responsible for determining all pricing
and contract terms for a Baxter agreement with a Alternate Site Distributor
or an Alternate Acute Care Distributor.
2.2.5 Baxter will set the price including guidelines for the
Allegiance surgery center sales force when such sales force solicits orders from
surgery centers, and Baxter will process all billing relating to surgery center
customers on Baxter's computer system.
3. DISTRIBUTOR MODEL.
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3.1 If a customer approaches Baxter rather than Allegiance in connection
with a Distributor Model transaction, Baxter will advise the customer that the
customer must obtain the delivered price from Allegiance, and Baxter will advise
Allegiance of the Suggested Sales Price. Baxter may inform the customer that it
will provide a Suggested Sales Price to Allegiance, and Allegiance could use the
Suggested Sales Price as a starting point. Nevertheless, Allegiance shall have
the sole right to set the delivered price.
3.2 Baxter will transfer to Allegiance's computer system all inventory
level information related to the Products.
3.3 Baxter will cooperate with Allegiance in developing and implementing
Allegiance's proposed vendor managed inventory ("VMI")system.
3.4 Baxter will administer customer contracts on its computer system
including, without limitation, account number set-up, ship-to/sold-to
information, licensing information and ongoing customer contract maintenance.
3.5 Baxter will transfer to Allegiance's computer system the Suggested
Sales Price related to the Products.
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AGENCY, SERVICES, AND DISTRIBUTION AGREEMENT
EXHIBIT E
SUPPLIER SCOREBOARD
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AGENCY, SERVICES AND DISTRIBUTION AGREEMENT
EXHIBIT F
INTERIM DISTRIBUTOR MODEL
1. GENERAL PROVISIONS.
1.1 All transactions under the Distributor Model during the Interim Period
will follow the Interim Distributor Model set forth in this Exhibit F.
1.2 Except as expressly stated in or necessarily implied by this Exhibit F,
all provisions of the body of this Agreement having general applicability, and
all provisions specifically relating to the Distributor Model, shall also apply
to the Interim Distributor Model set forth in this Exhibit F.
1.3 Allegiance will use commercially reasonable efforts, and Baxter will
cooperate with Allegiance to install all necessary systems and make all other
necessary preparations to permit terminating the Interim Distributor Model and
implementing the Distributor Model as set forth in the main text of this
Agreement as soon as possible, but in no event later than September 30, 1997.
2. INTERIM DISTRIBUTOR MODEL. Notwithstanding Section 3.3 of this Agreement,
for all transactions under the Interim Distributor Model:
Allegiance shall maintain the principal contractual relationship with the
customer for sales, sales support, customer invoicing, accounts receivable, and
customer service in connection with the supply of the Products under the Interim
Distributor Model. Such Interim Distributor Model shall apply to the provision
by Allegiance of Kits (except BCS Kits), Cost Management, ValueLink, and other
services consolidated on an Allegiance invoice for Products and, in some
instances Allegiance products (as required by the customer). Baxter shall use
reasonable efforts to cooperate with Allegiance and to facilitate Allegiance's
fulfillment of its obligations hereunder. Baxter shall sell the Products to
Allegiance at a price generally applicable to all of Baxter's distributors of
the Products (the "Distributor List Price"). Baxter shall not change its
Distributor List Price for any Product more frequently than once per calendar
year. Baxter shall provide to Allegiance a
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Suggested Sales Price for the Products; provided, however, that Allegiance shall
have the sole right and responsibility for negotiating and contracting with each
customer the delivered price of the Products. If the customer has a then-
current contract with Baxter for such Products, the Suggested Sales Price shall
be the then-current contract price. If Baxter has an agreement with any
customer for Baxter's provision of Products to such customer and such customer
subsequently requests (a) Kits (except BCS Kits), and/or (b) Cost Management,
ValueLink, and other services consolidated on an Allegiance invoice for such
Products and, in some instances, Allegiance products, then all such Interim
Distributor Model sales of Products to such customer shall apply to any minimum
purchase commitments or quantity discounts contained in Baxter's agreement with
such customer.
