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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER 1-4448
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LOGO
Baxter International Inc.
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DELAWARE 36-0781620
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State of I.R.S. Employer
Incorporation Identification No.
ONE BAXTER PARKWAY, DEERFIELD, ILLINOIS 60015
(708) 948-2000
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Address, including zip code, and telephone number,
including area code, of principal executive offices
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common stock, $1 par value New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Preferred Stock Purchase Rights
(currently traded with common stock) New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-
K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant (based on the per share closing sale price of $31.63 on March 10,
1995, and for the purpose of this computation only, the assumption that all
registrant's directors and executive officers are affiliates) was approximately
$8.7 billion.
The number of shares of the registrant's common stock, $1 par value,
outstanding as of March 10, 1995, was 282,851,308.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections or portions of the registrant's 1994 annual report to
stockholders and of the registrant's proxy statement for use in connection with
its annual meeting of stockholders to be held on May 8, 1995, described in the
cross reference sheet and table of contents attached hereto are incorporated by
reference in this report.
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<PAGE>
CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page Number or
(Reference) (1)
---------------
<C> <S> <C>
Item 1. Business.
(a)General Development of Business.................. 3(2)
(b)Financial Information about Industry Segments.... 3(3)
(c)Narrative Description of Business................ 3(4)
(d)Financial Information about Foreign and Domestic
Operations and Export Sales..................... 8(5)
Item 2. Properties.......................................... 8
Item 3. Legal Proceedings................................... 8(6)
Item 4. Submission of Matters to a Vote of Security Holders. 13
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters........................ 14(7)
Item 6. Selected Financial Data............................. 14(8)
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 14(9)
Item 8. Financial Statements and Supplementary Data......... 14(10)
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 14
Item 10. Directors and Executive Officers of the Registrant
(a)Identification of Directors...................... 15(11)
(b)Identification of Executive Officers............. 15
(c)Compliance with Section 16(a) of the Securities
Exchange Act of 1934............................ 17(12)
Item 11. Executive Compensation.............................. 17(13)
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................... 17(14)
Item 13. Certain Relationships and Related Transactions...... 17(15)
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................ 18
(a)Financial Statements............................. 18
(b)Reports on Form 8-K.............................. 18
(c)Exhibits......................................... 18
</TABLE>
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(1) Information incorporated by reference to the Company's Annual Report to
Stockholders for the year ended December 31, 1994 ("Annual Report") and
the board of directors' proxy statement for use in connection with the
Registrant's annual meeting of stockholders to be held May 8, 1995 ("Proxy
Statement").
(2) Annual Report, pages 49-66, section entitled "Notes to Consolidated
Financial Statements" and pages 31-42, section entitled "Management's
Discussion and Analysis."
(3) Annual Report, pages 63-65, section entitled "Notes to Consolidated
Financial Statements--Segment Information."
(4) Annual Report, pages 31-42, section entitled "Management's Discussion and
Analysis" and pages 63-65, section entitled "Notes to Consolidated
Financial Statements--Segment Information."
(5) Annual Report, pages 63-65, section entitled "Notes to Consolidated
Financial Statements--Segment Information."
(6) Annual Report, page 59-63, section entitled "Notes to Consolidated
Financial Statements--Legal Proceedings."
(7) Annual Report, page 66, section entitled "Notes to Consolidated Financial
Statements--Quarterly Financial Results and Market for the Company's
Stock."
(8) Annual Report, inside back cover, section entitled "Seven-Year Summary of
Selected Financial Data."
(9) Annual Report, pages 31-42, section entitled "Management's Discussion and
Analysis."
(10) Annual Report, pages 44-66, sections entitled "Report of Independent
Accountants," "Consolidated Balance Sheets," "Consolidated Statements of
Income," "Consolidated Statements of Cash Flows," "Consolidated Statements
of Stockholders' Equity" and "Notes to Consolidated Financial Statements."
(11) Proxy Statement, pages 2-4, sections entitled "Board of Directors" and
"Election of Directors."
(12) Proxy Statement, page 18, section entitled "Section 16 Reporting."
(13) Proxy Statement, pages 6-16, sections entitled "Compensation of Directors"
and "Compensation of Named Executive Officers," and page 17, section
entitled "Pension Plan and Excess Plan."
(14) Proxy Statement, pages 19-20, section entitled "Ownership of Company
Securities."
(15)Proxy Statement, page 18, section entitled "Significant Business
Relationships."
<PAGE>
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LOGO
Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015
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PART I
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ITEM 1. BUSINESS.
(a) General Development of Business.
Baxter International Inc. was incorporated under Delaware law in 1931. As
used in this report, except as otherwise indicated in information incorporated
by reference, "Baxter" means Baxter International Inc. and the "Company" means
Baxter and its subsidiaries.
The Company is engaged in the worldwide development, distribution and
manufacture of a diversified line of products, systems and services used
primarily in the health care field. Products are manufactured by the Company in
21 countries and sold in approximately 100 countries. Health care is concerned
with the preservation of health and with the diagnosis, cure, mitigation and
treatment of disease and body defects and deficiencies. The Company's more than
200,000 products are used primarily by hospitals, clinical and medical research
laboratories, blood and dialysis centers, rehabilitation centers, nursing
homes, doctors' offices and at home under physician supervision. The Company
also distributes and manufactures a wide range of products for research and
development facilities and manufacturing facilities.
For information regarding acquisitions, investments in affiliates and
divestitures, see the Company's Annual Report to Stockholders for the year
ended December 31, 1994 (the "Annual Report"), page 51, section entitled "Notes
to Consolidated Financial Statements--Acquisitions, Investments in Affiliates,
Divestitures and Discontinued Operations," which is incorporated by reference.
(b) Financial Information about Industry Segments.
Incorporated by reference from the Annual Report, pages 63-65, section
entitled "Notes to Consolidated Financial Statements--Segment Information."
(c) Narrative Description of Business.
Recent Developments
There are fundamental changes occurring in the United States health-care
system and significant changes are occurring in the Company's marketplace.
Competition among all health-care providers is becoming much more intense as
they attempt to gain patients on the basis of price, quality and service. Each
is under pressure to decrease the total cost of health-care delivery and,
therefore, is looking for ways to reduce materials handling costs, decrease
supply utilization, increase product standardization per procedure, and to
control capital expenditures. There was increased consolidation in the
Company's customer base and by its competitors. These trends are expected to
continue. In recent years, the Company's overall price increases were below the
increases in the Consumer Price Index, and these industry trends may inhibit
the Company's ability to increase its supply prices in the future.
Accordingly, in November 1993, the Company undertook a series of strategic
actions to improve shareholder value, to extend positions of leadership in
health-care markets and to reduce costs. These actions were designed to make
the Company's domestic medical/laboratory products and distribution segment
more efficient and more responsive in addressing the changes occurring in the
United States health-care system and accelerate growth of its medical
specialties businesses worldwide. The Company recorded a $700 million pre tax
provision in 1993 to cover costs associated with these restructuring
initiatives. The $700 million charge included approximately $300 million for
non-cash valuation adjustments as a result of the Company's decision to close
facilities or exit non-strategic businesses and investments. The Company
expects to spend approximately $400 million in cash related to the 1993
restructuring program, with most of that expended from 1994 through 1996.
3
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Since the announcement of the 1993 restructuring program, the Company has
implemented, or is in the process of implementing all of the major strategic
actions associated with the restructuring program and is satisfied that such
programs are progressing on schedule and that the overall restructuring program
will meet established financial targets. The Company realized approximately $95
million in expense savings in 1994 under the 1993 restructuring program.
Management believes that the overall expense savings to be realized in 1995 and
beyond will be substantially consistent with its earlier estimates of $200
million in 1995, $275 million in 1996, $325 million in 1997 and exceeding $350
million in 1998. Management anticipates that these savings will be partially
invested in increased research and development spending and the Company's
expansion into growing international markets. Management further believes that
its remaining restructuring reserves are adequate to complete the actions
contemplated by the 1993 restructuring program. Since the inception of the 1993
restructuring program, the Company has eliminated approximately 2,300 of the
4,500 positions affected by the program. The majority of the remaining
reductions will occur in 1995 and 1996 as facility closures and consolidations
are completed as planned.
As part of the 1993 restructuring program, the Company announced its intent
to divest its diagnostics manufacturing businesses. In December 1994, the
Company completed the divestiture of these businesses, but retained the rights
to distribute all current diagnostics products in the United States. This
transaction was completed substantially in accordance with the Company's
valuation estimates. The divestiture of the diagnostics manufacturing
businesses is not expected to have a material impact on the Company's results
of operations, but will decrease the growth rate of sales in the
medical/laboratory segment. See "Industry Segments--Medical/Laboratory Products
and Distribution".
Industry Segments
The Company is a world leader in global manufacturing and distribution of
health-care products and services for use in hospitals and other health-care
and industrial settings. It offers a broad array of products and services. The
Company's operations are reported in the following two industry segments:
Medical Specialties
The Company develops, manufactures and markets on a global basis highly
specialized medical products for treating kidney and heart disease and blood
disorders and for collecting and processing blood. These products include
dialysis equipment and supplies; prosthetic heart valves and cardiac catheters;
blood-clotting therapies; and machines and supplies for collecting, separating
and storing blood. These products require extensive research and development
and investment in worldwide distribution, marketing, and administrative
infrastructure. The Company's International Hospital unit, which manufactures
and distributes intravenous solutions and other medical products outside the
United States is also included in this segment because it shares facilities,
resources and customers with the other medical specialty businesses in several
locations worldwide.
Medical/Laboratory Products and Distribution
The Company manufactures medical and laboratory supplies and equipment,
including intravenous fluids and pumps, surgical instruments and procedure
kits, and a range of disposable and reusable medical products. These self-
manufactured products, as well as a significant volume of third party
manufactured medical products, are primarily distributed through the Company's
extensive distribution system to United States hospitals, alternate-site care
facilities, medical laboratories, and industrial and educational facilities.
Information about operating results by segments is incorporated by reference
from the Annual Report, pages 31-42, section entitled "Management's Discussion
and Analysis" and pages 63-65, section entitled "Notes to Consolidated
Financial Statements--Segment Information."
Joint Ventures
The Company conducts a portion of its business through joint ventures,
including a joint venture with Nestle, S.A. to develop, market and distribute
clinical nutrition products worldwide. This joint venture is accounted for
under the equity method of accounting and therefore, is excluded from the two
industry segments in which the Company operates.
4
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United States Health Care Environment
Accelerating cost pressures on hospitals are resulting in increased out-
patient and alternate-site health-care service delivery and a focus on cost-
effectiveness and quality. These forces increasingly shape the demand for, and
supply of medical care.
Many private health-care payors are providing incentives for consumers to
seek lower cost care outside the hospital. Many corporations' employee health
plans have been restructured to provide financial incentives for patients to
utilize the most cost-effective forms of treatment (managed care programs, such
as health maintenance organizations, have become more common), and physicians
have been encouraged to provide more cost-effective treatments.
The future financial success of suppliers, such as the Company, will depend
on their ability to work with hospitals to help them enhance their
competitiveness. The Company believes it can help hospitals achieve savings in
the total supply system by automating supply-ordering procedures, optimizing
distribution networks, improving materials management and achieving economies
of scale associated with aggregating supply purchases. The Company continues to
believe that its strategy of providing unmatched service to its health-care
customers and achieving the best overall cost in its delivery of health-care
products and services is compatible with any restructuring of the United States
health-care system which may ultimately occur.
Methods of Distribution
The Company conducts its selling efforts through its subsidiaries and
divisions. Many subsidiaries and divisions have their own sales forces and
direct their own sales efforts. In addition, sales are made to independent
distributors, dealers and sales agents. Distribution centers, which may serve
more than one division, are stocked with adequate inventories to facilitate
prompt customer service. Sales and distribution methods include frequent
contact by sales representatives, automated hospital communications via various
electronic purchasing systems, circulation of catalogs and merchandising
bulletins, direct mail campaigns, trade publications and advertising.
The Company's Corporate program provides large hospitals and multi-hospital
systems with a single point of contact for all of the Company's products,
services and special value-added programs. The Company is allied with other
companies through its ACCESS(TM) program. Through this program, the Company
provides its Corporate customers with products and services from leading
companies in related industries which go beyond the Company's scope of
proprietary product offerings. The Company maintains ACCESS alliances with a
subsidiary of WMX Technologies, Inc. (formerly Waste Management of America,
Inc.) for handling and disposal of medical waste; with Comdisco, Inc. for high
technology asset management and contingency services; with Kraft Foodservice
Inc., a subsidiary of Kraft General Foods, Inc., to distribute and market a
broad array of hospital food service products; with the Graphics and Technology
Group, a division of North American Paper Company; and with various divisions
of Trammell Crow Company for facilities management and real estate planning
services.
The Company's ValueLink(R) hospital inventory management service is designed
to deliver health-care products in ready-to-use packaging directly to
individual hospital departments on a "just-in-time" basis. As of the end of
1994, 108 hospitals were participating in the Company's ValueLink program. With
ValueLink services, hospitals reduce their inventories and the related
warehousing costs for medical-surgical supplies and rely on the Company for
frequent, standardized deliveries and improved service levels. The Company has
distribution facilities across the United States to serve the nation's
hospitals.
The Company's Quality Enhanced Distribution Services(TM) program is designed
to reduce the time it takes for a hospital to receive and store supplies and to
process accounts payable. Through Quality Enhanced Distribution Services and
based on each customer's unique requirements, the Company's products are
delivered in a manner which facilitates efficient processing of products and
related documents by the hospital's personnel. As a result, many hospital
customers have been able to reduce the amount of labor associated with the
receipt and storage of supplies. As of the end of 1994, more than 732 Quality
Enhanced Distribution Services initiatives were serving United States hospital
customers.
5
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International sales and distribution are made in approximately 100 countries
either on a direct basis or through independent local distributors.
International subsidiaries employ their own field sales forces in Argentina,
Australia, Austria, Belgium, Brazil, Brunei, Canada, China, Colombia, Ecuador,
Denmark, Finland, France, Germany, Hong Kong, India, Indonesia, Italy, Japan,
Malaysia, Mexico, the Netherlands, New Zealand, Norway, Pakistan, the
Philippines, Singapore, Spain, Sweden, Switzerland, Taiwan, Thailand and the
United Kingdom. In other countries, sales are made through independent
distributors or sales agents.
Raw Materials
Raw materials essential to the Company's business are purchased worldwide in
the ordinary course of business from numerous suppliers. The vast majority of
these materials are generally available, and no serious shortages or delays
have been encountered. Certain raw materials used in producing some of the
Company's products can be obtained only from a small number of suppliers. In
addition, certain biomaterials for medical implant applications (primarily
polymers) are becoming more difficult to obtain due to market withdrawals by
biomaterial suppliers, primarily as a result of perceived exposures to
liability in the United States.
In some of these situations, the Company has long-term supply contracts with
its suppliers, although it does not consider its obligations under such
contracts to be material. The Company does not always recover cost increases
through customer pricing due to contractual limits on such price increases. See
"Contractual Arrangements."
Patents and Trademarks
The Company owns a number of patents and trademarks throughout the world and
is licensed under patents owned by others. While it seeks patents on new
developments whenever feasible, the Company does not consider any one or more
of its patents, or the licenses granted to or by it, to be essential to its
business.
Products manufactured by the Company are sold primarily under its own
trademarks and trade names. Some products purchased and resold by the Company
are sold under the Company's trade names while others are sold under trade
names owned by its suppliers.
Competition
The Company is a major factor in the distribution and manufacture of hospital
and laboratory products and services and medical specialties. Although no
single company competes with the Company in all of its industry segments, the
Company is faced with substantial competition in all of its markets.
Historically, competition in the health-care industry has been characterized
by the search for technological and therapeutic innovations in the prevention,
diagnosis and treatment of disease. The Company believes that it has benefited
from the technological advantages of certain of its products. While others will
continue to introduce new products which compete with those sold by the
Company, the Company believes that its research and development effort will
permit it to remain competitive in all presently material product areas.
The changing health-care environment in recent years has led to increasingly
intense competition among health-care suppliers. Competition is focused on
price, service and product performance. Pressure in these areas is expected to
continue. See "United States Health Care Environment."
In part through its 1993 restructuring program, the Company continues to
increase its efforts to minimize costs and better meet accelerating price
competition. The Company believes that its cost position will continue to
benefit from improvements in manufacturing technology and increased economies
of scale. The Company continues to emphasize its investments in innovative
technologies and the quality of its product and services.
Credit and Working Capital Practices
The Company's debt ratings of A3 on senior debt by Moody's, A- by Standard &
Poor's and A by Duff & Phelps were reaffirmed by each rating agency in 1994.
Standard & Poor's and Duff & Phelps have indicated that continuation of these
ratings in the future is dependent on the Company's successful implementation
of the 1993 restructuring program, reduction of its leverage and reduction in
the uncertainty of the ultimate impact of products liability litigation.
6
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Although the Company's credit practices and related working capital needs
vary across industry segments, they are comparable to those of other market
participants. Collection periods tend to be longer for sales outside the United
States.
Customers may return defective merchandise for credit or replacement. In
recent years, such returns have been insignificant.
Quality Control
The Company places great emphasis on providing quality products and services
to its customers. An integrated network of quality systems, including control
procedures that are developed and implemented by technically trained
professionals, result in rigid specifications for raw materials, packaging
materials, labels, sterilization procedures and overall manufacturing process
control. The quality systems integrate the efforts of raw material and finished
goods suppliers to provide the highest value to customers. On a statistical
sampling basis, a quality assurance organization tests components and finished
goods at different stages in the manufacturing process to assure that exacting
standards are met.
Research and Development
The Company is actively engaged in research and development programs to
develop and improve products, systems and manufacturing methods. These
activities are performed at 25 research and development centers located around
the world and include facilities in Australia, Belgium, Germany, Italy, Japan,
Malaysia, Malta, the Netherlands, Sweden, Switzerland, the United Kingdom and
the United States. Expenditures for Company-sponsored research and development
activities were $343 million in 1994, $337 million in 1993 and $317 million in
1992.
The Company's research efforts emphasize self-manufactured product
development, and portions of that research relate to multiple product lines.
For example, many product categories benefit from the Company's research effort
as applied to the human body's circulatory systems. In addition, research
relating to the performance and purity of plastic materials has resulted in
advances that are applicable to a large number of the Company's products.
Principal areas of strategic focus for research are biotechnology, renal
therapy and transplantation, blood disorders and cardiovascular disease.
Government Regulation
Most products manufactured or sold by the Company in the United States are
subject to regulation by the Food and Drug Administration ("FDA"), as well as
by other federal and state agencies. The FDA regulates the introduction and
advertising of new drugs and devices as well as manufacturing procedures,
labeling and record keeping with respect to drugs and devices. The FDA has the
power to seize adulterated or misbranded drugs and devices or to require the
manufacturer to remove them from the market and the power to publicize relevant
facts. From time to time, the Company has removed products from the market that
were found not to meet acceptable standards. This may occur in the future.
Product regulatory laws exist in most other countries where the Company does
business.
Environmental policies of the Company mandate compliance with all applicable
regulatory requirements concerning environmental quality and contemplate, among
other things, appropriate capital expenditures for environmental protection.
Various non-material capital expenditures for environmental protection were
made by the Company during 1994 and similar expenditures are planned for 1995.
See Item 3.--"Legal Proceedings."
Employees
As of December 31, 1994, the Company employed approximately 53,500 people,
including approximately 30,600 in the United States and Puerto Rico.
Contractual Arrangements
A substantial portion of the Company's products are sold through contracts
with purchasers, both international and domestic. Some of these contracts are
for terms of more than one year and include limits on price increases. In the
case of hospitals, clinical laboratories and other facilities, these contracts
may specify minimum quantities of a particular product or categories of
products to be purchased by the customer.
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(d) Financial Information about Foreign and Domestic Operations and Export
Sales.
International operations are subject to certain additional risks inherent in
conducting business outside the United States, such as changes in currency
exchange rates, price and currency exchange controls, import restrictions,
nationalization, expropriation and other governmental action.
Financial information is incorporated by reference from the Annual Report,
pages 63-65, section entitled "Notes to Consolidated Financial Statements--
Segment Information."
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ITEM 2. PROPERTIES.
The Company owns or has long-term leases on substantially all of its major
manufacturing facilities. The Company maintains 34 manufacturing facilities in
the United States, including nine in Puerto Rico, and also manufactures in
Australia, Belgium, Brazil, Canada, the Chech Republic, Colombia, Costa Rica,
the Dominican Republic, France, Germany, Ireland, Italy, Japan, Malaysia,
Malta, Mexico, the Netherlands, Singapore, Spain, Russia and the United
Kingdom. Many of the major manufacturing facilities are multi-product and
manufacture items for both of the Company's industry segments.
The Company owns or operates 90 distribution centers in the United States and
Puerto Rico and 59 located in 23 foreign countries. Many of these facilities
handle products for both of the Company's industry segments.
The Company maintains a continuing program for improving its properties,
including the retirement or improvement of older facilities and the
construction of new facilities. This program includes improvement of
manufacturing facilities to enable production and quality control programs to
conform with the current state of technology and government regulations.
Capital expenditures were $411 million in 1994, $516 million in 1993 and $537
million in 1992. In addition, the Company added to the pool of equipment leased
or rented to customers, spending $91 million in 1994, $89 million in 1993 and
$103 million in 1992.
The Company's facilities are suitable for their respective uses and, in
general, are adequate for the Company's current needs.
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ITEM 3. LEGAL PROCEEDINGS.
As of December 31, 1994, the Company was a defendant, together with other
defendants, in 6,235 lawsuits and had 1,757 pending claims from individuals,
all of which seek damages for injuries allegedly caused by silicone mammary
prostheses ("mammary implants") manufactured by the American Heyer-Schulte
division of American Hospital Supply Corporation ("American"). The comparable
number of cases and claims was 4,870 as of December 31, 1993. In 1994, 311
cases and claims were disposed of.
The typical case or claim alleges that the individual's mammary implants
caused one or more of a wide range of ailments, including non-specific
autoimmune disease, scleroderma, lupus, rheumatoid arthritis, fibromyalgia,
mixed connective tissue disease, Sjogren's Syndrome, dermatomyositis,
polymyositis, and chronic fatigue.
In addition to the individual suits against the Company, a class action on
behalf of all women with mammary implants filed against all manufacturers of
such implants has been conditionally certified and is pending in the United
States District Court for the Northern District of Alabama (Dante, et al., v.
Dow Corning, et al., U.S.D.C., N. Dist., Ala., 92-2589; part of In re: Silicone
Gel Breast Implant Product Liability Litigation, U.S.D.C., N. Dist. Ala., MDL
926, (U.S.D.C., N. Dist. Ala., CV 92-P-10000-S)). Another class action has been
certified and is pending in state court in Louisiana (Spitzfadden, et al., v.
Dow Corning Corp., et al., Dist. Ct., Parish of Orleans, 92-2589). Baxter also
has been named in three purported additional class actions, none of which is
currently certified. (Barcellona, et al., v. Dow Corning, et al., U.S.D.C.,
Mich., 9300
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72045 DT and Moss, et al., v. Dow Corning, et al., U.S.D.C., Minn., 92-P-10560-
S, both of which have been transferred to and are part of In re: Silicone Gel
Breast Implant Product Liability Litigation, U.S.D.C., N. Dist. Ala., MDL-926
for discovery purposes, and Doe, et al., v. INAMED Corporation, et al., Circuit
Ct., Dade County, Fla., 92-07034.) A suit seeking class certification on behalf
of all residents of the Province of Ontario, Canada, who received Heyer-Schulte
implants was dismissed as to Baxter (Burke, v. American Heyer-Schulte, et al.,
Ontario Prov. Court, Gen. Div., 15981/93). That case currently is on appeal. A
second suit seeking class certification on behalf of all women in the Province
of Ontario who received Heyer-Schulte mammary implants has been filed (Bennett
v. American Heyer-Schulte, et al., Ontario Prov. Court, Gen. Div., 18169/94).
Additionally, the Company has been served with a purported class action
brought on behalf of children allegedly exposed to silicone in utero and
through breast milk. (Feuer, et al., v. McGhan, et al., U.S.D.C., E. Dist.
N.Y., 93-0146.) The suit names all mammary implant manufacturers as defendants
and seeks to establish a medical monitoring fund.
These implant cases and claims generally raise difficult and complex factual
and legal issues and are subject to many uncertainties and complexities,
including, but not limited to, the facts and circumstances of each particular
case or claim, the jurisdiction in which each suit is brought, and differences
in applicable law. Many of the cases and claims are at very preliminary stages,
and the Company has not been able to obtain information sufficient to evaluate
each case and claim.
There also are issues concerning which of the Company's insurers is
responsible for covering each matter and the extent of the Company's claims for
contribution against third parties. The Company believes that a substantial
portion of the liability and defense costs related to mammary implant cases and
claims will be covered by insurance, subject to self-insurance retentions,
exclusions, conditions, coverage gaps, policy limits and insurer solvency. Most
of the Company's insurers have reserved (i.e., neither admitted nor denied),
and may attempt to reserve in the future, the right to deny coverage, in whole
or in part, due to differing theories regarding, among other things, the
applicability of coverage and when coverage may attach. The Company is engaged
in active negotiations with its insurers concerning coverages and the
settlement described below. Two of the Company's claims-made insurers have
tendered the full amounts of their policies to the Company and a third has
tendered the full amounts of its policy on a prorata basis as claims are paid.
Additionally, the Company received certain funds in settlement of claims
pending against a carrier in liquidation. The total amount tendered is $85
million.
Also, some of the mammary implant cases pending against the Company seek
punitive damages and compensatory damages arising out of alleged intentional
torts. Depending on policy language, applicable law, and agreements with
insurers, the damages awarded pursuant to such claims may or may not be
covered, in whole or in part, by insurance. On February 7, 1994, the Company
filed suit against all of the insurance companies that issued product liability
policies to American, American Heyer-Schulte and Baxter for a declaratory
judgment that: the policies cover each year of injury or claim; the Company may
choose among multiple coverages; coverage begins with the date of implant; and
legal fees and punitive damages are covered. Subsequently, certain of the
Company's product liability insurance carriers filed suit against the Company
and all of its other carriers for a declaratory judgment to define various
terms in the Company's insurance policies, the extent of the Company's
coverage, the date of the occurrences giving rise to coverage, and the relative
liabilities of the various insurance carriers involved. In both cases, the
parties have entered into a "stand-still" agreement while negotiations
continue.
Representatives of the plaintiffs and certain defendants in these cases have
negotiated a global settlement of the issues under the jurisdiction of the
Court in the Dante v. Dow Corning, et al. case (now known as Lindsay, et al. v.
Dow Corning, et al.). The monetary provisions of the settlement providing
compensation for all present and future plaintiffs and claimants based on a
series of specific funds and scheduled medical conditions have been agreed upon
by most of the significant defendants and representatives of the plaintiffs.
The total of all of the specific funds, that would be paid-in and made
available over approximately thirty years following final approval of the
settlement by the courts, is capped at $4.75 billion. The settling defendants
have agreed to fund $4.255 billion of this amount. The Company's share of this
settlement has been established by the settlement negotiations at $556 million.
Appeals have been filed challenging the global settlement.
9
<PAGE>
The global settlement gave individual plaintiffs and claimants the
opportunity to remove themselves from the settlement ("opt-out"). The initial
opt-out period ended July 1, 1994. As of January 1995, approximately 11,360
individuals have opted out of the global settlement, of which 3,757 allege
claims against Baxter. Of the opt-outs who filed claims against Baxter, 2,101
represent U.S. claimants, 1,656 represent foreign claimants. The number of opt-
outs against Baxter will change as some claimants elect to rescind their opt-
out notice, others are found to not have valid claims against Baxter, and
others are identified as having claims against Baxter. In December 1994, and
January 1995, over 1,600 opt-out claimants asserting a claim against Baxter
rescinded their opt-out notices and returned to the global settlement. The
Company believes that a substantial number of the suits filed in the second,
third and fourth quarters of 1994 against Baxter will ultimately be dismissed
because it will be determined that no Heyer-Schulte mammary implant is
involved.
At present, the Company is not able to estimate the nature and extent of its
potential future liability with respect to opt-outs. The Company believes that
most of its potential future liability with respect to opt-outs is covered by
insurance. The Company intends to continue to litigate pending mammary implant
cases.
In the fourth quarter of 1993, the Company accrued $556 million for its
estimated liability resulting from the global settlement of the mammary implant
class action and recorded a receivable for estimated insurance recovery of $426
million, resulting in a net charge of $130 million. The reserves for the
settlement do not include any provisions for opt-outs.
Upon resolution of any of the uncertainties concerning these cases, the
Company will ultimately incur charges in excess of presently established
reserves. While such a future charge could have a material adverse impact on
the Company's net income in the period in which it is recorded, management
believes that any outcome of this litigation will not have a material adverse
effect on the Company's consolidated financial position.
As of December 31, 1994, the Company was a defendant, together with other
defendants, in 246 lawsuits, and had one pending claim, in the United States
and Canada involving individuals who have hemophilia, or their representatives.
Those cases and the claim seek damages for injuries allegedly caused by anti-
hemophilic factor concentrates VIII and IX derived from human blood plasma
processed and sold by the Company. Furthermore, 57 lawsuits seeking damages
based on similar allegations are pending in Ireland and Japan.
The typical case or claim alleges that the individual with hemophilia was
infected with HIV by infusing Factor VIII or Factor IX concentrates ("Factor
Concentrates") containing HIV.
All Federal Court Factor Concentrate cases have been transferred to the
U.S.D.C. for the Northern District of Illinois for case management under Multi
District Litigation (MDL) rules. In addition to the individual suits against
the Company, a purported class action was filed on September 30, 1993, on
behalf of all U.S. residents with hemophilia (and their families) who were
treated with Factor Concentrates and who allegedly are infected with HIV as a
result of the use of such Factor Concentrates. This lawsuit was filed in the
United States District Court for the Northern District of Illinois (Wadleigh,
et al., v. Rhone-Poulenc Rorer, et al., U.S.D.C., N. Dist., Ill. 93C 5969). The
court has certified the class only for the purpose of determining whether the
defendants' actions were negligent. Baxter has also been named in three other
purported class actions, none of which have been certified and all of which
have been transferred to the MDL for discovery purposes.
Many of the cases and claims are at very preliminary stages, and the Company
has not been able to obtain information sufficient to evaluate each case and
claim. In most states, the Company's potential liability is limited by laws
that provide that the sale of blood or blood derivatives, including Factor
Concentrates, is not the sale of a "good," and thus is not covered by the
doctrine of strict liability. As a result, each claimant will have to prove
that his or her injuries were caused by the Company's negligence. The Wadleigh
case alleges that the Company was negligent in failing: to use available
purification technology; to promote research and development for product
safety; to withdraw Factor Concentrates once it knew or should have known of
viral-contamination of such concentrates; to screen plasma donors properly; to
recall contaminated Factor Concentrates; and to warn of risks known at the time
the product was used. The Company denies these allegations and has filed a
challenge to the class proceedings. On March 16, 1995, the Seventh Circuit
Court of Appeals granted the defendants' writ of mandamus and directed the
District Court to decertify the class action.
10
<PAGE>
The Company believes that a substantial portion of the liability and defense
costs related to anti-hemophilic Factor Concentrate cases and claims will be
covered by insurance, subject to self-insurance retentions, exclusions,
conditions, coverage gaps, policy limits and insurer solvency. Most of the
Company's insurers have reserved (i.e., neither admitted nor denied), and may
attempt to reserve in the future, the right to deny coverage, in whole or in
part, due to differing theories regarding, among other things, the
applicability of coverage and when coverage may attach. Zurich Insurance Co.,
one of the Company's comprehensive general liability insurance carriers has
filed a suit in Illinois, against the Company seeking a declaratory judgment
that the policies it had issued do not cover the losses that the Company has
notified it of for a number of reasons, including that Factor Concentrates are
products, not services, and are, therefore, excluded from the policy coverage,
and that the Company has failed to comply with various obligations of tender,
notice, and the like under the policies. The Company has filed suit in
California, against all of the insurance companies that issued comprehensive
general liability and excess liability policies to the Company for a
declaratory judgment that the policies of all of the carriers provide coverage.
In that suit, the Company also sued Zurich for failure to defend it and Zurich
and Columbia Casualty Company for failure to indemnify it. Subsequently, the
Company's excess liability insurance carriers also brought suit for a
declaratory judgment as to the parties' respective liabilities. The suit filed
by Zurich has been stayed pending resolution of the Company's case against
Zurich and its excess carriers. Zurich has appealed that stay.
The Company has notified its insurers concerning coverages and the status of
the cases. Also, some of the anti-hemophilic factor concentrates cases pending
against the Company seek punitive damages and compensatory damages arising out
of alleged intentional torts. Depending on policy language, applicable law and
agreements with insurers, the damages awarded pursuant to such claims may or
may not be covered, in whole or in part, by insurance. Accordingly, the Company
is not currently in a position to estimate the amount of its potential future
recoveries from its insurers, but has estimated its recovery with respect to
the reserves it has established.
The Company is vigorously defending each of the cases and claims against it.
The Company will continue to seek ways to resolve pending and threatened
litigation concerning these issues through a negotiated resolution.
In the fourth quarter of 1993, the Company accrued $131 million for its
estimated worldwide liability for litigation and settlement expenses involving
anti-hemophilic Factor Concentrate cases, and recorded a receivable for
insurance coverage of $83 million, resulting in a net charge of $48 million.
Upon resolution of any of the uncertainties concerning these cases, or if the
Company, along with the other defendants, enters into a comprehensive
settlement of the class actions described above, the Company may incur charges
in excess of presently established reserves. While such a future charge could
have a material adverse impact on the Company's net income in the period in
which it is recorded, management believes that any outcome of this litigation
will not have a material adverse effect on the Company's consolidated financial
position.
On February 21, 1994, the Company began the voluntary withdrawal world-wide
of its Gammagard(R) IGIV (intravenous immune globulin) because of indications
that it might be implicated in Hepatitis C infections occurring in users of the
product. Gammagard is a concentration of antibodies derived from human plasma
and is used to treat immune-suppressed patients. A new immune globulin product,
Gammagard S/D, produced with an additional viral inactivation process was
introduced by the Company after licensure in the United States and certain
other countries.
As of December 31, 1994, the Company had received reports of Hepatitis C
transmission from 219 patients. The exact cause for these reports has not been
determined; however, all reports have been associated with Gammagard injection
produced from plasma which was screened for antibodies to the Hepatitis C virus
through second generation testing. The number of patients receiving Gammagard
IGIV produced from the second-generation screened plasma is not yet known, nor
is the number of patients claiming exposure to Hepatitis C known.
As of December 31, 1994, 14 suits resulting from this incident have been
served on the Company. Two suits have been filed as purported class actions,
Lowe v. Baxter, U.S.D.C., W.D. KY, C94-0125, and Mock v. Baxter, U.S.D.C., ID,
CIV-94-0524-S-LMV. The suits allege infection with the Hepatitis C virus from
the use of Gammagard. The Company is defending these cases.
11
<PAGE>
At this time the Company cannot estimate its level of exposure to claims or
lawsuits stemming from the market withdrawal. The Company does not, however, at
this time expect the exposure to have a material adverse effect on the
Company's operations or its consolidated financial condition.
At the start of 1993, the Company was a defendant in patent litigation
brought by Scripps Clinic and Research Foundation ("Scripps") and Rhone-Poulenc
Rorer, Inc. (formerly Rorer Group, Inc.) ("Rorer") in which the plaintiffs
alleged that the Company's monoclonal anti-hemophilic Factor VIII and its
Recombinate(R) Factor VIII infringed a patent. The Company entered into a
worldwide settlement of the litigation with Scripps and Rorer. Under this
settlement agreement, in 1993, the Company paid $105 million to Rorer to settle
claims relating to certain anti-hemophilic Factor VIII products.
Baxter Healthcare Corporation ("BHC") was one of ten defendants named in a
purported class action filed in August 1993, on behalf of all medical and
dental personnel in the state of California who suffered allergic reactions to
natural rubber latex gloves and other protective equipment or who have been
exposed to natural rubber latex products. (Kennedy, et al., v. Baxter
Healthcare Corporation, et al., Sup. Ct., Sacramento Co., Cal., #535632). The
case alleges that users of various natural rubber latex products, including
medical gloves made and sold by BHC and other manufacturers, suffered allergic
reactions to the products ranging from skin irritation to systemic anaphylaxis.
The Court granted defendants' demurrer to the class action allegations. This is
currently on appeal. In April 1994, a similar purported class action, Green, et
al. v. Baxter Healthcare Corporation, et al., (Cir. Ct., Milwaukee Co., WI) was
filed against Baxter and three other defendants. The class action allegations
have been withdrawn, but additional plaintiffs added individual claims. The
Company will vigorously defend against these actions. Management believes that
the outcome of these matters will not have a material adverse effect on the
Company's results of operations or consolidated financial position.
A purported class action has been filed against the Company, Caremark
International, Inc. ("Caremark"), C.A. (Lance) Piccolo, James G. Connelly and
Thomas W. Hodson (all current officers of Caremark) alleging securities law
disclosure violations in connection with the November 30, 1992, spin-off of
Caremark in the Registration and Information Statement ("Registration
Statement") and subsequent SEC filings submitted by Caremark (Isquith v.
Caremark International, Inc., et al., U.S.D.C., N. Dist. Ill., 94C 5534). The
plaintiffs allege, among other things, that the Registration Statement and
subsequent SEC filings contained false and misleading statements regarding the
scope of the Office of Inspector General for the Department of Health and Human
Services' investigation of Caremark's business and Medicare/Medicaid patient-
referral practices. The Company will respond to the complaint and vigorously
defend this action. Management believes that the outcome of this matter will
not have a material adverse effect on the Company's results of operations or
consolidated financial position.
Most of the individuals who served as directors of American in 1985,
including Mr. Cathcart and Ms. Evans, who currently are directors of the
Company, were defendants in a pending lawsuit filed as a derivative action.
Lewis v. Bays, et al. was filed on March 23, 1990 in the Circuit Court of Cook
County, Illinois. The plaintiffs allege breach of fiduciary duty claims
relating to American's buyout of an agreement with Hospital Corporation of
America ("HCA") in connection with the Company's merger with American in 1985.
On April 12, 1994, the parties in this case filed a settlement agreement with
the court for approval. The Court entered a preliminary order of fairness, and,
on April 26, 1994, the Company began notifying its stockholders of the
settlement. The settlement order was entered on June 15, 1994, and the time for
appeal has expired. The terms of the settlement did not have a material adverse
effect on the Company's results of operations or consolidated financial
position.
All of the individuals who served as directors of the Company as of September
1, 1993, as well as Lester B. Knight, executive vice president of the Company,
were named as defendants in a lawsuit ostensibly filed as a "demand excused"
derivative action. Siegel v. Loucks, et al., was filed September 15, 1993, in
the Court of Chancery in New Castle County, Delaware Cir. Ct., New Castle Co.,
Del., C. A. No. 13130. On October 24, 1993, a substantially identical complaint
was filed in the same court by Bartholomew J. Millano. The two complaints were
consolidated. The plaintiffs allege that the directors failed to oversee
management in connection with actions which were the basis for a dispute
between the Company and the Department of Veterans Affairs concerning sales and
pricing practices, failed to prevent such actions, and failed to create a
12
<PAGE>
compliance program to prevent or detect such actions. The complaint seeks to
recover alleged damages incurred by the Company as the result of lost sales due
to the dispute, as well as the compensation paid to Messrs. Gantz, Knight,
Loucks and Tobin since 1991. The Company and its directors filed motions to
dismiss the suit, answered the complaint and filed a counterclaim seeking
permanently to bar and enjoin the plaintiff from prosecuting this case because
her claims have been disposed of and barred in a prior suit against the
Company. On March 7, 1995 the court granted defendants' motions to dismiss the
suit. The plaintiffs have thirty days to appeal the dismissal order.
As of December 31, 1994, the Company has been named as a potentially
responsible party for cleanup costs at 15 hazardous waste sites. The Company
was a significant contributor to waste disposed of at only one of these sites,
the Thermo-Chem site in Muskegon, Michigan. The Company expects that the total
cleanup costs for this site will be between $44 million and $65 million, of
which the Company's share will be approximately $5 million. This amount has
been reserved and is reflected in the Company's financial statements.
In all of the other sites, the Company was a minor contributor and does not
have information on the total cleanup costs. The Company has, however, in most
of these cases been advised by the potentially responsible party of its roughly
estimated exposure at these sites. Those estimated exposures total
approximately $7 million. This amount has been reserved and reflected in the
Company's financial statements.
The Company is a defendant in a number of other claims, investigations and
lawsuits. Based on the advice of counsel, management does not believe that the
other claims, investigations and lawsuits individually or in the aggregate,
will have a material adverse effect on the Company's operations or its
consolidated financial condition.
--------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
13
<PAGE>
PART II
--------------------------------------------------------------------------------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Incorporated by reference from the Annual Report, page 66, section entitled
"Notes to Consolidated Financial Statements--Quarterly Financial Results and
Market for the Company's Stock."
--------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA.
Incorporated by reference from the Annual Report, inside back cover, section
entitled "Seven-Year Summary of Selected Financial Data."
--------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Incorporated by reference from the Annual Report, pages 31-42, section
entitled "Management's Discussion and Analysis." Also incorporated by reference
is the section of this Form 10-K, Part I captioned "Recent Developments,"
"United States Health Care Environment" and "Legal Proceedings" on pages 3 to
4, 5 and 8 to 13, respectively.
--------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Incorporated by reference from the Annual Report, pages 44-66, sections
entitled "Report of Independent Accountants," "Consolidated Balance Sheets,"
"Consolidated Statements of Income," "Consolidated Statements of Cash Flows,"
"Consolidated Statements of Stockholders' Equity," and "Notes to Consolidated
Financial Statements."
--------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
14
<PAGE>
PART III
--------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Identification of Directors
Incorporated by reference from the board of directors' proxy statement for
use in connection with Baxter's annual meeting of stockholders to be held on
May 8, 1995 (the "Proxy Statement"), pages 2-4, sections entitled "Board of
Directors" and "Election of Directors."
(b) Identification of Executive Officers
Following are the names and ages, as of March 10, 1995, of the executive
officers of Baxter International Inc. ("Baxter"), and one or both of its two
principal direct subsidiaries, Baxter Healthcare Corporation ("Healthcare") and
Baxter World Trade Corporation ("World Trade"), their positions and summaries
of their backgrounds and business experience. All executive officers of Baxter
are elected or appointed by the board of directors and hold office until the
next annual meeting of directors and until their respective successors are
elected and qualified. The annual meeting of directors is held after the annual
meeting of stockholders. All executive officers of Healthcare and World Trade
are elected or appointed by the boards of directors of the applicable
subsidiary and hold office until their respective successors are elected and
qualified. As permitted by applicable law, actions by these boards (and their
sole stockholder, Baxter) may be taken by written consent in lieu of a meeting.
(1) Baxter International Inc. Executive Officers
William B. Graham, age 83, has been senior chairman of the board of directors
since 1985. Mr. Graham became president of the Company in 1953 and chief
executive officer in 1960 and continued in these positions until 1971. From
1971 to 1980 he was chairman of the board and chief executive officer, and
thereafter he served as chairman until he became senior chairman.
Vernon R. Loucks Jr., age 60, has been chairman of the board of directors
since 1987 and chief executive officer of Baxter since 1980. Mr. Loucks was
first elected an officer of Baxter in 1971.
Lester B. Knight, age 36, has been an executive vice president of Baxter
since 1992, and a vice president since 1990. Mr. Knight previously was
president of a division of Healthcare.
Tony L. White, age 48, has been an executive vice president of Baxter since
1992, and a vice president since 1986, when he was first elected an officer of
Baxter.