For all Products sold under the Interim Distributor Model, Allegiance will
deduct from its purchase payments to Baxter an amount equal to the amount, if
any, by which the Distributor List Price exceeds the Suggested Sales Price (the
"Vendor Rebate"). Such Vendor Rebate shall be in addition to the service fee
and other payments set forth in Section 6 of this Agreement.
3. INVOICING AND PAYMENTS FOR INTERIM DISTRIBUTOR MODEL. Notwithstanding any
contrary provisions of Section 8 of this Agreement:
3.1 On or before the fifth business day of each calendar month during the
Interim Period, Baxter shall provide to Allegiance a service fee report in a
format to be agreed upon, showing the service fees payable for Products sold
under the Interim Distributor Model during the previous month. On or before the
second business day of each month during the Interim Period, Allegiance shall
report to Baxter its aggregate sales and returns of Products for the preceding
month by code and by customer for Interim Distributor Model transactions, and
such reports shall also include the Suggested Sales Price, the Distributor List
Price, and the applicable Vendor Rebate for such Products.
3.2 Allegiance shall pay Baxter for its aggregate purchases of Products
under the Interim Distributor Model, net 60 days from the date of Baxter's
invoice to Allegiance. Allegiance may deduct from such purchase payments to
Baxter any Vendor Rebates then owed to Allegiance by Baxter.
3.3 Baxter shall pay Allegiance any applicable service fees in connection
with sales of Products under the Interim Distributor Model on the 15th day of
the month following the month in which such sales are reported.
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3.4 Notwithstanding the foregoing provisions of this Section 3 of Exhibit
F, Allegiance's payment for Products transferred by Baxter to Allegiance prior
to October 1, 1996 shall occur on November 15, 1996.
4. TRANSFER OF TITLE AND RISK OF LOSS UNDER THE INTERIM DISTRIBUTOR MODEL.
4.1 Notwithstanding Section 13 of this Agreement, title and risk of loss
with respect to Products to be sold pursuant to the Interim Distributor Model
shall pass from Baxter to Allegiance upon issuance of Baxter's invoice to
Allegiance for such Products.
4.2 Notwithstanding Section 4.1 of this Exhibit F and Sections 6.17 and
6.18 of this Agreement, if any Products purchased by Allegiance under the
Interim Distributor Model are damaged, lost or stolen while in an Allegiance-
owned replenishment center or distribution center, and Allegiance is responsible
under this Agreement for carton failure and such damage, theft or loss, (1)
Baxter will issue a credit memo to Allegiance for such damaged, lost or stolen
Products, but not carton failure, at Baxter's applicable Distributor List Price,
and (2) Baxter will invoice Allegiance monthly for such damaged, lost or stolen
Products at its applicable standard cost as stated in Baxter's inventory
valuation reports.
4.3 Notwithstanding Section 1.6.7.2 of Exhibit C of the Agreement, during
the Interim Period, Allegiance rather than Baxter shall have the right to any
amounts recovered with respect to freight claims for Products shipped from
Allegiance facilities to customers under the Interim Distributor Model.
5. TERMINATION OF INTERIM DISTRIBUTOR MODEL.
5.1 On the date agreed upon for termination of the Interim Distributor
Model and the transition to the Distributor Model, but no later than September
30, 1997, Baxter will purchase from Allegiance all Products then in Allegiance's
inventory at Baxter's Distributor List Price. Baxter will issue Allegiance a
credit memorandum reflecting such purchase within 30 days after receipt of
Allegiance's invoice for such inventory. Baxter and Allegiance will cooperate
with each other in providing any inventory reports or conducting any audits in
connection with such transition.
5.2 Once the parties have made the transition to the Distributor Model as
contemplated in Section 1.2 of this Exhibit F, the provisions of this Exhibit F
relating to the Interim
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Distributor Model shall have no further effect, except that both parties shall
have the right to receive any amounts owed under the Interim Distributor Model.
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