Harry M. Jansen Kraemer, Jr., age 40, has been senior vice president and
chief financial officer of Baxter since 1993. Mr. Kraemer previously was the
vice president of finance and operations for a subsidiary of Baxter. Prior to
that he was employed as controller, group controller, and president of various
divisions of subsidiaries of Baxter.
Arthur F. Staubitz, age 55, has been senior vice president, secretary and
general counsel of Baxter since 1993. Mr. Staubitz previously was vice
president/general manager of the ventures group of a subsidiary of Baxter.
Prior to that he was senior vice president, secretary and general counsel of
Amgen, Inc. Prior to that he was a vice president of a Baxter subsidiary, and
prior to that he was a vice president and deputy general counsel of Baxter.
Herbert E. Walker, age 60, has been senior vice president of Baxter since
1993. Mr. Walker previously was vice president of human resources of a division
of Healthcare.
Dale A. Smith, age 63, has been a group vice president of Baxter since 1979,
when he was first elected an officer of Baxter.
David J. Aho, age 45, has been a vice president of Baxter since 1989, when he
was first elected an officer of Baxter.
15
<PAGE>
John F. Gaither, Jr., age 45, has been a vice president of Baxter since 1994.
Between 1991 and 1994, Mr. Gaither was vice president of business development
and strategic planning and associate general counsel for a subsidiary of
Baxter, and prior to that was secretary and deputy general counsel of Baxter.
James H. Taylor, Jr., age 56, has been a vice president of Baxter since 1992.
Mr. Taylor previously was the general manager of operations of a division of
Healthcare, and prior to that was vice president of manufacturing of that
division.
Brian P. Anderson, age 44, has been controller of Baxter since 1993. Mr.
Anderson previously was the vice president of corporate audit of a subsidiary
of Baxter, and prior to that was a partner in the international accounting firm
of Deloitte & Touche.
Lawrence D. Damron, age 48, has been treasurer of Baxter since 1992. Mr.
Damron previously was a vice president and controller of a division of a
subsidiary of Baxter, and prior to that was the corporate auditor of another
subsidiary. Prior to that, he was vice president and controller of a division
of that subsidiary.
A. Gerard Sieck, age 38, has been secretary of Baxter since 1994. From 1992
to 1994, Mr. Sieck was assistant secretary of Baxter, and prior to that was
corporate counsel in the law department of a subsidiary of Baxter.
(2) Healthcare and World Trade Executive Officers
Timothy B. Anderson, age 48, has been a group vice president of Healthcare
and World Trade since 1994. Between 1992 and 1994, Mr. Anderson was a vice
president of Baxter. Mr. Anderson previously was president of several divisions
of a subsidiary of Baxter.
Manuel A. Baez, age 53, has been a group vice president of World Trade since
1994. Between 1990 and 1994, Mr. Baez was a group vice president of Baxter. Mr.
Baez was first elected an officer of Baxter in 1989.
Joseph F. Damico, age 41, has been a group vice president of Healthcare since
1994. Between 1992 and 1994, Mr. Damico was a vice president of Baxter. Mr.
Damico previously was president of a division of Healthcare, and prior to that
was a vice president-general manager of that division.
Michael S. Estes, age 51, has been a group vice president of Healthcare and
World Trade since 1994. Between 1990 and 1994, Mr. Estes was a group vice
president of Baxter. Mr. Estes was first elected an officer of Baxter in 1987.
Donald W. Joseph, age 57, has been a group vice president of Healthcare and
World Trade since 1994. Between 1990 and 1994, Mr. Joseph was a vice president
of Baxter. Mr. Joseph previously was president of a division of a subsidiary of
Baxter.
Darnell Martin, age 46, has been a group vice president of Healthcare since
1994. Between 1992 and 1994, Mr. Martin was a group vice president of Baxter,
and a vice president since 1987, when he was first elected an officer of
Baxter.
Jack L. McGinley, age 48, has been a group vice president of Healthcare since
1994. Between 1992 and 1994, Mr. McGinley was a vice president of Baxter. Mr.
McGinley previously was president of a division of Healthcare, and prior to
that was president of the Japanese subsidiary of World Trade.
Terrence J. Mulligan, age 49, has been a group vice president of Healthcare
since 1994. Between 1990 and 1994, Mr. Mulligan was a senior vice president of
Baxter. Mr. Mulligan was first elected an officer of Baxter in 1985.
Michael A. Mussallem, age 42, has been a group vice president of Healthcare
since 1994. Between 1993 and 1994, Mr. Mussallem was president of a division of
Healthcare, and from 1990 to 1993, was president of another division of that
subsidiary.
Fabrizio Bonanni, age 48, has been a corporate vice president of World Trade
since 1994. Mr. Bonanni previously was a vice president of a division of World
Trade.
16
<PAGE>
Carlos del Salto, age 52, has been a corporate vice president of World Trade
since 1994. Between 1992 and 1994, Mr. del Salto was a vice president of
Baxter. Mr. del Salto previously was president--Latin
America/Switzerland/Austria of a subsidiary of Baxter, and prior to that, he
was vice president--Latin America of that subsidiary.
J. Robert Hurley, age 45, has been a corporate vice president of World Trade
since 1993. Mr. Hurley previously was vice president of a division of World
Trade.
Robert Perez, age 45, has been a corporate vice president of Healthcare and
World Trade since March 3, 1995. Between 1992 to 1995, Mr. Perez was president
of a division of a subsidiary of Baxter, and prior to that was a vice president
of that division.
John L. Quick, age 50, has been a corporate vice president of Healthcare
since 1994. Between 1992 and 1994, Mr. Quick was a vice president of a division
of Healthcare, and prior to that, was a vice president of another division of
that subsidiary.
Michael J. Tucker, age 42, has been a corporate vice president of World Trade
since 1994. Between 1992 and 1994, Mr. Tucker was a vice president of a
division of World Trade, and prior to that, was a vice president of another
division of a subsidiary of Baxter.
(c) Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Incorporated by reference from Proxy Statement, page 18, section entitled
"Section 16 Reporting."
--------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference from the Proxy Statement, pages 6-16, sections
entitled "Compensation of Directors" and "Compensation of Named Executive
Officers," and page 17, section entitled "Pension Plan and Excess Plan."
--------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from the Proxy Statement, pages 19-20, section
entitled "Ownership of Company Securities."
--------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference from the Proxy Statement, page 18, section entitled
"Significant Business Relationships."
17
<PAGE>
--------------------------------------------------------------------------------
PART IV
--------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The following documents are filed as a part of this report:
<TABLE>
<C> <S> <C>
(a) Financial Statements Location
Financial Statements required by Item 8 of this Form
Consolidated Balance Sheets Annual Report, page 45
Consolidated Statements of Income Annual Report, page 46
Consolidated Statements of Cash Flows Annual Report, page 47
Consolidated Statements of Stockholders'
Equity Annual Report, page 48
Notes to Consolidated Financial Statements Annual Report, pages 49-66
Report of Independent Accountants Annual Report, page 44
Schedules required by Article 12 of Regulation S-X
Report of Independent Accountants on
Financial Statement Schedule page 19
II Valuation and Qualifying Accounts page 20
All other schedules have been omitted because they are not applicable or not
required.
(b) Reports on Form 8-K
A report on Form 8-K, dated December 23, 1994, was filed with the SEC under
Item 5, Other Events, to file a press release which announced the completion
of the sale of the Company's diagnostics businesses.
A report on Form 8-K, dated February 14, 1995, was filed with the SEC under
Item 5, Other Events, to file a press release which announced the Company's
stock repurchase program.
(c) Exhibits required by Item 601 of Regulation S-K are listed in the
Exhibit Index, which is incorporated herein by reference.
</TABLE>
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULE
Board of Directors
Baxter International Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 13, 1995 appearing on page 44 of the 1994 Annual Report to
Stockholders of Baxter International Inc. (which report and consolidated
financial statements are incorporated by reference in the Annual Report on Form
10-K) also included an audit of the Financial Statement Schedule listed in Item
14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Chicago, Illinois
February 13, 1995
19
<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,
1994:
Accounts receivable $32 $14 $ 2 $(9) $39
=== === ==== === ===
-------------------------------------------------------------------------------
Year ended December 31,
1993:
Accounts receivable $29 $ 8 $-- $(5) $32
=== === ==== === ===
-------------------------------------------------------------------------------
Year ended December 31,
1992:
Accounts receivable $27 $ 6 $ 1 $(5) $29
=== === ==== === ===
</TABLE>
--------------------------------------------------------------------------------
(A) Valuation accounts of acquired or divested companies and foreign currency
translation adjustments. Reserves are deducted from assets to which they
apply.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Baxter International Inc.
/s/ Vernon R. Loucks Jr.
By: ____________________________________
Vernon R. Loucks Jr.
Chairman of the Board and
Chief Executive Officer
Date: March 22, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
(i) Principal Executive Officer: (iv)A Majority of the Board of
Directors
/s/ Vernon R. Loucks Jr.
___________________________________ Silas S. Cathcart
Vernon R. Loucks Jr. John W. Colloton
Director, Chairman of the Board Susan Crown
and Chief Executive Officer Mary Johnston Evans
Frank R. Frame
(ii) Principal Financial Officer: William B. Graham
David W. Grainger
/s/ Harry M. Jansen Kraemer, Martha R. Ingram
Jr. Arnold J. Levine
___________________________________ Georges C. St. Laurent, Jr.
Harry M. Jansen Kraemer, Jr. Monroe E. Trout, M.D.
Senior Vice President and Fred L. Turner
Chief Financial Officer
/s/ Vernon R. Loucks Jr.
(iii) Controller: By: ____________________________________
Vernon R. Loucks Jr.
/s/ Brian P. Anderson Director and Attorney-in-Fact
___________________________________
Brian P. Anderson
Controller
21
<PAGE>
--------------------------------------------------------------------------------
APPENDICES
<TABLE>
<CAPTION>
DESCRIPTION PAGE
----------- ----
<S> <C>
Computation of Primary Earnings per Common Share (Exhibit 11.1) 25
Computation of Fully Diluted Earnings per Common Share (Exhibit 11.2) 26
Computation of Ratio of Earnings to Fixed Charges (Exhibit 12) 27
Subsidiaries of the Company (Exhibit 21) 28
</TABLE>
--------------------------------------------------------------------------------
EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
<TABLE>
<CAPTION>
NUMBER AND DESCRIPTION OF EXHIBIT
---------------------------------
<C> <C> <S>
3. Certificate of Incorporation and Bylaws
3.1* Restated Certificate of Incorporation, filed as exhibit 3.1 to the
Company's annual report on Form 10-K for the year ended December
31, 1992, file number 1-4448 (the "1992 Form 10-K").
3.2* Certificate of Designation of Series A Junior Participating
Preferred Stock, filed under the Securities Act of 1933 as exhibit
4.3 to the Company's registration statement on Form S-8 (No. 33-
28428).
3.3* Amended and Restated Bylaws, filed as exhibit 3.3 to the Form 10-Q
for the quarter ended September 30, 1994, file number 1-4448.
4. Instruments defining the rights of security holders, including indentures
4.1* Indenture for 4% Convertible Subordinated Debentures due January 1,
2001, filed under the Securities Act of 1933 as exhibit 2(d) to the
Company's registration statement on Form S-7 (No. 2-55622).
4.2* Indenture dated November 15, 1985 between the Company and Bankers
Trust Company, filed as exhibit 4.8 to the Company's current report
on Form 8-K dated December 16, 1985, file no. 1-4448.
4.3* Amended and Restated Indenture dated November 15, 1985, between the
Company and Continental Illinois National Bank and Trust Company of
Chicago, filed under the Securities Act of 1933 as exhibit 4.1 to
the Company's registration statement on Form S-3 (No. 33-1665).
4.4* First Supplemental Indenture to Amended and Restated Indenture
dated November 15, 1985, between the Company and Continental
Illinois National Bank and Trust Company of Chicago, filed under
the Securities Act of 1933 as exhibit 4.1(A) to the Company's
registration statement on Form S-3 (No. 33-6746).
4.5* Indenture dated as of August 15, 1977, between the Company and
Midlantic National Bank, as supplemented, filed as exhibit 4.7 to
the Company's annual report on Form 10-K for the year ended
December 31, 1985, file no. 1-4448 (the "1985 Form 10-K").
4.6* Fiscal and Paying Agency Agreement dated as of April 26, 1984,
among American Hospital Supply International Finance N.V., the
Company and The Toronto-Dominion Bank, as amended, filed as exhibit
4.9 to the 1985 Form 10-K.
4.7* Fiscal and Paying Agency Agreement dated as of November 15, 1984,
between the Company and Citibank, N.A., as amended, filed as
exhibit 4.16 to the Company's annual report on Form 10-K for the
year ended December 31, 1987, file no. 1-4448 (the "1987 Form 10-
K").
4.8* Specimen Medium-Term Note, filed as exhibit 4.10 to the 1985 Form
10-K.
4.9* Specimen Extendible Note, filed as exhibit 4.11 to the 1985 Form
10-K.
4.10* Specimen 13 1/8% Note, filed as exhibit 4.12 to the 1985 Form 10-K.
4.11* Specimen 9 5/8% Note, filed as exhibit 4.13 to the 1987 Form 10-K.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
NUMBER AND DESCRIPTION OF EXHIBIT
---------------------------------
<C> <C> <S>
4.12* Specimen 8 7/8% Debenture, filed as exhibit 4.2(a) to the Company's
current report on Form 8-K dated June 15, 1988, file no. 1-4448.
4.13* Specimen 9 1/2% Note, filed as exhibit 4.3(a) to the Company's
current report on Form 8-K dated June 23, 1988, file no. 1-4448.
4.14* Specimen 9 1/4% Note, filed as exhibit 4.3(a) to the Company's
current report on Form 8-K dated September 13, 1989, file number 1-
4448.
4.15* Specimen 9 1/4% Note, filed as exhibit 4.3(a) to the Company's
current report on Form 8-K dated December 7, 1989, file number 1-
4448.
10. Material Contracts
10.1* Employment Agreement between William B. Graham and the Company,
filed as exhibit 10.1 to the 1985 Form 10-K.
10.2* Form of Indemnification Agreement entered into with directors and
officers, filed as exhibit 19.4 to the Company's quarterly report
on Form 10-Q for the quarter ended September 30, 1986, file no. 1-
4448.
10.3* Stock Option Plan of 1977 (as amended and restated), filed as
exhibit 19.3 to the Company's quarterly report on Form 10-Q for the
quarter ended September 30, 1984, file no. 1-4448.
10.4* 1988 Long-Term Incentive Plan, filed as exhibit 10.12 to the 1987
Form 10-K.
10.5* 1987-1989 Long-Term Performance Incentive Plan, filed as exhibit
10.15 to the Company's annual report on Form 10-K for the year
ended December 31, 1986 (the "1986 Form 10-K").
10.6* 1989 Long-Term Incentive Plan, filed as exhibit 10.12 to the
Company's annual report on Form 10-K for the year ended December
31, 1988, file no. 1-4448 (the "1988 Form 10-K").
10.7* Stock Option Plan Adopted July 25, 1988, filed as exhibit 10.13 to
the 1988 Form 10-K.
10.8* 1991 Officer Incentive Compensation Plan, filed as exhibit 10.11 to
the Company's annual report on Form 10-K for the year ended
December 31, 1990, file number 1-4448 (the "1990 Form 10-K").
10.9* Baxter International Inc. and Subsidiaries Incentive Investment
Excess Plan, filed as exhibit 10.17 to the 1988 Form 10-K.
10.10* Baxter International Inc. and Subsidiaries Supplemental Pension
Plan, filed as exhibit 10.18 to the 1988 Form 10-K.
10.11* Amendment to Stock Option Plan of 1977, filed as exhibit 19.2 to
the Company's quarterly report on Form 10-Q for the quarter ended
September 30, 1989, file no. 1-4448 (the "September, 1989 Form 10-
Q").
10.12* Limited Rights Plan, filed as exhibit 19.6 to the September, 1989
Form 10-Q.
10.13* Amendments to various plans regarding disability, filed as exhibit
19.9 to the September, 1989 Form 10-Q.
10.14* Amendments to 1987-1989 Long-Term Performance Incentive Plan and
1988 Long-Term Incentive Plan, filed as exhibit 19.10 to the
September, 1989 Form 10-Q.
10.15* 1987 Incentive Compensation Program, filed as exhibit C to the
Company's proxy statement for use in connection with its May 13,
1987, annual meeting of stockholders, file no. 1-4448.
10.16* Rights Agreement between the Company and The First National Bank of
Chicago,
filed as exhibit 1 to a registration statement on Form 8-A dated
March 21, 1989, file
no. 1-4448.
10.17* Amendment to 1987 Incentive Compensation Program, filed as exhibit
19.1 to September, 1989 Form 10-Q.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
NUMBER AND DESCRIPTION OF EXHIBIT
---------------------------------
<C> <C> <S>
10.18* Deferred Compensation Plan (1990), filed as exhibit 10.24 to the
1990 Form 10-K.
10.19* Restricted Stock Grant Terms and Conditions, filed as exhibit 10.25
to the Company's annual report on Form 10-K for the year ended
December 31, 1991, file number 1-4448 (the "1991 Form 10-K").
10.20* Vernon R. Loucks Restricted Stock Grant Terms and Conditions, filed
as exhibit 10.26 to the 1991 Form 10-K.
10.21* Deferred Compensation Plan (1990), as amended in 1992, filed as
exhibit 10.27 to the 1992 Form 10-K.
10.22* Restricted Stock Plan for Non-Employee Directors (as amended and
restated in 1992), filed as exhibit 10.28 to the 1992 Form 10-K.
10.23* Restricted Stock Grant Terms and Conditions (as amended), filed as
exhibit 10.31 to the 1992 Form 10-K.
10.24* 1992 Officer Incentive Compensation Plan, filed as exhibit 10.29 to
the 1992 Form 10-K.
10.25* 1993 Officer Incentive Compensation Plan, filed as exhibit 10.30 to
the 1992 Form 10-K.
10.26* 1994 Officer Incentive Compensation Plan, filed as exhibit 10.31 to
the Company's annual report on Form 10-K for the year ended
December 31, 1993, file number 1-4448 (the "1993 Form 10-K").
10.27* Corporate Aviation Policy, filed as exhibit 10.33 to the 1992 Form
10-K.
10.28* Plan and Agreement of Reorganization Between Baxter and Caremark
International Inc., filed as exhibit 10.34 to the 1992 Form 10-K
10.29* 1994 Incentive Compensation Program, filed as exhibit A to the
Company's proxy statement for use in connection with its April 29,
1994 annual meeting of stockholders, file no. 1-4448.
10.30* 1994 Shared Investment Plan and Terms and Conditions, filed as
exhibit 10.1 to the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 1994.
10.31 1995 Officer Incentive Compensation Plan.
10.32 Baxter International Inc. Restricted Stock Plan for Non-Employee
Directors, as amended and restated effective May 8, 1995.
11. Statement re: computation of per share earnings.
11.1 Computation of primary earnings per common share.
11.2 Computation of fully diluted earnings per common share.
12. Statements re: computation of ratios.
13. 1994 Annual Report to Stockholders (such report, except to the extent
incorporated herein by reference, is being furnished for the information of
the Securities and Exchange Commission only and is not deemed to be filed
as part of this annual report on Form 10-K).
21. Subsidiaries of the Company.
23. Consent of Price Waterhouse LLP.
24. Powers of Attorney.
27. Financial Statement Schedule.
</TABLE>
-------
* Incorporated herein by reference.
(All other exhibits are inapplicable.)
24
<PAGE>
Exhibit 10.31
BAXTER INTERNATIONAL INC.
1995 OFFICER INCENTIVE COMPENSATION PLAN
This 1995 Officer Incentive Compensation Plan ("Plan") of Baxter International
Inc. ("Baxter") and its subsidiaries (collectively, the "Company") is adopted
pursuant to the Baxter International Inc. 1987 Incentive Compensation Program
(the "Program") for the purposes stated in the Program. The Plan is intended to
comply with the requirements of Section 162(m)(4)(C) of the Internal Revenue
Code of 1986, as amended, and the related income tax regulations issued
thereunder.
1. ELIGIBILITY
-----------
Officers of the Company are eligible to participate in the Plan during 1995
("Plan Year") if the officer's participation is approved by the Compensation
Committee of the Board of Directors of Baxter (the "Committee"). Officers so
approved by the Committee shall be referred to herein as "Participants".
2. BONUS AWARD
-----------
2.1 Each Participant shall be eligible to receive a "Bonus Award" in
accordance with the terms provided herein and any other terms established by the
Committee. To determine a Participant's Bonus Award, the Committee shall
establish a) Company performance goals for the Plan Year ("Company Performance
Criteria"), b) a "Bonus Range" for each Participant, and c) the amount within a
Participant's Bonus Range that will be payable to a Participant based upon the
achievement of the Company Performance Criteria. The terms described in the
preceding sentence must be established by April 1, 1995, and such terms shall
not thereafter be changed, except as permitted by paragraph 2.2.
2.2 By March 31, 1996, the Committee shall assess the extent to which the
Company has achieved the Company Performance Criteria based on the Company's
publicly reported results for the Plan Year. The Committee shall exclude the
effect of acquisitions, divestitures, changes in accounting principle, and other
extraordinary or non-recurring events occurring in 1995 when assessing the
extent to which the Company has achieved the Company Performance Criteria, but
only if such exclusion would enhance the Company's performance relative to the
Company Performance Criteria. The exclusion authorized by the preceding
<PAGE>
sentence shall only apply to the extent it is consistent with Section
162(m)(4)(C) and the related regulations described above. The Committee shall
then determine each Participant's Bonus Award based upon the terms described in
paragraph 2.1 above. The Committee, however, has the discretion to reduce the
amount of a Participant's Bonus Award determined under the preceding sentence.
The Committee's determination shall be consistent with Section 162(m)(4)(C) and
the related regulations described above. In addition, the committee may
exercise discretion in the determination of the Bonus Awards earned under the
Plan with respect to participants who are not subject to 162(m).
2.3 If an officer becomes a Participant in the Plan during 1995, but after
January 1, 1995, the Committee shall establish a prorated Bonus Range for such
Participant based on the number of full months remaining in 1995 after he or she
becomes a Participant. To the extent applicable, the determination of a
prorated Bonus Range shall be consistent with Section 162(m)(4)(C) and the
related regulations described above.
3. PAYMENT
-------
3.1 Except as otherwise determined by the Committee and except with respect to
Participants who have filed deferral elections pursuant to paragraph 4, all
bonuses will be paid in cash as soon as possible following determination of
Bonus Awards by the Committee.
3.2 No Participant will be eligible to receive a Bonus Award unless he or she
continues to be employed by the Company through February 1, 1996, except as
otherwise determined by the Committee. The Committee's Bonus Award
determination with respect to such participant may be determined in the same
manner as provided in paragraphs 2.1 and 2.2 above.
4. DEFERRAL OF PAYMENT
-------------------
Participants may elect to defer payment in accordance with the Baxter
International Inc. and Subsidiaries Deferred Compensation Plan.
<PAGE>
Exhibit 10.32
BAXTER INTERNATIONAL INC.
RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
As amended and restated effective May 8, 1995
---------------------------------------------
This Plan contains the terms and conditions on which grants of common stock of
Baxter International Inc. ("Restricted Stock") are made to the directors of
Baxter International Inc. ("Baxter").
1. ELIGIBILITY AND GRANTS OF RESTRICTED STOCK
1.1 Each director of Baxter who is not an employee of Baxter or any of its
subsidiaries is eligible to participate in this Plan. Each eligible director
shall receive grants of Restricted Stock in accordance with this section 1
without further action by the board of directors or any of its committees. The
provisions of this section 1 shall not be amended more than once every six
months, other than to comport with changes in the Internal Revenue Code, the
Employee Retirement Income Security Act, or the rules thereunder.
1.2 Board Retainer. Each director elected for a three-year term shall receive
1,000 shares of Restricted Stock upon election or re-election to the Board of
Directors. If a director is elected for a term of fewer than three years, the
director shall receive 30 shares of Restricted Stock, upon election or re-
election to the board, for each full calendar month in the director's term of
office. If a director is elected for a term which does not include at least one
full calendar month, the director shall receive 30 shares of Restricted Stock
upon election or re-election to the board.
1.3 Board Membership Compensation. Each director elected for a three-year term
shall receive 3,000 shares of Restricted Stock upon election or re-election to
the Board of Directors. If a director is elected for a term of fewer than three
years, the director shall receive 100 shares of Restricted Stock, upon election
or re-election to the board, for each full calendar month in the director's term
of office. If a director is elected for a term which does not include at least
one full calendar month, the director shall receive 100 shares of Restricted
Stock upon election or re-election to the board.
Each director continuing in office after Baxter's annual meeting of
stockholders in May 1995 ("1995 Annual Meeting"), but who is not standing for
re-election at the 1995 Annual Meeting, shall receive a Restricted Stock grant
effective on the date of the 1995 Annual Meeting. Each director continuing in
office for a two-year term shall receive 2,000 shares of Restricted Stock. Each
director continuing in office for a one-year term shall receive 1,000 shares of
Restricted Stock.
1.4 Board Retirement Benefit. Each director who ceases membership on the Board
of Directors (for a reason other than death or removal for cause) at or after
age 65 with at least five years of service as a non-employee director will
receive a retirement benefit equal to 1,000 shares of Restricted Stock for each
twelve-month
<PAGE>
period of service as a non-employee director. The Restricted Stock
grant shall be made effective on the director's last day of membership on the
board.
1.5 Each grant of Restricted Stock shall be issued from shares held by Baxter
in its treasury and when so issued, such shares shall be fully paid and non-
assessable.
2. AGREEMENT AND CERTIFICATES
Each director receiving Restricted Stock shall enter into an agreement with
Baxter incorporating the terms and conditions of this Plan. A stock certificate
for the shares of Restricted Stock awarded will be issued in the name of each
director and deposited, together with a stock power endorsed in blank by the
director, with Baxter. Each such certificate shall bear a legend in
substantially the following form:
The transferability of this certificate and the shares of Common Stock
represented by it are subject to the terms and conditions (including
conditions of forfeiture) contained in the Restricted Stock Plan for Non-
Employee Directors of Baxter International Inc. ("Baxter"), as amended
effective May 8, 1995, and an agreement entered into between the registered
owner and Baxter. A copy of the Plan and agreement are on file in the office
of the secretary of Baxter.
3. VESTING
3.1 Board Retainer. Each director who receives a Restricted Stock grant
pursuant to section 1.2 of this Plan shall become vested in those shares of
Restricted Stock at the expiration of the term of office to which the grant
relates.
3.2 Board Membership Compensation. Each director elected for a three-year term
shall become vested in the 3,000 shares of Restricted Stock he or she receives
pursuant to section 1.3 in 1,000 share installments on the dates of Baxter's
three annual meetings of stockholders following the election to which the grant
relates. Each director elected for a term of fewer than three years shall
become vested in the shares of Restricted Stock he or she receives pursuant to
section 1.3 at the expiration of the term of office to which the grant relates.
Each director continuing in office for a two-year term after the 1995
Annual Meeting shall become vested in the 2,000 shares of Restricted Stock he or
she receives pursuant to section 1.3 in 1,000 share installments on the dates of
Baxter's 1996 and 1997 annual meetings of stockholders. Each director
continuing in office for a one-year term after the 1995 Annual Meeting shall
become vested in the 1,000 shares of Restricted Stock he or she receives
pursuant to section 1.3 on the date of Baxter's 1996 annual meeting of
stockholders.
3.3 Board Retirement Benefit. Each director who receives a Restricted Stock
grant pursuant to section 1.4 of this Plan shall become vested in those shares
of Restricted Stock on the six-month anniversary of the grant date. If the
director dies after the Restricted Stock grant is made pursuant to section 1.4,
but before it vests in accordance with this section 3.3, then the director's
estate shall become vested in such Restricted Stock on the date specified in the
preceding sentence.
<PAGE>
3.4 If a director dies while in office or becomes disabled such that he or she
is unable to perform the duties of a director, then the director or the
director's estate shall become vested in all of the Restricted Stock granted
pursuant to sections 1.2 and 1.3 of this Plan. If a director resigns or is
otherwise removed as a director prior to vesting of the Restricted Stock granted
pursuant to sections 1.2 and 1.3 of this Plan, then the director shall become
vested in that number of shares of Restricted Stock held by the director
determined by multiplying the number of shares held by a fraction, the numerator
of which is the number of months served in the director's term and the
denominator of which is the number of months of the term at the time of the
director's election, rounded to the nearest whole share. The director shall
forfeit all rights to Restricted Stock which does not become vested.
3.5 When a director's rights to Restricted Stock become vested, the director
shall be entitled to receive certificates representing shares of Baxter's common
stock, $1.00 par value, ("Common Stock") free and clear of all restrictions,
except as otherwise provided in section 7.2 of this Plan. The certificates
representing these shares shall be delivered to the director within 30 days
after the date such rights become vested.
4. RIGHTS OF PARTICIPANTS
4.1 Subject to the conditions of the Plan, each director receiving Restricted
Stock shall have all of the rights of a stockholder with respect to the shares
of Restricted Stock during the period in which such shares are subject to
forfeiture and restrictions on transfer, including without limitation, the right
to vote the shares. Dividends paid in cash or property other than Common Stock
with respect to shares of Restricted Stock shall be paid to the director
currently or, at the election of the director, shall be reinvested under
Baxter's Stockholder Investment Service. Shares purchased with reinvested
dividends shall not be restricted.
4.2 Dividends with respect to shares of Restricted Stock which are paid in
Common Stock shall be restricted on the same basis as the underlying Restricted
Stock.
4.3 Restricted Stock is not transferable and may not be sold, assigned, pledged
or otherwise encumbered by any director at any time. No recognition shall be
required to be given by Baxter to any attempted assignment of any rights to
Restricted Stock or other rights under this Plan.
<PAGE>
5. ADJUSTMENT
In the event of any merger, consolidation or reorganization of Baxter with
any other corporation or corporations, there shall be substituted for each of
the shares of Restricted Stock then subject to the Plan the number and kind of
shares of stock or other securities to which the holders of the shares of Common
Stock will be entitled pursuant to the transaction. In the event of any
recapitalization, stock dividend, stock split, combination of shares or other
change in the Common Stock, the number of shares of Restricted Stock then
subject to the Plan shall be adjusted in proportion to the change in outstanding
shares of Common Stock.
6. ACCELERATION
Notwithstanding any provision in this Plan to the contrary, the
restrictions on all shares of Restricted Stock awarded shall lapse immediately
if a Change in Control occurs. For purposes of this Plan, a Change in Control
shall have occurred if:
(i) any "person", as such term is used in Section 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than
Baxter, any corporation owned, directly or indirectly, by the stockholders of
Baxter in substantially the same proportions as their ownership of stock of
Baxter, and any trustee or other fiduciary holding securities under an employee
benefit plan of Baxter or such proportionately owned corporation), is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly of securities of Baxter representing 30% or more of the
combined voting power of Baxter's then outstanding securities;
(ii) during any 24 month period (not including any period prior to the
execution of this amendment to the Plan), individuals who at the beginning of
such period constitute the board of directors of Baxter, and any new director
(other than a director designated by a Person who has entered into an agreement
with Baxter to effect a transaction described in clause (i), (iii) or (iv) of
this Section) whose election by the board or nomination for election by Baxter's
stockholders was approved by a vote of at least two-thirds of the directors then
still in office who either were directors at the beginning of the period or
whose election or nomination for election was previously so approved, cease for
any reason to constitute at least a majority thereof;
(iii) the stockholders of Baxter approve a merger or consolidation of
Baxter with any other corporation, other than (A) a merger or consolidation
which would result in the voting securities of Baxter outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) more than 60% of
the combined voting power of the voting securities of Baxter or such surviving
entity outstanding immediately after such merger or consolidation or (B) a
merger or consolidation effected to implement a recapitalization of Baxter (or
similar transaction) in which no Person acquires more than 30% of the combined
voting power of Baxter's then outstanding securities; or
(iv) the stockholders of Baxter approve a plan of complete liquidation of
Baxter or an agreement for the sale or disposition by Baxter of all or
substantially all of Baxter's assets (or any transaction having a similar
effect).
<PAGE>
7. GENERAL
7.1 Subject to the limitation in section 1.1, the Board may amend or
discontinue the Plan at any time. However, no such amendment or discontinuance
shall, subject to adjustment under section 5, change or impair, without the
consent of the recipient, the terms of Restricted Stock previously granted.
7.2 Notwithstanding any provision in this Plan to the contrary:
(a) Baxter may, if it shall determine it necessary or desirable for any reason,
at the time of award of any Restricted Stock or at the time of the removal of
the restrictions imposed on such shares and the issuance of shares of otherwise
unrestricted Common Stock, require the recipient of the shares, as a condition
to the receipt thereof, to deliver to Baxter a written representation of present
intention to acquire the Restricted Stock or the shares of Common Stock for his
or her own account for investment and not for distribution and (b) if at any
time Baxter further determines, in its sole discretion, that the listing,
registration or qualification of any Restricted Stock or shares of Common Stock
is necessary on any securities exchange or under any federal or state securities
or blue sky law, or that the consent or approval of any governmental regulatory
body is necessary or desirable as a condition of, or in connection with the
award of any Restricted Stock or the removal of any restrictions imposed on such
shares, such Restricted Stock shall not be awarded or such restrictions shall
not be removed, as the case may be, in whole or in part, unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to Baxter.
7.3 Baxter may require a participant to pay to Baxter any amounts required to
be withheld under applicable income tax laws as a condition for the issuance of
any Common Stock.
7.4 No director in this Plan shall have any right because he or she is a
participant in the Plan to continue as a director of Baxter for any period of
time or to continue his or her present or any other rate of compensation.
7.5 This Plan shall continue in effect until all restriction imposed on shares
of Common Stock by it have lapsed and all unrestricted shares of Common Stock
required to be issued pursuant to the Plan have been issued.
<PAGE>
EXHIBIT 11.1
--------------------------------------------------------------------------------
COMPUTATION OF PRIMARY EARNINGS PER COMMON SHARE
(In millions, except per share data)
<TABLE>
<CAPTION>
Year ended December
31,
-----------------------------------------------------------------------------
1994 1993 1992
-----------------------------------------------------------------------------
<S> <C> <C> <C>
EARNINGS
Income (loss) from continuing operations before
cumulative effect of accounting changes $ 596 $ (268) $ 561
Preferred stock dividends -- -- (5)
-----------------------------------------------------------------------------
Income (loss) from continuing operations before
cumulative effect of accounting changes applicable to
common stock 596 (268) 556
Total discontinued operations -- -- 45
Cumulative effect of accounting changes -- 70 (165)
-----------------------------------------------------------------------------
Net income (loss) available for common stock $ 596 $( 198) $ 436
-----------------------------------------------------------------------------
SHARES
Average common shares outstanding 280 277 279
-----------------------------------------------------------------------------
PRIMARY EARNINGS (LOSS) PER COMMON SHARE
INCOME FROM CONTINUING OPERATIONS $2.13 $(0.97) $ 1.99
DISCONTINUED OPERATIONS -- -- 0.16
CUMULATIVE EFFECT OF ACCOUNTING CHANGES -- 0.25 (0.59)
-----------------------------------------------------------------------------
NET INCOME (LOSS) $2.13 $(0.72) $ 1.56
-----------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 11.2
--------------------------------------------------------------------------------
COMPUTATION OF FULLY DILUTED EARNINGS PER COMMON SHARE
(In millions, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------------
1994 1993(a) 1993(a) 1992
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EARNINGS
Income (loss) from continuing operations
before cumulative effect of accounting
changes $596 $(268) $(268) $ 561
Preferred stock dividends -- -- -- (5)
------------------------------------------------------------------------------
Pro Forma income (loss) from continuing
operations before cumulative effect of
accounting changes applicable to common
stock 596 (268) (268) 556
Total discontinued operations -- -- -- 45
Cumulative effect of accounting changes -- 70 70 (165)
------------------------------------------------------------------------------
Pro forma net income (loss) available for $596 $(198) $(198) $ 436
------------------------------------------------------------------------------
SHARES
Weighted average number of common shares
outstanding 280 277 277 279
Additional shares assuming conversion of
exercise of stock options, performance share
awards and stock purchase plan subscriptions 2 -- 1 3
------------------------------------------------------------------------------
Average common shares outstanding 282 277 278 282
------------------------------------------------------------------------------
PRIMARY EARNINGS (LOSS) PER COMMON SHARE
INCOME FROM CONTINUING OPERATIONS $2.11 $(0.97) $(0.96) $ 1.97
DISCONTINUED OPERATIONS -- -- -- 0.16
CUMULATIVE EFFECT OF ACCOUNTING CHANGES -- 0.25 0.25 (0.59)
------------------------------------------------------------------------------
NET INCOME (LOSS) $2.11 $(0.72) $(0.71) $ 1.54
------------------------------------------------------------------------------
</TABLE>
(a) For the year ended December 31, 1993, fully diluted earnings (loss) per
common share has been computed with and without anti-dilutive common stock
equivalents.
<PAGE>
EXHIBIT 12
--------------------------------------------------------------------------------
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratios)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------------------
1994 1993(2) 1992 1991 1990
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing operations
before income tax expense (benefit) $ 801 $(330) $ 753 $688 $ 16
Add:
Interest costs 242 232 221 231 264
Estimated interest in rentals (1) 43 44 43 36 35
-----------------------------------------------------------------------------
Fixed charges as defined 285 276 264 267 299
Interest costs capitalized (5) (10) (10) (9) (5)
Losses of less than majority owned
affiliates, net of dividends 18 27 34 32 22
-----------------------------------------------------------------------------
Income (loss) as adjusted $1,099 $ (37) $1,041 $978 $332
-----------------------------------------------------------------------------
Ratio of earnings to fixed charges 3.86 (0.13) 3.94 3.66 1.11
-----------------------------------------------------------------------------
</TABLE>
(1) Represents the estimated interest portion of rents.
(2) Earnings were inadequate to cover fixed charges for the year-ended December
31, 1993, due to the provision for the restructuring program costs. The
amount of the coverage deficiency is $313 million.
<PAGE>
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
This discussion and analysis presents the factors that had a material effect on
Baxter International Inc.'s ("Baxter" or the "company") results of operations
during the three years ended December 31, 1994, and the company's financial
position at that date. Trends of a material nature are discussed to the extent
known and considered relevant.
INDUSTRY OVERVIEW
International Markets
Throughout the world, as developing countries create more wealth, improving
the health and well-being of their citizens becomes a much higher social
priority and usually leads to increased per-capita spending on health care. The
world's largest developing markets in China, the Pacific Rim countries and Latin
America are all poised for significant economic growth. Based on these factors,
management believes there will be improved expansion opportunities for Baxter
with its broad portfolio of proven cost-effective products, services and
therapies to meet the demands of these markets. In the developed world --
especially in Western Europe and Japan -- there continues to be strong demand
for more technologically advanced and cost-effective therapies, products and
services, and Baxter has long been a leader in these markets.
In view of these conditions, management believes Baxter's best opportunities
for growth are outside the United States, and the company's strategies for its
medical specialties segment emphasize international expansion to capitalize on
the company's strong global positions in renal therapy, biotechnology and
cardiovascular therapies.
U.S. Market
Though the U.S. government failed to enact health-care reform legislation in
1994, there continued to be fundamental change in the U.S. health-care system.
Competition for patients among health-care providers is becoming more intense
and, increasingly, they are looking for ways to better manage costs in materials
handling, supply utilization, product standardization for specific procedures,
and capital expenditures. There was increased consolidation in the company's
customer base and by its competitors. These trends are expected to continue. In
recent years, the company's overall price increases were below the Consumer
Price Index, and industry trends may inhibit the company's ability to increase
prices in the future.
In the U.S. health-care market, management believes Baxter's strong positions
in manufacturing and broad-based distribution create a unique competitive
advantage, since the company is well positioned to help customers reduce costs
by being more efficient, while maintaining or improving the quality of patient
care. In 1994 for example, Baxter and Duke University Medical Center signed a
risk-sharing supply agreement that aligns the financial incentives of both
organizations around reducing total system costs. Given the increased pressure
on hospital revenues, this agreement is designed to reduce costs by determining
and using the appropriate amount of resources for specific clinical outcomes.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPANY OBJECTIVES AND RESULTS
Management outlined key financial objectives to stockholders for 1994. These
objectives and the results achieved are summarized below:
OBJECTIVES RESULTS
. Improve "operational cash . The company achieved
flow" to $450 million in 1994, "operational cash flow" of
allowing the company to $954 million in 1994, and
remain debt-neutral, after the reduced net debt by
payment of dividends and all $742 million.
financing costs.
. Reduce the company's net- . The company's net-debt-to-
debt-to-net-capital ratio from net-capital ratio was 39% at
approximately 50% at the December 31, 1994, after the
end of 1993 to the mid-40s receipt of $44 million in
by the end of 1994, before partial net proceeds related
considering the use of any to the sale of the diagnostics
proceeds from the divestiture manufacturing businesses.
of the diagnostics
manufacturing businesses.
. Grow sales in the high . In the third quarter, the com-
single-digit percentage range. pany indicated that its future
sales growth would be below
its earlier expectations of
growth in the high single dig-
its as sales growth slowed in
the U.S. market. Worldwide
sales growth for the full year
was 5%, including interna-
tional sales growth of 8%.
. Grow net earnings in the high . The company's net earnings
single-digit percentage range. grew 10% and EPS grew 9%
in 1994, excluding the 1993
after-tax restructuring and
litigation charges.
. Hold operating expenses flat . The company's marketing
for 1994 and 1995 and and administrative expenses
position Baxter to further declined by $20 million in
reduce its expense ratio in 1994 and resulted in a ratio
the years beyond 1995. of 19.9% of sales as compared
to 21.2% of sales in 1993.
. Complete the divestiture of . The divestiture of Baxter's
diagnostics manufacturing diagnostics manufacturing
businesses. businesses was completed in
December 1994.
"OPERATIONAL CASH FLOW"
(in millions of dollars)
[BAR GRAPH APPEARS HERE]
1992 1993 1994
---- ---- ----
207 292 954
NET DEBT
(in millions of dollars)
[BAR GRAPH APPEARS HERE]
1992 1993 1994
----- ----- -----
2,901 3,143 2,401
These objectives were associated with the November 1993 announcement that the
company's board of directors approved a series of strategic actions to improve
shareholder value, to extend positions of leadership in health-care markets and
to reduce costs. These actions were designed to make the company's domestic
medical/laboratory products and distribution segment more efficient and more
responsive in addressing the sweeping changes occurring in the U.S. health-care
system and to accelerate growth of Baxter's medical specialties businesses
worldwide. The company recorded a $700 million pretax provision in 1993 to cover
costs associated with these restructuring initiatives.
The restructuring activities included:
. Realigning the company's U.S. sales organization;
. Restructuring the distribution organization and investing in new systems to
improve manufacturing and distribution efficiencies worldwide;
. Seeking to divest its diagnostics manufacturing businesses and exiting
selected non-strategic product lines in other businesses; and
. Reducing corporate staff and layers of management to give business units more
autonomy.
Additional details of the restructuring program are discussed later.
The following discussion and analysis illustrates how management met all its
key financial objectives, except for the attainment of anticipated domestic
sales growth as discussed above.
32
<PAGE>
BAXTER INTERNATIONAL
RESULTS OF OPERATIONS
The company operates in two industry segments, medical specialties and
medical/laboratory products and distribution. The medical specialties segment
includes specialized products that Baxter develops, manufactures and markets on
a global basis for treating kidney and heart disease and blood disorders and for
collecting and processing blood. The company's International Hospital unit,
which manufactures and distributes intravenous solutions and other medical
products outside the United States, is also included in this segment because it
shares facilities, resources and customers with the other medical specialty
businesses in several locations worldwide. The medical/laboratory products and
distribution segment ("med/lab") includes products that Baxter manufactures for
use in U.S. hospitals, alternate-site facilities, medical laboratories, and
other industrial and educational facilities. A significant volume of third-party
manufactured medical products (included in this segment) also are distributed
through the company's extensive distribution system.
The following table shows net sales trends for each industry segment (in
millions):
<TABLE>
<CAPTION>
Percent increase
1994 1993 1992 1994 1993
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Medical specialties
Renal $1,160 $1,061 $ 978 9% 8%
Biotech 949 849 805 12% 5%
Cardiovascular 632 562 540 12% 4%
International Hospital 816 778 773 5% 1%
---------------------------------------------------------------------------------------------------
Total medical specialties 3,557 3,250 3,096 9% 5%
% to total company 38.1% 36.6% 36.5%
Medical/laboratory products and distribution 5,767 5,629 5,375 2% 5%
% to total company 61.9% 63.4% 63.5%
---------------------------------------------------------------------------------------------------
Total net sales $9,324 $8,879 $8,471 5% 5%
===================================================================================================
</TABLE>
Worldwide sales of renal products and services were strong over the past three
years, reflecting a growing patient base and increased acceptance of peritoneal
dialysis ("PD") therapy. Sales penetration of PD products was especially strong
in international markets, where many national governments recognize the low
start-up and operating costs of PD when compared to traditional hemodialysis.
Sales of the HomeChoice(TM) automated PD system in North America, Japan and
Europe in 1994 helped sales growth. Additionally, sales of the UltraBag(TM)
system, designed to reduce the incidence of infection and improve convenience
for the patient, also contributed to increased sales during 1993 and 1994. The
company experienced strong demand for its therapeutic blood products including
Recombinate(TM) Anti-hemophilic factor (Recombinant) which was launched in
December 1992. Sales in the Biotech unit were adversely affected in 1994 by the
voluntary market withdrawal of Gammagard(R) IGIV, an immune globulin intravenous
product. A new product, Gammagard(R)S/D was introduced in the second quarter of
1994. It is treated with a solvent and two detergents known to inactivate
viruses such as hepatitis B, hepatitis C and HIV. The demand for automated
blood-collection products was strong in all years. Sales of manual collection
products were flat for 1994 and 1993. The market for the company's blood-
collection products slowed in 1993, as the number of whole-blood-collections
declined in the U.S. and Europe. Sales growth of the company's cardiovascular
("CV") products was strong in 1994. Key contributors were heart valves and the
acquisition of Macchi Engenharia Biomedica Ltda. (a Brazilian-based manufacturer
and marketer of oxygenators and other cardiovascular products used in open-heart
surgery). Sales growth of CV products moderated in 1993, primarily due to
reduced levels of hospital activity in the U.S. Sales of the company's hospital
products in international markets increased moderately in 1994 and 1993. The
company's sales in Canada slowed in 1994 and 1993 as hospital cost containment
in that country put downward pressure on the consumption of health-care products
and services. Sales of specialty IV products were strong as the company
broadened its base-product offering to international markets. Sales in the
International Hospital unit in 1993 were
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
adversely affected by weakening of foreign currencies.
Sales in the med/lab segment were up slightly during 1994. The trend reflects
continued pricing pressures on certain product lines, the loss of some
Columbia/HCA contracts and the decline in sales of diagnostics products as a
result of reduced capital purchases by hospitals and uncertainties regarding
Baxter's plans to divest its diagnostics manufacturing businesses. Although some
contracts were lost, in September 1994, the company signed an eight-year
contract with Columbia/HCA Healthcare Corporation valued at $800 million
(including current and incremental volume) for products and services related to
intravenous systems and laboratory products. The sales growth rate in 1993
primarily reflects market growth and increased market penetration. It is
anticipated that the med/lab segment will be adversely affected in 1995 because
it will lose approximately $300 million in sales (primarily international)
related to the divestiture of the diagnostics manufacturing businesses and
certain distribution businesses in Canada. Baxter will continue to distribute
all current diagnostics products in the U.S. but will not distribute these
products internationally as a result of the divestiture. The divestiture of the
diagnostics manufacturing businesses will not have a material impact on the
company's results of operations although it will decrease the growth rate of
sales in the med/lab segment.
Net sales by geographical region were (in millions):
<TABLE>
<CAPTION>
Percent increase (decrease)
1994 1993 1992 1994 1993
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Medical specialties
International $2,354 $2,142 $2,076 10% 3%
United States 1,203 1,108 1,020 9% 9%
----------------------------------------------------------------------------------------------------------------
Total medical specialties 3,557 3,250 3,096 9% 5%
----------------------------------------------------------------------------------------------------------------
Medical/laboratory products and distribution
United States 5,490 5,343 5,060 3% 6%
International 277 286 315 (3%) (9%)
----------------------------------------------------------------------------------------------------------------
Total medical/laboratory products and distribution 5,767 5,629 5,375 2% 5%
----------------------------------------------------------------------------------------------------------------
Total United States sales $6,693 $6,451 $6,080 4% 6%
Total international sales 2,631 2,428 2,391 8% 2%
----------------------------------------------------------------------------------------------------------------
Total net sales $9,324 $8,879 $8,471 5% 5%
================================================================================================================
</TABLE>
The slowdown in the growth rate of U.S. sales in 1994 as compared to 1993 is
due to the factors affecting the U.S. health-care market discussed earlier.
These factors are expected to continue in 1995 and beyond. Sales in
international markets increased in 1994 due to increased unit volume, market
penetration and improved foreign currency rates. International sales growth in
local currency was approximately 8%, 7% and 9% in 1994, 1993 and 1992,
respectively.
It is anticipated that the ratio of self-manufactured sales as a percentage of
total sales versus distributed sales in the med/lab segment will decline in 1995
as a result of the sale of the company's diagnostics manufacturing businesses in
December 1994.
MED/LAB
NET SALES
(in billions of dollars)
. Distributed products
. Self-Manufactured
products
[BAR GRAPH APPEARS HERE]
1992 1993 1994
---- ---- ----
Distributed products............................... 2.2 2.4 2.7
Self-Manufactured products......................... 3.2 3.2 3.1
MEDICAL SPECIALTIES
NET SALES
(in billions of dollars)
. Distributed products
. Self-Manufactured
products
[BAR GRAPH APPEARS HERE]
1992 1993 1994
---- ---- ----
Distributed products............................... 0.4 0.4 0.4
Self-Manufactured products......................... 2.7 2.9 3.2
34
<PAGE>
BAXTER INTERNATIONAL
The following table gives key ratios of certain income statement items (as a
percent of sales):
<TABLE>
<CAPTION>
1994 1993 1992
-----------------------------------------------
<S> <C> <C> <C>
Gross margin 35.3% 36.3% 38.1%
Marketing and
administrative expenses 19.9% 21.2% 21.2%
===============================================
</TABLE>
The decline in the gross margin rate in 1994 versus 1993 reflects pricing
pressures on certain product lines, a heavier mix of lower-margin distributed
products, and the voluntary market withdrawal of Gammagard(R) IGIV discussed
previously. The gross margin rate improved sequentially in every quarter
beginning with the second quarter of 1994. The decline in this rate in 1993
reflects lower prices on certain product lines, a heavier mix of lower-margin
distributed and manufactured products and unfavorable manufacturing variances
related to the rebalancing of inventories, which caused some manufacturing
plants to operate at reduced-capacity levels. The mix shift towards distributed
products is consistent with the company's strategy of being a broad-based
distributor of health-care supplies and services in the U.S. The impact of
foreign currency exchange rates reduced the company's overall gross margin rate
by approximately .3% in 1994 and by approximately .7% in 1993.
The decrease in the marketing and administrative expense ratio offset the
gross margin erosion in 1994. The decrease in these expenses in 1994 reflects
improved expense leveraging as a result of initiatives taken in connection with
the 1993 downsizing and restructuring programs. The company expects to further
reduce the marketing and administrative expense ratio in 1995 and to continue
the trend of reductions through 1998. The 1993 total included $53 million in
charges to provide for staff reductions in the company's hospital and
diagnostics businesses. The $53 million in charges were primarily incurred to
combine sales staffs and streamline administrative functions.
MARKETING AND
ADMINISTRATIVE EXPENSES
(as a percent of sales)
[BAR GRAPH APPEARS HERE]
1990 1991 1992 1993 1994
----- ----- ----- ----- -----
21.3% 21.1% 21.2% 21.2% 19.9%
The following table shows research and development expenses for each industry
segment (in millions):
<TABLE>
<CAPTION>
Percent increase (decrease)
1994 1993 1992 1994 1993
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Medical specialties $259 $237 $213 9% 11%
Medical/laboratory products and distribution 84 100 104 (16%) (4%)
-----------------------------------------------------------------------------------------------------------
Total research and development $343 $337 $317 2% 6%
as a % of self-manufactured sales 5.4% 5.5% 5.3%
===========================================================================================================
</TABLE>
The company's research and development ("R&D") expenses increased at a lower
rate in 1994 as compared to the 1993 growth rate primarily as a result of the
company's strategic review of research and development initiatives. R&D expenses
have increased in the medical specialties segment as the company continues to
increase its investment in key strategic initiatives such as renal therapy and
transplantation, the Novacor(R) left-ventricular assist system and blood
substitutes. Significant R&D investments were made in 1993 in these same areas.
The decrease in R&D spending in 1994 in the med/lab segment is primarily related
to the rationalization of projects being developed in the diagnostics
manufacturing businesses. It is anticipated that R&D spending in the med/lab
segment will be lower in 1995 due to the divestiture of the diagnostics
manufacturing businesses and the company's strategy to focus its R&D
expenditures in the medical specialties segment. New self-manufactured products
introduced to worldwide markets in the last five years comprised approximately
37% of the company's total worldwide self-manufactured sales in 1994, 35% in
1993 and 34% in 1992.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
During 1993, the company recorded a special charge for major litigation
settlements and minimum liability exposures, and recorded significant estimated
insurance recoveries with respect to these liabilities. The net results of the
charges and recoveries are as follows (in millions):
<TABLE>
<CAPTION>
Gross Estimated Net
litigation insurance litigation
charge recoveries charge
-------------------------------------------------------------
<S> <C> <C> <C>
Mammary implant
product liabilities $556 $426 $130
HIV/hemophilia
product liabilities 131 83 48
Patent infringement
settlement 105 -- 105
Legal fees and other 47 -- 47
-------------------------------------------------------------
Total $839 $509 $330
=============================================================
</TABLE>
The provision for mammary implant product liabilities pertains to the
company's share of the global settlement of class action litigation. The
provision for HIV/hemophilia product liabilities pertains to worldwide
litigation and expected settlement expenses involving anti-hemophilic Factor
Concentrate cases for HIV-positive hemophiliacs. The patent infringement
settlement pertains to patent litigation with Scripps Research Institute and
Rhone-Poulenc Rorer, Inc., relating to certain anti-hemophilic Factor VIII
products manufactured. The provision for legal fees pertains primarily to
product liability litigation. See accompanying Notes to Consolidated Financial
Statements titled "Legal Proceedings" for a more detailed description of these
issues.
Other costs and expenses include approximately $21 million in net gains
associated with the disposal or discontinuance of minor, non-strategic
businesses and investments in 1994, versus $44 million in net gains in 1993 and
$21 million in net losses in 1992. The company also realized $10 million in
gains related to the termination of an interest-rate hedging contract due to the
significant reduction in net debt during 1994. Foreign exchange losses were $17
million in 1994, $28 million in 1993 and $26 million in 1992. Also included in
other non-operating expenses in 1993 was a provision for $8 million in costs
related to Baxter's settlement of anti-boycott investigations under the U.S.
Export Administration Act.
The impact of the recent devaluation of the peso in Mexico is not expected to
have a material effect on Baxter's results of operations during 1995.
Income before income taxes was $801 million in 1994 compared to a loss of $330
million in 1993 and income of $753 million in 1992. The following table shows
income (loss) before income taxes for each industry segment (in millions):
<TABLE>
<CAPTION>
1994 1993 1992
--------------------------------------------------------------
<S> <C> <C> <C>
Medical specialties
Pretax income before restructuring
and litigation charges $ 621 $ 605 $ 556
Restructuring and litigation charges - (253) -
--------------------------------------------------------------
Total medical specialties 621 352 556
--------------------------------------------------------------
Med/lab
Pretax income before restructuring
charge 474 422 512
Restructuring charge - (550) -
--------------------------------------------------------------
Total med/lab 474 (128) 512
--------------------------------------------------------------
General corporate and other
Expenses excluding restructuring
and litigation charges (101) (135) (128)
Restructuring and litigation charges - (227) -
--------------------------------------------------------------
Total general corporate and other (101) (362) (128)
--------------------------------------------------------------
Interest - net (193) (192) (187)
--------------------------------------------------------------
Total pretax income (loss) $ 801 $(330) $ 753
==============================================================
</TABLE>
The increase in pretax income of 3% (excluding the restructuring and
litigation charges in 1993) in the medical specialties segment for 1994 is
primarily related to an increase in sales that was offset by lost margin and
related rework costs related to the voluntary market withdrawal of
Gammagard(R)IGIV discussed above.
Pretax income in 1993 for the medical specialties segment was adversely
affected by the impact of the restructuring and litigation charges discussed
above. The restructuring charge was $100 million of this total (approximately
$42 million non-
36
<PAGE>
BAXTER INTERNATIONAL
cash) and was provided to rationalize manufacturing capacity in the U.S. and
Canada, consolidate distribution facilities in Europe and streamline
administrative efficiency in several countries. Excluding the restructuring and
litigation charges, 1993 pretax income for the segment increased as a result of
lower manufacturing costs, improved expense control and improved pricing in
select product lines, offset by the adverse impact of foreign currency rates.
The med/lab segment's pretax income (excluding the 1993 restructuring and
litigation charges) increased 12% in 1994 as a result of the benefits of cost-
containment measures implemented throughout 1993 and 1994, and a decrease in the
level of net gains from divestitures in 1994 offset by the $53 million of
downsizing costs incurred in the second and third quarters of 1993.
The pretax loss in 1993 in the med/lab segment was due to the provision of
$550 million ($231 million non-cash) for the 1993 restructuring program. These
charges were incurred to make the company's domestic hospital-supply operations
more efficient and more responsive in addressing the changes occurring in the
U.S. health-care system. Pretax income in 1993 decreased, excluding
restructuring program costs, as a result of lower sales growth of the company's
manufactured products and higher sales of the company's distributed products,
the impact of an inventory-reduction program that caused some manufacturing
plants to operate at reduced capacity utilization levels, the company's
inability to recover raw material and other cost increases through product
pricing, and downsizing costs discussed previously.
The net decrease in costs in general corporate and other (excluding the 1993
restructuring and litigation charges) in 1994 primarily reflects the impact of
cost savings achieved in connection with the restructuring program and the
effect of net gains associated with the disposal or discontinuance of minor,
non-strategic business investments.
The increase in interest expense for 1994 was due primarily to higher interest
rates offset by lower average debt levels. The increase in interest expense for
1993 as compared to 1992 was due primarily to higher debt levels offset by lower
interest rates. Interest income improved in both 1994 and 1993 due to higher
average investment levels and improved returns on the company's portfolio of
investments.
The increase in pretax income in 1994 versus 1993, excluding the $700 million
restructuring charge and the $330 million special charge for litigation, was
primarily a result of improved sales and improved expense leveraging. The
decline in pretax income from 1992 to 1993 is largely the result of
restructuring and litigation charges discussed previously, which were recorded
in 1993. Pretax income in 1993, excluding the charges, was $700 million.
The effective tax rate was 26% in 1994 compared to 19% in 1993 and 25% in
1992. The 1993 effective tax rate was unusually low due primarily to the tax
benefits associated with the restructuring and litigation charges discussed
previously, offset by a $151 million provision for U.S. taxes on previously
unremitted foreign earnings that the company intends to use for the cash
requirements of its restructuring program. The increase in the 1994 effective
tax rate as compared to 1992 was due primarily to a larger proportion of
earnings generated in higher-tax jurisdictions.
Net earnings from continuing operations was $596 million in 1994 compared with
a net loss of $268 million in 1993 and net earnings of $561 million in 1992.
Earnings per common share from continuing operations was $2.13 in 1994 versus a
loss of 97 cents in 1993 and earnings of $1.99 in 1992. The loss in 1993
primarily reflects the provisions for restructuring and litigation charges. The
company estimates that earnings per share from operations in 1993, excluding
these charges, would have been approximately $1.95.
RESTRUCTURING PROGRAM
As discussed previously, the company announced a major restructuring program
that resulted in a $700 million pretax charge in the fourth quarter of 1993.
This charge included approximately $300 million for non-cash valuation
adjustments as a result of the company's decision to close facilities or exit
non-strategic businesses and investments. The company expects to spend
approximately $400 million in cash related to the restructuring program, with
most of that expended between 1994 and 1996.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table summarizes major components of the company's restructuring
charge, use of restructuring reserves through December 31, 1994 and the
remaining restructuring reserves at December 31, 1994 (in millions):
<TABLE>
<CAPTION>
Major cost categories
-------------------------------------
Employee- Write-down
related of assets to Other
costs be sold costs Total
------------------------------------------------------------
<S> <C> <C> <C> <C>
Total restructuring
charge $295 $289 $116 $700
Less reserves
utilized through
Dec. 31, 1994:
Cash 58 -- 66 124
Noncash -- 206 -- 206
------------------------------------------------------------
Reserves as of
Dec. 31, 1994 $237 $ 83 $ 50 $370
============================================================
</TABLE>
Employee-related costs include provisions for severance, outplacement
assistance, relocation and retention payments.
Since the inception of the restructuring program, the company has eliminated
approximately 2,300 of the approximately 4,500 positions affected by the
program. The majority of the remaining reductions will occur in 1995 and 1996 as
facility closures and consolidations are completed as planned.
Since the announcement of the restructuring program, the company has
implemented, or is in the process of implementing, all of the major strategic
actions associated with the restructuring program and is satisfied that such
programs are progressing on schedule and that the overall restructuring program
will meet previously established financial targets. As part of the
restructuring, the company announced its intent to divest its diagnostics
manufacturing businesses and established a valuation allowance as a component of
the 1993 restructuring charge. In December 1994, the company completed the
divestiture of these businesses and received net proceeds of approximately $44
million in cash, $200 million in installment notes (which were collected in cash
during January 1995) and $40 million in face value of preferred stock. In
addition, Baxter retained accounts receivable of approximately $85 million,
which will be collected from customers by Baxter in the normal course of
business. Baxter has retained the rights to distribute all current diagnostics
products in the U.S. The transaction was completed substantially in accordance
with the company's valuation estimates and, therefore, no gain or loss was
recognized on the sale. The divestiture of the diagnostics manufacturing
businesses will not have a material impact on the company's results of
operations, but will decrease the growth rate of sales in the med/lab segment.
The company realized approximately $95 million in expense savings for the
total year 1994, which was consistent with forecasted savings. Management
believes that its overall savings to be realized in 1995 and beyond will be
substantially consistent with earlier estimates disclosed which are $200 million
in 1995, $275 million in 1996, $325 million in 1997 and exceeding $350 million
in 1998. Management anticipates that these savings will be partially invested in
increased research and development spending and the company's expansion into
growing international markets. Management further believes that its remaining
restructuring reserves are adequate to complete the actions contemplated by the
restructuring program.
DISCONTINUED OPERATIONS
Net earnings from discontinued operations were $45 million in 1992 or 16 cents
per share. This included costs the company incurred of $18 million (net of $6
million in related income tax benefits) to effect the distribution of Caremark
International Inc. to Baxter stockholders as of November 30, 1992.
ADOPTION OF NEW ACCOUNTING STANDARDS
The 1993 benefit for the cumulative effect of adopting FASB Statement No. 109,
"Accounting for Income Taxes" was $81 million, or 29 cents per common share.
This Statement
38
<PAGE>
BAXTER INTERNATIONAL
was adopted on January 1, 1993. The 1993 charge for the cumulative effect of
adopting FASB Statement No. 112, "Accounting for Postemployment Benefits" was
$11 million (net of $7 million in income tax benefits) or 4 cents per common
share. Statement No. 112 was adopted during the fourth quarter of 1993,
retroactive to January 1, 1993. The 1992 charge for the cumulative effect of
adopting FASB Statement No. 106, "Employer's Accounting for Postretirement
Benefits Other Than Pensions" covering the accounting for retiree benefits other
than pensions was $165 million (net of $50 million in income tax benefits), or
59 cents per common share. Statement No. 106 was adopted during the fourth
quarter of 1992, retroactive to January 1, 1992.
IMPACT OF INFLATION
In recent years, the company has experienced increases in its labor and
material cost base influenced, in part, by general inflationary trends. While
not directly related to inflationary trends, the company's revenue base, on
average, over recent years has been adversely affected by lower average selling
prices on certain products as a result of Medicare reimbursement regulations and
economic pressures in the U.S. hospital marketplace. There is little correlation
between general inflation rates directly affecting costs and expenses and the
company's pricing levels for products sold to health-care customers. Management
expects that these trends will continue.
LIQUIDITY AND CAPITAL RESOURCES
Management assesses the company's liquidity in terms of its overall ability to
mobilize cash to support ongoing business levels and to fund its growth.
The company increased its emphasis on cash flow during 1994. To facilitate
this emphasis, management introduced a new internal performance measure called
"operational cash flow." This measure evaluates each operating business on all
aspects of cash flow under their direct control. Management's objective in 1994
was to generate "operational cash flow" of at least $450 million (after the
payment of restructuring costs planned in 1994). In addition, the incentive
compensation programs for the company's senior management in each business have
been modified to include significant emphasis on the attainment of both
"operational cash flow" as well as earnings objectives. The company expects to
sustain at least $500 million in annual "operational cash flow" in the years
ahead.
The table that follows shows that "operational cash flow" increased to $954
million in 1994 from a level of $292 million in 1993. This increase enabled the
company to reduce net debt by $742 million. The increase primarily reflects the
increase in income and improved balance sheet management, including
approximately $110 million in proceeds for the sale of certain lease
receivables. The increase in the level in 1993 of $292 million from $207 million
in 1992 is due to a variety of items including improvement in the collection of
accounts receivable. The following table reconciles cash flow provided by
continuing operations, as determined by generally accepted accounting
principles, to the company's internal measure of "operational cash flow" (in
millions):
<TABLE>
<CAPTION>
Brackets denote cash outflows 1994 1993 1992
-------------------------------------------------------
<S> <C> <C> <C>
Cash flow provided by
operations $1,316 $ 765 $ 742
Capital expenditures (502) (605) (640)
Net interest after tax 116 115 113
Other 24 17 (8)
-------------------------------------------------------
Total "operational cash flow" $ 954 $ 292 $ 207
=======================================================
</TABLE>
The company's current assets exceeded current liabilities by $1.6 billion at
December 31, 1994 versus an excess of $1.5 billion at December 31, 1993. Current
assets at December 31, 1994, included receivables of $1.9 billion and
inventories of $1.5 billion. These sources of liquidity are convertible into
cash over a relatively short period of time and thus, will help the company
satisfy normal operating cash requirements. Inventory level changes from 1993
contributed to the improved balance sheet management and cash flow.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Capital expenditures for the three years ended December 31, 1994, are shown
below (in millions):
<TABLE>
<CAPTION>
Percent increase (decrease)
1994 1993 1992 1994 1993
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Medical specialties $289 $266 $259 9% 3%
Medical/laboratory products and distribution 199 300 365 (34%) (18%)
General corporate 14 39 16 (64%) 144%
------------------------------------------------------------------------------------------------------
Total capital expenditures $502 $605 $640 (17%) (5%)
======================================================================================================
</TABLE>
Major capital projects in 1994 include expenditures in Singapore for a
dialysis facility, renal HomeChoice(TM) leased equipment, the completion of a
plant in Puerto Rico to manufacture disposable products used in the automated
collection of blood and a new manufacturing plant for dialysis products in
China. Capital expenditures in 1993 included the expansion of manufacturing
capacity for renal products in Puerto Rico and Singapore, a recombinant
manufacturing facility in Thousand Oaks, California, and expenditures for a
distribution center in Waukegan, Illinois.
As the table above illustrates, the shift of capital expenditures is
consistent with the company's strategy to increase its investment in its higher-
return medical specialties businesses. The company has made significant
investments in recent years in its U.S. distribution and manufacturing
capabilities and corporate infrastructure. As a consequence, the level of
capital expenditures in the med/lab segment and general corporate capital
expenditures has declined in 1994 versus 1993 and 1992 levels. The company
expects to invest approximately $500 to $540 million in capital expenditures in
1995, primarily in the medical specialties segment.
The acquisitions made by the company involved no significant change to the
company's strategic direction, and were made for the purpose of acquiring
technologies, broadening product lines or expanding market coverage. The
proceeds received from the disposition of the diagnostics-products manufacturing
and other non-strategic businesses have been used to reduce net debt.
Additionally, $200 million related to the divestiture of the diagnostics
manufacturing businesses was received in January 1995.
Notes and other current receivables increased due to the $200 million in notes
related to the proceeds which were received in January 1995 from the sale of the
diagnostics manufacturing businesses as discussed earlier, the reclassification
of insurance receivables to reflect payments expected to be received within one
year offset by the sale of certain lease receivables. The decrease in long-term
litigation liabilities is due primarily to the reclassifications to current
liabilities of payments expected to be made within one year. There are
agreements or ongoing negotiations with some insurance carriers for timely
reimbursement of litigation settlements. Other reimbursements may lag the
settlement payments.
DEBT AND FINANCIAL INSTRUMENTS
To meet its net financing requirements during the two years ended December 31,
1994, the company used short-term borrowings as required. For purposes of
covenant compliance and rating agency reviews, the company's credit arrangements
permit it to reduce its debt-to-capital ratio by a percentage of cash and
equivalents. (Also see the accompanying Notes to Consolidated Financial
Statements titled "Credit Facilities.")
Net debt (after consideration of cash equivalents) declined to $2,401 million
since the beginning of the year after paying $286 million in dividends. At
December 31, 1994, the company's net-debt-to-net capital ratio was 39.2% versus
49.7% at year-end 1993, a decrease of 10.5 percentage points. This decrease
resulted from the strong cash flow generated by the company during 1994. Net
debt will be reduced further with the proceeds of $200 million received in
January 1995 for the divestiture of the diagnostics manufacturing businesses.
The company's debt ratings of A3 on senior debt by Moody's, A- by Standard &
Poor's and A by Duff & Phelps were reaffirmed by each rating agency. Standard &
Poor's and Duff & Phelps have indicated that continuation of these ratings in
the future is dependent on Baxter's successful implementation of the 1993
restructuring program, reduction of its leverage and reduction in the
uncertainty of the ultimate impact of product liability litigation.
40
<PAGE>
BAXTER INTERNATIONAL
At December 31, 1994, the company could issue up to $300 million in aggregate
principal amount of additional senior unsecured debt securities under an
effective registration statement filed with the Securities and Exchange
Commission.
The company intends to fund its short-term and long-term obligations as they
mature by issuing additional debt or through cash flow from operations. The
company believes it has lines of credit adequate to support ongoing operational,
restructuring and litigation requirements. Beyond that, the company believes it
has sufficient financial flexibility to attract long-term capital on acceptable
terms as may be needed to support its growth objectives.
The company uses financial instruments ("derivatives") as an essential tool to
manage interest-rate risk and reduce costs of capital. It is the company's
policy to manage debt securities and derivatives in an integrated manner to (i)
lower funding risk by diversifying access to debt markets at an appropriate
cost, (ii) reduce the cost of funding without increasing the overall interest-
rate risk of the debt portfolio, and (iii) manage interest-rate risk by lowering
the company's exposure to adverse movements in interest rates at a cost deemed
appropriate for the benefit received. With respect to foreign exchange, the
policy is to use derivatives to reduce the overall risk of the company to an
acceptable level. The company does not hold or issue financial instruments for
trading purposes.
For all years the company lowered its cost of floating rate debt by issuing
long-term notes in 1992 and 1993 (that remain outstanding at December 31, 1994)
and swapping (for the term of the notes through 2008) the fixed rate coupon to a
floating rate that resulted in a lower cost than the company's then existing
short-term borrowing rate. In 1993, the company entered into a currency swap to
hedge its net investment in a foreign affiliate. Starting in October 1993 and
continuing through 1994, the company has been implementing a long-term hedging
strategy that uses swaps to fix the interest rate of the company's short-term
borrowings for up to ten years, including hedging the rate of debt expected to
be issued to refinance the notes that mature during 1995. Options are used to
enable the company to benefit in future periods should short-term interest rates
fall below certain levels.
In the early part of each year, the company assesses and implements
appropriate hedges of its foreign exchange exposure with contracts that usually
terminate on or before each year-end. The company monitors its credit exposure
to its counterparties on a periodic basis using market measures that reflect the
long-term nature of the hedges. In both 1994 and 1993, except for the previously
discussed $10 million gain related to the termination of an interest-rate
hedging contract, the gains and losses resulting from interest-rate and foreign
exchange hedging activities were not material.
The company's board of directors had previously authorized the purchase of
common stock to fund various employee-benefit plans and for other corporate
purposes. Under this authorization, the company purchased approximately 1.8
million shares of common stock for $47 million in 1994. In February 1995, the
board of directors authorized the purchase of up to $500 million of common
stock, which replaced the prior authorization. Management expects to repurchase
these shares over the next two years, while maintaining a net-debt-to-net-
capital ratio in the 35% to 40% range.
In connection with a newly implemented Shared Investment Plan, the company
received $121 million in cash from 63 members of Baxter's senior management team
who collectively purchased 4.7 million shares of the company's common stock.
This plan more directly aligns management and shareholder interests. Under terms
of the voluntary program, Baxter managers used personal full-recourse loans to
exercise options to purchase stock at the June 15, 1994, closing price of $26.
The loans, borrowed from several commercial banks, are the personal obligations
of the participants. Baxter has agreed to guarantee repayment to the banks in
the event of default by a participant. Baxter may take all actions necessary to
obtain full reimbursement from the participant for amounts paid to the banks
under its guarantee.
In February 1995, the board of directors declared the quarterly dividend on
the company's common stock of 26.25 cents per share (annualized rate of $1.05
per share). The company intends to grow its dividends at a rate lower than its
anticipated growth in earnings per share with a goal of a long-term dividend
payout ratio of approximately 40% compared to the 1994 payout ratio of 48%.
DIVIDENDS PER
COMMON SHARE
(in dollars)
[BAR GRAPH APPEARS HERE]
1990 1991 1992 1993 1994
---- ---- ---- ---- -----
0.64 0.74 0.86 1.00 1.025
41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
LITIGATION
See the accompanying Notes to Consolidated Financial Statements titled "Legal
Proceedings" for a detailed description of the company's litigation for the
cases and claims from individuals seeking damages for injuries allegedly caused
by silicone gel-filled mammary prostheses manufactured by a division of American
Hospital Supply Corporation. That section also discusses the status of lawsuits
and claims involving individuals with hemophilia, seeking damages for injuries
allegedly caused by anti-hemophilic factor VIII and IX concentrates derived from
human blood plasma processed and sold by the company and other commercial
producers.
As of December 31, 1994, the company has been named as a potentially
responsible party for cleanup costs at 15 hazardous waste sites. The company was
a significant contributor to waste disposed of at only one of these sites, the
Thermo-Chem site in Muskegon, Michigan. The company expects that the total
cleanup costs for this site will be between $44 million and $65 million, of
which the company's share will be approximately $5 million. This amount has been
accrued and is reflected in the company's financial statements.
In all of the other sites, the company was a minor contributor and does not
have information on the total cleanup costs. The company has, however, in most
of these cases been advised by the potentially responsible party of its
estimated exposure at these sites. Those estimated exposures total approximately
$7 million. This amount has been accrued and reflected in the company's
financial statements.
The company is a defendant in a number of other claims, investigations and
lawsuits. Upon resolution of any of the uncertainties described in "Legal
Proceedings," the company may incur charges in excess of presently established
reserves. While such future charges could have a material adverse impact on the
company's net income in the period in which it is recorded, based on the advice
of counsel, management believes that any outcome of these actions, individually
or in the aggregate, will not have a material adverse effect on the company's
consolidated financial position.
42
<PAGE>
MANAGEMENT'S RESPONSIBILITIES FOR FINANCIAL REPORTING
The consolidated balance sheets of Baxter International Inc. and subsidiaries
as of December 31, 1994 and 1993, and the related consolidated statements of
income, cash flows and stockholders' equity for each of the years in the three-
year period ended December 31, 1994, have been prepared by management, which is
responsible for their integrity and objectivity. The statements have been
prepared in conformity with generally accepted accounting principles and include
some amounts that are based upon management's best estimates and judgments. The
financial information contained elsewhere in this annual report is consistent
with that contained in the financial statements.
Management is responsible for establishing and maintaining a system of
internal control over financial reporting and safeguarding of assets against
unauthorized acquisition, use or disposition which is designed to provide
reasonable assurance over the integrity and reliability of financial reporting
and asset safeguarding. The concept of reasonable assurance is based on the
recognition that there are inherent limitations in all systems of internal
control, and that the cost of such systems should not exceed the benefits to be
derived therefrom.
Management believes that the foundation of an appropriate system of internal
control is a strong ethical company culture and climate. To this end the
Corporate Responsibility Office was created in 1993 to recommend to the Public
Policy Committee of the Board of Directors, revisions to the company's existing
ethics and compliance policies, and to direct the implementation of and
compliance with the company's ethics and compliance policies and procedures. The
Corporate Responsibility Office also monitors compliance with the company's
ethics through audit programs and review of annual representations by senior
managers. Additionally, a professional staff of corporate auditors reviews the
related internal control system design, the accounting policies and procedures
supporting this system and compliance therewith. The results of these reviews
are reported annually to the Public Policy and Audit Committees.
Independent certified public accountants perform audits, in accordance with
generally accepted auditing standards, which include a review of the system of
internal controls and result in assurance that the financial statements are, in
all material respects, fairly presented.
The board of directors, through its Audit Committee composed solely of non-
employee directors, is responsible for overseeing the integrity and reliability
of the company's accounting and financial reporting practices and the
effectiveness of its system of internal controls. The independent certified
public accountants and corporate auditors meet regularly with, and have access
to, this committee, with and without management present, to discuss the results
of the audit work.
Management assessed the company's system of internal control as of December
31, 1994, in relation to criteria for effective internal control over financial
reporting described in "Internal Control-Integrated Framework" issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, it is management's opinion that, as of December 31, 1994, the
company maintained an effective system of internal controls over the preparation
of its published interim and annual financial statements and over safeguarding
of assets against unauthorized acquisition, use or disposition.
/s/ Vernon R. Loucks Jr.
Vernon R. Loucks Jr.
Chairman and
Chief Executive Officer
/s/ Harry M. Jansen Kraemer, Jr.
Harry M. Jansen Kraemer, Jr.
Senior Vice President
and Chief Financial Officer
/s/ Brian P. Anderson
Brian P. Anderson
Controller
43
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Baxter International Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, cash flows and stockholders' equity present
fairly, in all material respects, the financial position of Baxter International
Inc. (the company) and its subsidiaries at December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Effective January 1, 1993, as discussed in the Income Taxes Note, the company
adopted Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" and as discussed in the Retirement and Other Benefit Programs
Note, the company also adopted Statement No. 112, "Employers Accounting for
Postemployment Benefits." Additionally, as discussed in the Retirement and Other
Benefit Programs Note, effective January 1, 1992, the company adopted Statement
of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Chicago, Illinois
February 13, 1995
44
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 (in millions, except shares) 1994 1993
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT ASSETS Cash and equivalents $ 471 $ 479
Accounts receivable, net of allowance for
doubtful accounts of $39 in 1994 and $32 in 1993 1,543 1,594
Notes and other current receivables 373 82
Inventories 1,537 1,772
Short-term deferred income taxes 271 341
Prepaid expenses 145 154
-----------------------------------------------------------------------------
Total current assets 4,340 4,422
----------------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND At cost 4,431 4,491
EQUIPMENT Accumulated depreciation and amortization (1,869) (1,836)
-----------------------------------------------------------------------------
Net property, plant and equipment 2,562 2,655
----------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS Goodwill and other intangibles 2,290 2,490
Insurance receivables 446 509
Other 364 469
-----------------------------------------------------------------------------
Total other assets 3,100 3,468
-----------------------------------------------------------------------------
Total assets $10,002 $10,545
==================================================================================================================================
CURRENT LIABILITIES Notes payable to banks $ 131 $ 271
Current maturities of long-term debt and lease obligations 400 551
Accounts payable and accrued liabilities 1,834 1,783
Income taxes payable 401 328
-----------------------------------------------------------------------------
Total current liabilities 2,766 2,933
----------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT AND LEASE OBLIGATIONS 2,341 2,800
----------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEFERRED INCOME TAXES 167 201
----------------------------------------------------------------------------------------------------------------------------------
LONG-TERM LITIGATION LIABILITIES 458 674
----------------------------------------------------------------------------------------------------------------------------------
OTHER NON-CURRENT LIABILITIES 550 752
----------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY Common stock, $1 par value, authorized 350,000,000 shares,
issued 287,701,247 shares in 1994 and 1993 288 288
Additional contributed capital 1,810 1,883
Retained earnings 1,762 1,452
Common stock in treasury, at cost, 5,391,092 shares in 1994
and 11,187,278 shares in 1993 (135) (350)
Cumulative foreign currency adjustment (5) (88)
-----------------------------------------------------------------------------
Total stockholders' equity 3,720 3,185
-----------------------------------------------------------------------------
Total liabilities and stockholders' equity $10,002 $10,545
==================================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
45
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31 (in millions, except per share data) 1994 1993 1992
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS Net sales $9,324 $8,879 $8,471
Costs and expenses
Cost of goods sold 6,032 5,657 5,244
Marketing and administrative expenses 1,859 1,879 1,798
Research and development expenses 343 337 317
Restructuring charge -- 700 --
Special charge for litigation -- 330 --
Interest - net 193 192 187
Goodwill amortization 67 67 67
Other 29 47 105
----------------------------------------------------------------------
Total costs and expenses 8,523 9,209 7,718
----------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes and cumulative effect of
accounting changes 801 (330) 753
Income tax expense (benefit) 205 (62) 192
----------------------------------------------------------------------
Income (loss) from continuing operations
before cumulative effect of accounting
changes 596 (268) 561
Total discontinued operations -- -- 45
----------------------------------------------------------------------
Income (loss) before cumulative effect of
accounting changes 596 (268) 606
Cumulative effect of change in accounting for:
Income taxes -- 81 --
Other postemployment/postretirement benefits,
net of income tax benefits of $7 and $50
for 1993 and 1992, respectively -- (11) (165)
----------------------------------------------------------------------
Net income (loss) $ 596 $ (198) $ 441
========================================================================================================
PER SHARE DATA Earnings (loss) per common share
Continuing operations $ 2.13 $(0.97) $ 1.99
Total discontinued operations -- -- 0.16
Cumulative effect of change in accounting
for:
Income taxes -- 0.29 --
Other postemployment/postretirement
benefits -- (0.04) (0.59)
----------------------------------------------------------------------
Net income (loss) $ 2.13 $(0.72) $ 1.56
======================================================================
Average number of common shares and
equivalents outstanding 280 277 279
========================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
46
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31 (in millions) (Brackets denote cash outflows) 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOW PROVIDED BY Income (loss) from continuing operations $596 ($268) $561
CONTINUING OPERATIONS Adjustments
Depreciation and amortization 524 494 447
Deferred income taxes 30 (172) 32
Asset dispositions, net (pretax) (21) (44) 21
Restructuring and special charge for litigation -- 925 --
Minority and equity interests, net of distributions 16 27 35
Other 12 24 13
Changes in balance sheet items
Accounts receivable (5) (42) (171)
Inventories 112 (167) (139)
Accounts payable and accrued liabilities 54 61 63
Income taxes payable 58 4 (14)
Restructuring program payments (106) (29) (63)
Other 46 (48) (43)
----------------------------------------------------------------------------------------
Cash flow provided by continuing operations 1,316 765 742
---------------------------------------------------------------------------------------------------------------------
CASH FLOW PROVIDED BY DISCONTINUED OPERATIONS -- -- 21
---------------------------------------------------------------------------------------------------------------------
INVESTMENT TRANSACTIONS Capital expenditures (411) (516) (537)
Additions to the pool of equipment leased
or rented to customers (91) (89) (103)
Acquisitions (net of cash received)
and investments in affiliates (62) (120) (125)
Proceeds from asset dispositions 159 70 39
----------------------------------------------------------------------------------------
Investment transactions, net (405) (655) (726)
---------------------------------------------------------------------------------------------------------------------
FINANCING TRANSACTIONS Issuances of debt and lease obligations 970 2,437 3,203
Redemption of debt and lease obligations (1,593) (2,021) (2,684)
Increase (decrease) in debt with
maturities of three months or less (151) 274 (215)
Redemption of preferred stock -- -- (337)
Common stock cash dividends (286) (278) (240)
Preferred stock cash dividends -- -- (5)
Stock issued under Shared Investment Plan 121 -- --
Stock issued under employee benefit plans 56 52 85
Purchase of treasury stock (47) (124) (123)
----------------------------------------------------------------------------------------
Financing transactions, net (930) 340 (316)
---------------------------------------------------------------------------------------------------------------------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS 11 (3) 12
---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (8) 447 (267)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 479 32 299
---------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $471 $479 $ 32
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year ended December 31 (in millions) 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE Balance, beginning of year $ -- $ -- $ 339
PREFERRED STOCK Redemption of preferred stock -- -- (339)
----------------------------------------------------------------------------------------
Balance, end of year -- -- --
---------------------------------------------------------------------------------------------------------------------
COMMON STOCK Balance, beginning and end of year 288 288 288
---------------------------------------------------------------------------------------------------------------------
ADDITIONAL CONTRIBUTED Balance, beginning of year 1,883 1,889 1,859
CAPITAL Stock issued under Shared Investment Plan (44) -- --
Stock issued under employee benefit plans (29) (6) 30
----------------------------------------------------------------------------------------
Balance, end of year 1,810 1,883 1,889
---------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS Balance, beginning of year 1,452 1,928 2,083
Net income (loss) 596 (198) 441
Common stock cash dividends (286) (278) (240)
Preferred stock cash dividends -- -- (5)
Stock dividend of Caremark International Inc. -- -- (351)
----------------------------------------------------------------------------------------
Balance, end of year 1,762 1,452 1,928
---------------------------------------------------------------------------------------------------------------------
COMMON STOCK Balance, beginning of year (350) (281) (234)
IN TREASURY Purchases (47) (124) (123)
Stock issued under Shared Investment Plan 165 -- --
Stock issued under employee benefit plans 87 55 76
Stock issued for acquisition 10 -- --
----------------------------------------------------------------------------------------
Balance, end of year (135) (350) (281)
---------------------------------------------------------------------------------------------------------------------
CUMULATIVE FOREIGN Balance, beginning of year (88) (29) 38
CURRENCY ADJUSTMENT Currency fluctuations 83 (59) (67)
----------------------------------------------------------------------------------------
Balance, end of year (5) (88) (29)
---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity $3,720 $3,185 $3,795
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the consolidated financial statements.
These policies are in conformity with generally accepted accounting principles
and have been applied consistently in all material respects.
Basis of consolidation
The consolidated financial statements include the accounts of Baxter
International Inc. and its majority-owned subsidiaries ("Baxter" or the
"company"). Operations outside the United States and its territories are
included in the consolidated financial statements on the basis of fiscal years
ending November 30.
Cash and equivalents
Cash and equivalents include cash, cash investments and marketable securities
with a maturity of three months or less.
Cash payments for interest were $226 million in 1994, $217 million in 1993 and
$193 million in 1992. Cash payments for income taxes related to continuing
operations in 1994, 1993 and 1992 were $127, $79 and $157 million, respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Market for raw materials is based on replacement costs and for other
inventory classifications on net realizable value. Appropriate consideration is
given to deterioration, obsolescence and other factors in evaluating net
realizable value.
Inventories consisted of the following at December 31 (in millions):
<TABLE>
<CAPTION>
1994 1993
-----------------------------------
<S> <C> <C>
Raw materials $ 219 $ 238
Work in process 191 221
Finished products 1,127 1,313
-----------------------------------
Total inventories $1,537 $1,772
===================================
</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 estimated useful lives of the assets or, for leasehold
improvements, over the terms of the related facility leases, if shorter.
Straight-line and accelerated methods of depreciation are used for income tax
purposes.
Property, plant and equipment consisted of the following at December 31 (in
millions):
<TABLE>
<CAPTION>
1994 1993
-----------------------------------------------------------------
<S> <C> <C>
Land $ 187 $ 203
Buildings and leasehold improvements 1,049 1,051
Machinery and equipment 2,539 2,508
Equipment leased or rented to customers 365 390
Construction in progress 291 339
-----------------------------------------------------------------
Total property, plant and equipment, at cost 4,431 4,491
Accumulated depreciation and amortization (1,869) (1,836)
-----------------------------------------------------------------
Net property, plant and equipment $ 2,562 $ 2,655
=================================================================
</TABLE>
Depreciation expense was $381, $362 and $323 million in 1994, 1993 and 1992,
respectively. Repairs and maintenance expense was $104 million in 1994, $111
million in 1993 and $115 million in 1992.
Goodwill and other intangible assets
Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized on a straight-line basis over estimated useful lives
not exceeding 40 years. Based upon management's assessment of the future
undiscounted operating cash flows of acquired businesses, the carrying value of
goodwill at December 31, 1994, has not been impaired. As of December 31, 1994
and 1993, goodwill was $1,990 million and $2,098 million, respectively, net of
accumulated amortization of $587 million and $538 million, respectively.
Other intangible assets include purchased patents, trademarks, deferred
charges and other identified rights which are amortized on a straight-line basis
over their legal or estimated useful lives, whichever is shorter (generally not
exceeding 17 years). As of December 31, 1994 and 1993, other intangibles were
$300 million and $392 million, respectively, net of accumulated amortization of
$256 million and $226 million, respectively.
Income taxes
Effective January 1, 1993, the company adopted Financial Accounting Standards
Board ("FASB") Statement No. 109, "Accounting for Income Taxes." Under this
standard, deferred income taxes reflect the impact of temporary differences
between the assets and liabilities recognized for financial
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reporting purposes and amounts recognized for tax purposes. Deferred income tax
accounts are adjusted to reflect changes in tax rates made from time to time by
taxing authorities in the jurisdiction in which the company operates.
Earnings per share
Earnings per share of common stock are computed by dividing the net income
available for common stock by the weighted average number of common shares
outstanding during the period.
Derivatives
Gains and losses on hedges of existing assets or liabilities are included in the
carrying amounts of those assets or liabilities and are ultimately recognized in
income as part of those carrying amounts. Gains and losses relating to
qualifying hedges of firm commitments or anticipated transactions also are
deferred and are recognized in income or as adjustments of carrying amounts when
the hedged transaction occurs. Gains and losses on interest rate and foreign
exchange contracts that do not qualify for hedge accounting treatment are
recognized as other income or expense.
Reclassifications
Certain immaterial reclassifications have been made to conform the 1993 and 1992
financial statements to the 1994 presentation.
RESTRUCTURING CHARGE
In November 1993, the company announced that its board of directors approved a
series of strategic actions to improve shareholder value, to extend positions of
leadership in high-growth health-care markets and to reduce costs. These actions
were designed to make the company's domestic medical/laboratory products and
distribution segment more efficient and more responsive in addressing the
changes occurring in the U.S. health-care system and accelerate growth of its
medical specialties businesses worldwide. The company recorded a $700 million
pretax provision to cover costs associated with these restructuring initiatives.
The following table summarizes major components of the company's restructuring
charge, use of restructuring reserves through December 31, 1994, and the
remaining restructuring reserves at December 31, 1994, (in millions):
<TABLE>
<CAPTION>
Major cost categories
-----------------------------------------
Write-down
Employee- of assets to Other
related costs be sold costs Total
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total restructuring
charge $295 $289 $116 $700
Less reserves
utilized through
Dec. 31, 1994:
Cash 58 -- 66 124
Noncash -- 206 -- 206
--------------------------------------------------------------------
Reserves as of
Dec. 31, 1994 $237 $ 83 $ 50 $370
====================================================================
</TABLE>
Employee-related costs include provisions for severance, outplacement
assistance, relocation and retention payments.
Since the inception of the restructuring program, the company has eliminated
approximately 2,300 of the approximately 4,500 positions affected by the
program. The majority of the remaining reductions will occur in 1995 and 1996 as
facility closures and consolidations are completed as planned.
Since the announcement of the restructuring program, the company has
implemented, or is in the process of implementing, all of the major strategic
actions associated with the restructuring program and is satisfied that such
programs are progressing on schedule and that the overall restructuring program
will meet established financial targets. As part of the restructuring, the
company announced its intent to divest its diagnostics manufacturing businesses
and established a valuation allowance as a component of the 1993 restructuring
charge. In December 1994, the company completed the divestiture of these
businesses and received net proceeds of approximately $44 million in cash, $200
million in installment notes (which were collected in cash during January 1995)
and $40 million in face value of preferred stock. In addition, Baxter retained
accounts receivable of approximately $85 million, which will be collected from
customers by Baxter in the normal course of business. Baxter has retained the
rights to distribute all current diagnostics products in the U.S. The
transaction was completed substantially in accordance with the company's
valuation estimates, and therefore, no gain or loss was recognized on the sale.
50
<PAGE>
BAXTER INTERNATIONAL
ACQUISITIONS, INVESTMENTS IN AFFILIATES, DIVESTITURES AND DISCONTINUED
OPERATIONS
The company invested $18 million in 1994, $104 million in 1993 and $113 million
in 1992 for acquisitions accounted for as purchase transactions and investments
in affiliated companies. The company also issued $10 million in common stock in
1994 for one acquisition. Had these transactions taken place on January 1,
consolidated results in the year of acquisition would not have been materially
different from reported results. The acquisitions involved no significant change
to the company's strategic direction. They were made to acquire technologies,
broaden product lines and expand market coverage. Additionally, the company paid
previously recorded acquisition-related liabilities associated with the 1985
acquisition of American Hospital Supply Corporation ("American") of $44 million
in 1994, $16 million in 1993 and $12 million in 1992.
The company disposed of or discontinued several minor non-strategic or
unprofitable business units and investments which resulted in a net gain of $14
million (net of $7 million related tax expense) in 1994, as compared to net
gains of $27 million (net of $17 million related tax expense) in 1993 and net
losses of $16 million (net of related tax benefits of $5 million) in 1992. The
majority of these transactions resulted in the disposition of the company's
entire interest in such businesses. The aggregate net sales proceeds for such
dispositions were $115 million in 1994, $70 million in 1993 and $30 million in
1992. Additionally, the company received net proceeds of $44 million in 1994
related to the divestiture of the diagnostics manufacturing businesses discussed
previously.
On October 28, 1992, the board of directors of Baxter declared a dividend to
the company's common stockholders of all the common stock of Caremark
International Inc. ("Caremark," formerly a wholly-owned subsidiary of Baxter).
This dividend was distributed to holders of record on November 30, 1992. The
primary purpose for the stock dividend was to eliminate a developing strategic
competitive conflict between the customers of Baxter's hospital business and
Caremark's alternate site health-care businesses. The company reported income
from discontinued operations of $63 million (net of taxes of $31 million) or 22
cents per share offset by costs associated with effecting the business
discontinuance of $18 million (net of a tax benefit of $6 million) or costs of 6
cents per share in 1992.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following at December
31 (in millions):
<TABLE>
<CAPTION>
1994 1993
--------------------------------------------------------------
<S> <C> <C>
Accounts payable, principally trade $ 701 $ 738
Employee compensation and withholdings 272 339
Restructuring and merger consolidation costs 100 237
Litigation 240 62
Pension and other deferred benefits 81 64
Property, payroll and other taxes 84 93
Other 356 250
--------------------------------------------------------------
Accounts payable and accrued liabilities $1,834 $1,783
==============================================================
</TABLE>
CREDIT FACILITIES
At December 31, 1994, Baxter's revolving credit facilities enabled the company
to borrow funds on an unsecured basis at variable interest rates. The banks
participating in these facilities are committed to maintain a $953 million five-
year facility which expires in August 1999 and a $477 million facility which
expires in July 1995. The agreements contain convenants which include a maximum
debt-to-capital ratio (as defined) and a minimum interest coverage ratio. At
December 31, 1994, there were no borrowings outstanding under these facilities.
Baxter also maintains other short-term credit arrangements totaling
approximately $900 million in support of international and domestic operations.
At December 31, 1994, approximately $176 million of borrowings were outstanding
under these facilities, of which $45 million is classified as long-term debt.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LONG-TERM DEBT AND LEASE OBLIGATIONS
Long-term debt and lease obligations consisted of the following at December 31
(in millions):
<TABLE>
<CAPTION>
Effective
interest rate 1994 1993
-----------------------------------------------------------------
<S> <C> <C> <C>
Commercial paper 6.0% $ 314 $ 833
-----------------------------------------------------------------
Short-term notes 6.0% 728 467
-----------------------------------------------------------------
Notes due 1995 6.5% 299 297
-----------------------------------------------------------------
9-1/4% notes due 1996 9.7% 149 148
-----------------------------------------------------------------
7-1/2% notes due 1997 7.2% 201 202
-----------------------------------------------------------------
Notes redeemable by
holders/callable by
company in 1998 9.7% 185 199
-----------------------------------------------------------------
9-1/4% notes due 1999 10.2% 97 96
-----------------------------------------------------------------
Zero coupon notes
due 2000 10.7% 79 74
-----------------------------------------------------------------
Swapped notes due 1997,
2002 and 2008 6.2% 387 418
-----------------------------------------------------------------
Industrial development
obligations, due 1995
through 2013 8.5% 71 74
-----------------------------------------------------------------
Notes and capitalized lease
obligations due 1995
through 2020 7.7% 231 543
-----------------------------------------------------------------
Total long-term debt and
lease obligations 2,741 3,351
Current portion (400) (551)
-----------------------------------------------------------------
Long-term portion $2,341 $2,800
=================================================================
</TABLE>
At December 31, 1994 and 1993, commercial paper and certain short-term notes
together totaling $953 million and $1 billion respectively, have been classified
with long-term debt as they are supported by long-term credit facilities and
will continue to be refinanced. Commercial paper and short-term notes of $89
million and $300 million as of December 31, 1994 and 1993, have been included in
current maturities as they were supported by short-term credit facilities. The
company had unamortized original issue discounts of $66 million for the Zero
coupon notes due in 2000.
The company leases certain facilities and equipment under capital and
operating leases expiring at various dates. Most of the operating leases contain
renewal options. Total expense for all operating leases was $128 million in
1994, $132 million in 1993 and $128 million in 1992.
Future minimum lease payments (including interest) under capital and
noncancelable operating leases and aggregate debt maturities at December 31,
1994, were as follows (in millions):
<TABLE>
<CAPTION>
Aggregate
debt
maturities
Operating and capital
leases leases
----------------------------------------------------------
<S> <C> <C>
1995 $ 88 $ 402
1996 61 208
1997 37 228
1998 27 102
1999 19 1,056
Thereafter 76 821
----------------------------------------------------------
Total obligations and commitments $308 2,817
==========================================
Amounts representing interest,
discounts, premiums and deferred
financing costs 76
----------------------------------------------------------
Present value of long-term debt and
lease obligations $2,741
==========================================================
</TABLE>
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Concentrations of credit risk
The company provides credit, in the normal course of business, to hospitals,
private and government institutions, health-care agencies, insurance agencies
and doctors' offices. The company performs ongoing credit evaluations of its
customers and maintains reserves for potential credit losses which, when
realized, have been within the range of management's allowance for doubtful
accounts.
The company invests the majority of its excess cash, primarily generated
through operations in Puerto Rico, in certificates of deposit with major banks
there. These certificates typically have a maturity of 30 to 45 days. The
company has not experienced any losses on its certificate of deposit
investments.
Financial instrument use
Baxter uses forward contracts, options and interest-rate swaps from one to
fifteen years in duration to reduce the company's exposure to adverse movements
in interest rates and lower the costs related to various debt instruments. The
company does not hold or issue financial instruments for trading purposes. The
book values of debt at December 31, 1994, reflect deferred hedge gains of $7
million offset by $7 million of deferred hedge losses.
52
<PAGE>
BAXTER INTERNATIONAL
The notional amounts of derivatives summarized below are used to calculate
amounts exchanged in future periods relating to interest rates, foreign exchange
rates or other indices. While the company is exposed to credit-related losses
equal to the market value of the derivative instrument shown below (which
reflects the gain or loss at December 31, that would result from replacing the
instrument in the case of non-performance by the counterparty), the company does
not anticipate that any of its counterparties will fail to meet their
obligations because of their high credit ratings. Where appropriate, the company
has diversified its selection of counterparties, and has arranged
collaterization and master-netting agreements to minimize the risk of loss.
Interest rate risk management
The company's types of interest-rate contracts, their market value gain (loss)
on termination, and their weighted-average interest rates as of December 31
consisted of the following (in millions):
<TABLE>
<CAPTION>
1994 1993
-------------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted-
Notional Market value average Notional Market value average
amounts credit exposure interest rate amounts credit exposure interest rate
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Floating to fixed rate hedges $950 $ 57 $300 $ 9
Average pay rate 5.8% 4.5%
Average receive rate 6.2% 3.4%
Fixed to floating rate (swapped notes) 395 (31) 405 22
Average pay rate 6.2% 3.4%
Average receive rate 7.3% 7.3%
Options 425 13 350 (5)
Hedges of anticipated transactions 300 30 300 7
===============================================================================================================================
</TABLE>
Options principally consisted, in 1993, of swaptions which expired in 1994,
and in 1994 of caps and floors that will lower the cost of associated debt if
floating rates fall below 7.5% during the periods from 1996 through 2005. Hedges
of anticipated transactions consisted of forward starting swaps hedging the debt
expected to be issued upon the maturity of the company's notes in 1995 at a
fixed rate of approximately 7%.
Foreign exchange risk management
The company enters into various types of foreign exchange contracts in
managing its foreign exchange risk including their market gain (loss) on
termination, as indicated in the following table at December 31 (in millions):
<TABLE>
<CAPTION>
1994 1993
------------------------------------------------------------------------------------------------------
Notional Market value Notional Market value
amounts credit exposure amounts credit exposure
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign exchange contracts $462 $(40) $191 $(8)
======================================================================================================
</TABLE>
The corporation enters into forward exchange contracts and options to hedge
anticipated but not yet committed sales expected to be denominated in foreign
currencies. The term of these currency derivatives are less than two years. The
purpose of the company's foreign currency hedging activities is designed to
protect the company from the risk that the eventual dollar net cash inflows
resulting from the sale of products to foreign customers, purchases from foreign
suppliers and the repayment on non-U.S. dollar borrowings may be adversely
affected by changes in exchange rates. The company also enters into foreign
exchange contracts, for up to ten years, to hedge its net investments in foreign
affiliates. The company principally hedges the following currencies: Japanese
Yen, Belgian Franc, Canadian Dollar and French Franc.
Deferred realized and unrealized gains and losses from hedging anticipated but
not yet committed sales and purchase transactions are not material to the
company.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair values of financial instruments
The carrying values of cash and cash equivalents, accounts receivable and
payable, and accrued liabilities, approximate fair value due to the short-term
maturities of these assets and liabilities.
Investments in affiliates are accounted for by both the cost and equity
methods and pertain to several minor equity investments in companies for which
fair values are determined by quoted market prices and others for which fair
values are not readily available, but are believed to exceed carrying amounts.
The assets and liabilities of the company also include the following categories
of financial instruments as of December 31 (in millions):
<TABLE>
<CAPTION>
Carrying amounts Approximate fair values
-----------------------------------------------------------------------------------------------
1994 1993 1994 1993
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Long-term insurance receivables $ 446 $ 509 $ 248 $ 222
Investment in affiliates 163 180 235 180
Liabilities
Notes payable to banks 131 271 131 271
Short-term borrowings classified as long-term 1,042 1,300 1,042 1,300
Other long-term debt and lease obligations 1,699 2,051 1,694 2,206
Interest rate and foreign exchange hedges N/A N/A (29) (25)
Long-term litigation liabilities 458 674 254 384
==============================================================================================
</TABLE>
The aggregate fair value of notes payable to banks and short-term borrowings
approximates its carrying amount because of the recent and frequent repricing
based on market conditions. The fair value of other long-term debt and lease
obligations was based on quoted market prices for the same or similar issues,
giving consideration to quality, interest rates, maturity and other significant
characteristics. The aggregate fair value of hedges was based on market
valuations and is equivalent to the credit exposures at each December 31 for
these instruments. Although the company's litigation has not yet been settled,
the estimated fair values of insurance receivables and litigation liabilities
were computed by discounting the expected cash flows based on currently
available information.
PREFERRED STOCK
The stockholders have authorized the issuance of 100 million shares of no par
value preferred stock. This stock can be issued in series with varying terms as
determined by the board of directors.
Preferred Stock Purchase Rights
During 1989, common stockholders received a dividend of one preferred stock
purchase right (collectively, the "Rights") for each share of common stock held
of record. Each Right entitles the registered holder to purchase from the
company one one-hundredth of a share of Series A Junior Participating Preferred
Stock for $70. The Rights will become exercisable (and transferable apart from
the common stock) on the earlier of (1) 10 days following a public announcement
that a person or group has acquired 20% or more of the common stock, or (2) 10
business days following the commencement or announcement of an offer to acquire
20% or more of the common stock.
If, after the Rights become exercisable, any person or group (the "Acquirer")
acquires 20% or more of the common stock (except pursuant to an offer for all
outstanding shares of common stock which the independent directors determine to
be fair to and otherwise in the best interests of the company and its
stockholders) each Right may be exercised for common stock (or, in certain
circumstances, cash, other property or securities) having a value of $140. In
specified circumstances, each Right may be exercised for common stock of an
acquiring entity having a value of $140. All Rights held by the Acquirer will be
null and void. The company may generally redeem the Rights at a price of $.01
per Right at any time until 10 days following a public announcement that a
person or group has acquired 20% or more of the common stock. The Rights will
expire on March 20, 1999, unless earlier redeemed.
54
<PAGE>
BAXTER INTERNATIONAL
Adjustable rate preferred stock
On April 1, 1992, the company redeemed all 6,771,408 outstanding shares of its
adjustable rate preferred stock, no par value, $50 liquidation value, for a
redemption price of $50 per share together with the regular quarterly dividend
of 78.75 cents per share. No shares of this security may be issued in the
future.
COMMON STOCK
In connection with a newly implemented Shared Investment Plan, the company
received $121 million in cash from 63 members of Baxter's senior management team
who collectively purchased 4,685,000 shares of the company's common stock. This
plan more directly aligns management and shareholder interests. Under the terms
of the voluntary program, Baxter managers used personal full-recourse loans to
exercise options to purchase stock at the June 15, 1994, closing price of $26.
The loans, borrowed from several commercial banks, are the personal obligation
of the participants. Baxter has agreed to guarantee repayment to the banks in
the event of default by a participant.
All common stock prices and outstanding shares for unfulfilled employee
benefit plan obligations were, as of November 30, 1992, equitably adjusted to
maintain the value of the benefits by taking into consideration the market price
of Baxter stock before and after the Caremark distribution. The following tables
reflect this adjustment.
The company has employee stock purchase plans under which the sale of its
common stock has been authorized. The purchase price is the lower of 85% of the
closing market price on the date of subscription or 85% of the closing market
price on the date sufficient funds have been withheld to purchase 20 shares.
Stock purchase plan transactions for the three years ended December 31, 1994,
are summarized below:
<TABLE>
<CAPTION>
Shares subscribed 1994 1993 1992
-----------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year 2,496,703 1,704,735 1,726,738
Subscriptions 1,968,058 3,303,465 1,993,581
Equitable adjustment -- -- 479,477
Purchases (1,881,757) (1,592,102) (1,488,925)
Cancellations (532,034) (919,395) (1,006,136)
-----------------------------------------------------------------------
End of year 2,050,970 2,496,703 1,704,735
-----------------------------------------------------------------------
Subscription price per
share outstanding,
end of year $17.21-$31.19 $17.21-$32.78 $19.59-$32.78
=======================================================================
</TABLE>
At December 31, 1994, approximately 6,400 of approximately 32,000 eligible
employees in the U.S. and Canada and approximately 900 of approximately 12,000
other eligible employees were participating in the plans. Expiration dates for
these subscriptions run from 1995 to 1997. The weighted average subscription
price approximated $20.87 for U.S. and Canadian employees and $20.21 for other
employees at December 31, 1994.
The company has various employee stock option plans. All outstanding options
under these plans have been granted at 100% of market value on the dates of
grant.
Stock option transactions for employees and directors for the three years
ended December 31, 1994, are summarized below:
<TABLE>
<CAPTION>
Option shares
outstanding 1994 1993 1992
----------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year 11,225,565 8,887,657 9,125,182
Granted 2,777,182 3,496,709 2,166,200
Equitable adjustment -- -- 555,223
Exercised (471,837) (466,105) (1,590,324)
Cancelled/Expired (1,162,590) (692,696) (1,368,624)
----------------------------------------------------------------------
End of year 12,368,320 11,225,565 8,887,657
======================================================================
Option price per share
Exercised $ 8.35-$26.00 $10.32-$24.36 $8.74-$35.75
Outstanding,
end of year $13.07-$36.66 $ 8.35-$36.66 $8.35-$36.66
======================================================================
</TABLE>
As of December 31, 1994, options were held by approximately 6,500 employees,
of which 7,225,525 shares were exercisable. Expiration dates for these options
range from 1995 to 2004. The weighted average option price approximated $27.83
at December 31, 1994.
In addition, stock options were granted to The Baxter Foundation ( a
philanthropic organization), as follows: an option to purchase 1,047,000 shares
of common stock, at $33.78 per share (both equitably adjusted) was granted on
April 22, 1991, and expires in 2001; and an option to purchase 1 million shares
of common stock at $33.75 per share was granted on December 2, 1992, and expires
in 2002. The Baxter Foundation sold its option to purchase 250,000 shares of
common stock, exercisable at $18.1875 per share, to an unrelated not-for-profit
organization, which then exercised the option during 1992.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under various plans, the company has made grants of restricted stock and
performance shares in the form of the company's common stock to provide
incentive compensation to key employees and non-employee directors.
Restricted stock transactions for the three years ended December 31, 1994, are
summarized below:
<TABLE>
<CAPTION>
Restricted stock
outstanding 1994 1993 1992
------------------------------------------------------
<S> <C> <C> <C>
Beginning of year 1,466,200 2,052,777 2,336,023
Granted 508,320 5,400 858,211
Vested (free of
restrictions) (169,709) (313,353) (904,488)
Cancelled (232,970) (278,624) (236,969)
------------------------------------------------------
End of year 1,571,841 1,466,200 2,052,777
======================================================
</TABLE>
At December 31, 1994, 158,340 shares were subject to restrictions which lapse
between 1995 and 1998, and 1,413,501 shares were subject to restrictions that
lapse upon achievement of future performance objectives.
Performance share transactions for the three years ended December 31, 1994,
are summarized below:
<TABLE>
<CAPTION>
Performance shares
outstanding 1994 1993 1992
----------------------------------------------------
<S> <C> <C> <C>
Beginning of the year 49,547 57,736 57,736
Granted/awarded 12,000 12,000 12,000
Issued (20,001) (20,189) (12,000)
Cancelled (875) -- --
----------------------------------------------------
End of year 40,671 49,547 57,736
====================================================
</TABLE>
The company's board of directors had previously authorized the purchase of
common stock to fund various employee-benefit plans and for other corporate
purposes. The company purchased 1.8 million shares of common stock for $47
million in 1994 under this authorization. In February 1995, the board of
directors authorized the purchase of up to $500 million of common stock, which
replaced the prior authorization.
At December 31, 1994, the company's common stock was reserved for issuance as
follows:
<TABLE>
--------------------------------------------------------
<S> <C>
Acquisitions 986,525
Stock purchase plans 4,585,012
Management incentive compensation programs 21,744,305
Other 2,047,000
--------------------------------------------------------
Total shares reserved 29,362,842
========================================================
</TABLE>
RETIREMENT AND OTHER BENEFIT PROGRAMS
The company and its subsidiaries sponsor qualified and non-qualified non-
contributory, defined benefit pension plans covering substantially all employees
in the U.S. and Puerto Rico. The benefits are based on years of service and the
employee's compensation during 5 of the last 10 years of employment as defined
by the plans. The company's funding policy is to make contributions to the trust
of the Qualified Plan which meet or exceed the minimum requirements of the
Employee Retirement Income Security Act of 1974. Assets held by the trusts of
the plans consist primarily of equity and fixed income securities. The company
also has various retirement plans in locations outside the U.S. and Puerto Rico.
The assumed discount rate applied to benefit obligations to determine 1994
pension expense was 7.5% and the assumed long-term rate of return on assets was
10.5% for the U.S. and Puerto Rico plans. These rates averaged 7.4% and 8.0%
respectively, for the international plans. Pension expense includes the
following components (in millions):
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ 51 $ 50 $ 42
Interest cost on projected
benefit obligation 74 72 63
Actual return on assets (70) (67) (50)
Net amortization and deferral 10 21 7
----------------------------------------------------------------------------
Total pension expense $ 65 $ 76 $ 62
============================================================================
</TABLE>
Assumptions used in determining the funded status of these plans as of
December 31, 1994 and 1993, were:
<TABLE>
<CAPTION>
December 31,
1994 1993
------------------------------------------------------------------------------
<S> <C> <C>
Annual rate of increase in compensation levels:
U.S. plans 4.5% 4.5%
Puerto Rico plan 4.0% 4.0%
International plans (average) 4.8% 4.6%
Discount rate applied to benefit obligations:
U.S. plans 9.0% 7.5%
Puerto Rico plan 9.0% 7.5%
International plans (average) 7.4% 7.7%
Return on assets:
U.S. plans 9.5% 10.5%
Puerto Rico plan 9.5% 10.5%
International plans (average) 8.0% 8.4%
==============================================================================
</TABLE>
56
<PAGE>
BAXTER INTERNATIONAL
The following table sets forth the funded status and amount included in the
consolidated balance sheets at December 31, 1994 and 1993, (in millions):
<TABLE>
<CAPTION>
Plans whose Plans whose
accumulated assets exceed
benefits exceed accumulated
assets benefits
-------------------------------------------------------------------------------
December 31, December 31,
1994 1993 1994 1993
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefits $56 $789 $683 $ 46
-------------------------------------------------------------------------------
Accumulated benefits $59 $817 $702 $ 48
-------------------------------------------------------------------------------
Projected benefits $80 $924 $782 $ 61
Less plan assets at fair value 13 675 761 73
-------------------------------------------------------------------------------
Projected benefit obligation
in excess of plan assets 67 249 21 (12)
Unrecognized net gains
and unrecognized prior
service cost 8 (100) 17 (4)
Unrecognized obligation at
January 1, net of
amortization (7) (59) (37) 4
Additional minimum liability -- 62 -- --
-------------------------------------------------------------------------------
Net pension liability (asset) $68 $152 $ 1 $(12)
===============================================================================
</TABLE>
The company also offers non-qualified supplemental retirement benefits to
certain individuals. The liability for these benefits was $9 million and $6
million at December 31, 1994 and 1993, respectively.
Most U.S. employees are eligible to participate in a qualified 401(k) plan.
Participants may contribute up to 12% of their annual compensation (limited in
1994 to $9,240 per individual) to the plan and the company matches participants'
contributions, up to 3% of compensation. Matching contributions made by the
company were $27 million in 1994, $28 million in 1993 and $27 million in 1992.
In addition to pension benefits, the company sponsors certain contributory
health-care and life insurance benefits for substantially all domestic retired
employees. Effective January 1, 1992, the company adopted FASB Statement No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions"
which requires companies to accrue costs for postretirement benefits over the
service years of employees. The company recorded the transition obligation as a
cumulative effect of an accounting change for $165 million (net of $50 million
in related income tax benefits).
Net postretirement health-care and life insurance expense includes the
following components (in millions):
<TABLE>
<CAPTION>
1994 1993
-----------------------------------------------------------------------------
<S> <C> <C>
Service cost-benefits earned during the period $ 5 $ 7
Interest cost on projected benefit obligation 16 16
Net amortization and deferral (1) --
-----------------------------------------------------------------------------
Net postretirement benefits cost $20 $23
=============================================================================
</TABLE>
Assumptions used in determining the net postretirement benefits cost in 1994
and 1993 were:
<TABLE>
<CAPTION>
1994 1993
-----------------------------------------------------------------------------
<S> <C> <C>
Discount rate 7.5% 8%
Annual rate of increase in
the per capita cost 13% 14%
Rate to decrease to 5% 6%
by the year ended 2002 2002
=============================================================================
</TABLE>
The postretirement benefit plans are not funded. The present value of the
company's obligation included in the consolidated balance sheets at December 31,
1994 and 1993, is as follows (in millions):
<TABLE>
<CAPTION>
December 31,
1994 1993
-----------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit
obligation ("APBO"):
Retirees $118 $112
Fully eligible active participants 6 11
Other active participants 61 85
Unrecognized net gains 73 45
-----------------------------------------------------------------------------
Accrued postretirement benefit liability $258 $253
=============================================================================
</TABLE>
Assumptions used in determining the APBO at December 31, 1994 and 1993, were:
<TABLE>
<CAPTION>
December 31,
1994 1993
-----------------------------------------------------------------------------
<S> <C> <C>
Discount rate applied to APBO 9.0% 7.5%
Annual rate of increase in the
per capita cost 11% 13%
Rate to decrease to 5% 5%
By the year ended 2002 2002
Increase if health-care trend
rates increase by 1% in
each year (in $ millions)
APBO $29 $30
Expense $ 3 $ 3
=============================================================================
</TABLE>
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective January 1, 1993, the company adopted FASB Statement No. 112,
"Employers' Accounting for Postemployment Benefits" which requires accrual
accounting for postemployment benefits such as disability-related and workers
compensation payments. The company recorded the obligation as a cumulative
effect of an accounting change for $11 million (net of $7 million in related
income tax benefits). The effect of this change on 1993 operating income versus
the prior method of accounting for these benefits was not material. The
company's liability for these benefits was approximately $35 million and $29
million at December 31, 1994 and 1993, respectively.
INTEREST AND OTHER NON-OPERATING EXPENSES
For the three years ended December 31, 1994, the components of interest-net and
other non-operating expenses (income) are as follows (in millions):
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------------------------------------------
<S> <C> <C> <C>
Interest-net
Interest costs $242 $232 $221
Interest costs capitalized (5) (10) (10)
---------------------------------------------------------------
Interest expense 237 222 211
Interest income (44) (30) (24)
---------------------------------------------------------------
Total interest-net $193 $192 $187
===============================================================
Other expenses (income)
Equity in losses of affiliates $ 18 $ 25 $ 32
Asset dispositions, net (21) (44) 21
Minority interests 9 11 13
Foreign exchange 17 28 26
Termination of interest-rate
hedging contracts (10) -- --
Settlement of anti-boycott
investigations -- 8 --
Other 16 19 13
---------------------------------------------------------------
Total non-operating expenses $ 29 $ 47 $105
===============================================================
</TABLE>
INCOME TAXES
U.S. federal income tax returns filed by Baxter International Inc. through
December 31, 1986, have been examined and closed by the Internal Revenue
Service. In the opinion of management, the company has made adequate provisions
for tax expenses for all open years. Income (loss) before tax expense by
category is as follows (in millions):
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------------------------------------------
<S> <C> <C> <C>
U.S. $327 $(585) $390
International 474 255 363
---------------------------------------------------------------
Income (loss) from
continuing operations
before income tax expense $801 $(330) $753
===============================================================
</TABLE>
Income tax expense (benefit) related to continuing operations and before
cumulative effect of accounting changes by category and by income statement
classification is as follows (in millions):
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------------------------------------------
<S> <C> <C> <C>
Current
U.S.
Federal $ 38 $ 15 $ 55
State and local 40 35 55
International 97 60 50
---------------------------------------------------------------
Current income tax expense 175 110 160
---------------------------------------------------------------
Deferred
U.S.
Federal 18 (137) 4
State and local 10 (24) 4
International 2 (11) 24
---------------------------------------------------------------
Deferred income tax
expense (benefit) 30 (172) 32
---------------------------------------------------------------
Income tax expense (benefit) $205 $(62) $192
===============================================================
</TABLE>
The income tax for continuing operations was calculated as if Baxter were a
stand-alone entity (without income from discontinued operations).
Effective January 1, 1993, the company adopted FASB Statement No. 109,
"Accounting for Income Taxes." Baxter recorded a tax benefit of $81 million, or
29 cents per common share reflecting the cumulative effect of the accounting
58
<PAGE>
BAXTER INTERNATIONAL
change. The components of deferred tax assets and liabilities are as follows (in
millions):
<TABLE>
<CAPTION>
December 31, January 1,
1994 1993 1993
----------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets
Accrued expenses $247 $ 302 $237
Accrued postretirement benefits 91 90 82
Merger and restructuring costs 148 262 46
Alternative minimum tax credit 77 75 73
Tax credits and net
operating losses 26 24 16
Valuation allowances (43) (37) (23)
----------------------------------------------------------------------------
Total deferred tax assets 546 716 431
----------------------------------------------------------------------------
Deferred tax liabilities
Asset basis differences 295 337 317
Subsidiaries' unremitted earnings 132 195 87
Other 12 47 81
----------------------------------------------------------------------------
Total deferred tax
liabilities 439 579 485
----------------------------------------------------------------------------
Net deferred tax assets (liabilities) $107 $137 $(54)
============================================================================
</TABLE>
Prior to 1993, deferred income taxes were provided under the accounting rules
then in effect. The components of the deferred income tax provisions were (in
millions):
<TABLE>
<CAPTION>
1992
-----------------------------------------------------
<S> <C>
Accelerated depreciation and amortization $15
Restructuring costs 27
Alternative minimum tax (2)
Asset dispositions (3)
Accrued expenses (16)
Other timing differences 11
-----------------------------------------------------
Deferred income tax expense $32
=====================================================
</TABLE>
Income tax expense before cumulative effect of accounting changes applicable
to consolidated income from continuing operations differs from income tax
expense calculated by using the U.S. federal income tax rate for the following
reasons (in millions):
<TABLE>
<CAPTION>
1994 1993 1992
--------------------------------------------------------
<S> <C> <C> <C>
Income tax expense (benefit) at
statutory rate $ 280 $(116) $ 256
Tax-exempt operations (129) (128) (123)
Unremitted foreign earnings -- 151 --
Nondeductible goodwill 23 30 22
State and local taxes 15 (18) 12
Tax credit carryforwards -- -- 12
Foreign tax expense 7 20 8
Other factors 9 (1) 5
--------------------------------------------------------
Income tax expense (benefit) $ 205 $ (62) $ 192
========================================================
</TABLE>
The company has received a tax exemption grant from Puerto Rico which provides
that manufacturing operations will be partially exempt from local taxes until
the year 2002. Appropriate taxes have been provided for these operations
assuming repatriation of all available earnings. In addition, the company has
other manufacturing operations outside the U.S. that benefit from reductions in
local tax rates under tax incentives that will continue at least through 1997.
U.S. federal income taxes, net of available foreign tax credits, on unremitted
earnings deemed permanently reinvested would be approximately $173 million as of
December 31, 1994. A federal tax provision of $151 million was made in 1993 for
unremitted foreign earnings to allow the transfer of $430 million cash to the
U.S. for restructuring costs.
LEGAL PROCEEDINGS
During 1993, the company recorded a special charge for major litigation
settlements and minimum liability exposures, and recorded significant estimated
insurance recoveries with respect to these liabilities. The net results of the
charges and recoveries are as follows (in millions):
<TABLE>
<CAPTION>
Estimated
Gross litigation insurance Net litigation
charge recoveries charge
----------------------------------------------------------------------
<S> <C> <C> <C>
Mammary implant
product liabilities $556 $426 $130
HIV/hemophilia
product liabilities 131 83 48
Patent infringement
settlement 105 -- 105
Legal fees and other 47 -- 47
----------------------------------------------------------------------
Total $839 $509 $330
======================================================================
</TABLE>
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1994, the company was a defendant, together with other
defendants, in 6,235 lawsuits and had 1,757 pending claims from individuals, all
of which seek damages for injuries allegedly caused by silicone mammary
prostheses ("mammary implants") manufactured by the American Heyer-Schulte
division of American. The comparable number of cases and claims was 4,870 as of
December 31, 1993. In 1994, 311 cases and claims were disposed of.
The typical case or claim alleges that the individual's mammary implants
caused one or more of a wide range of ailments, including non-specific
autoimmune disease, scleroderma, lupus, rheumatoid arthritis, fibromyalgia,
mixed connective tissue disease, Sjogren's Syndrome, dermatomyositis,
polymyositis, and chronic fatigue.
In addition to the individual suits against the company, a class action on
behalf of all women with mammary implants filed against all manufacturers of
such implants has been conditionally certified and is pending in the United
States District Court for the Northern District of Alabama (Dante, et al., v.
Dow Corning, et al., U.S.D.C., N. Dist., Ala., 92-2589; part of In re: Silicone
Gel Breast Implant Product Liability Litigation, U.S.D.C., N. Dist. Ala., MDL
926, (U.S.D.C., N. Dist. Ala., CV 92-P-10000-S)). The company has been named in
several other similar certified or purported class actions.
Additionally, the company has been served with a purported class action
brought on behalf of children allegedly exposed to silicone in utero and through
breast milk. (Feuer, et al., v. McGhan, et al., U.S.D.C., E. Dist. N.Y., 93-
0146.) The suit names all mammary implant manufacturers as defendants and seeks
to establish a medical monitoring fund.
These implant cases and claims generally raise difficult and complex factual
and legal issues and are subject to many uncertainties and complexities,
including, but not limited to, the facts and circumstances of each particular
case or claim, the jurisdiction in which each suit is brought, and differences
in applicable law. Many of the cases and claims are at very preliminary stages,
and the company has not been able to obtain information sufficient to evaluate
each case and claim.
There also are issues concerning which of the company's insurers is
responsible for covering each matter and the extent of the company's claims for
contribution against third parties. The company believes that a substantial
portion of the liability and defense costs related to mammary implant cases and
claims will be covered by insurance, subject to self-insurance retentions,
exclusions, conditions, coverage gaps, policy limits and insurer solvency. Most
of the company's insurers have reserved (i.e., neither admitted nor denied), and
may attempt to reserve in the future, the right to deny coverage, in whole or in
part, due to differing theories regarding, among other things, the applicability
of coverage and when coverage may attach. The company is engaged in active
negotiations with its insurers concerning coverages and the settlement described
below. Two of the company's claims-made insurers have tendered the full amounts
of their policies to the company and a third has tendered the full amounts of
its policy on a prorata basis as claims are paid. Additionally, the company
received certain funds in settlement of claims pending against a carrier in
liquidation. The total amount tendered is $85 million.
Also, some of the mammary implant cases pending against the company seek
punitive damages and compensatory damages arising out of alleged intentional
torts. Depending on policy language, applicable law, and agreements with
insurers, the damages awarded pursuant to such claims may or may not be covered,
in whole or in part, by insurance. On February 7, 1994, the company filed suit
against all of the insurance companies that issued product liability policies to
American, American Heyer-Schulte and Baxter for a declaratory judgment that: the
policies cover each year of injury or claim; the company may choose among
multiple coverages; coverage begins with the date of implant; and legal fees and
punitive damages are covered. Subsequently, certain of the company's product
liability insurance carriers filed suit against the company and all of its other
carriers for a declaratory judgment to define various terms in the company's
insurance policies, the extent of the company's coverage, the date of the
occurrences giving rise to coverage, and the relative liabilities of the various
insurance carriers involved. In both cases, the parties have entered into a
"stand-still" agreement while negotiations continue.
Representatives of the plaintiffs and certain defendants in these cases have
negotiated a global settlement of the issues under the jurisdiction of the Court
in the Dante v. Dow Corning, et al. case (now known as Lindsay, et al., v. Dow
Corning, et al.). The monetary provisions of the settlement providing
compensation for all present and future plaintiffs and claimants
60
<PAGE>
BAXTER INTERNATIONAL
based on a series of specific funds and scheduled medical conditions have been
agreed upon by most of the significant defendants and representatives of the
plaintiffs. The total of all of the specific funds, that would be paid-in and
made available over approximately thirty years following final approval of the
settlement by the courts, is capped at $4.75 billion. The settling defendants
have agreed to fund $4.255 billion of this amount. The company's share of this
settlement has been established by the settlement negotiations at $556 million.
Appeals have been filed challenging the global settlement.
The global settlement gave individual plaintiffs and claimants the opportunity
to elect to remove themselves from the settlement ("opt-out"). The initial opt-
out period ended July 1, 1994. As of January 1995, approximately 11,360
individuals have opted out of the global settlement, of which 3,757 allege
claims against Baxter. Of the opt-outs who filed claims against Baxter, 2,101
represent U.S. claimants, 1,656 represent foreign claimants. The number of opt-
outs against Baxter will change as some claimants elect to rescind their opt-out
notice, others are found to not have valid claims against Baxter, and others are
identified as having claims against Baxter. In December 1994, and January 1995,
over 1,600 opt-out claimants asserting a claim against Baxter rescinded their
opt-out notices and returned to the global settlement. The company believes that
a substantial number of the suits filed in the second, third and fourth quarters
of 1994 against Baxter will ultimately be dismissed because it will be
determined that no Heyer-Schulte mammary implant is involved.
At present, the company is not able to estimate the nature and extent of its
potential future liability with respect to opt-outs. The company believes that
most of its potential future liability with respect to opt-outs is covered by
insurance. The company intends to continue to litigate pending mammary implant
cases.
In the fourth quarter of 1993, the company accrued $556 million for its
estimated liability resulting from the global settlement of the mammary implant
class action and recorded a receivable for estimated insurance recovery of $426
million, resulting in a net charge of $130 million. The reserves for the
settlement do not include any provisions for opt-outs.
Upon resolution of any of the uncertainties concerning these cases, the
company will ultimately incur charges in excess of presently established
reserves. While such a future charge could have a material adverse impact on the
company's net income in the period in which it is recorded, management believes
that any outcome of this litigation will not have a material adverse effect on
the company's consolidated financial position.
As of December 31, 1994, the company was a defendant, together with other
defendants, in 246 lawsuits, and had one pending claim, in the United States and
Canada involving individuals who have hemophilia, or their representatives.
Those cases and the claim seek damages for injuries allegedly caused by anti-
hemophilic factor concentrates VIII and IX derived from human blood plasma
processed and sold by the company. Furthermore, 57 lawsuits seeking damages
based on similar allegations are pending in Ireland and Japan.
The typical case or claim alleges that the individual with hemophilia was
infected with HIV by infusing Factor VIII or Factor IX concentrates ("Factor
Concentrates") containing HIV.
All Federal Court Factor Concentrate cases have been transferred to the
U.S.D.C. for the Northern District of Illinois for case management under Multi
District Litigation (MDL) rules. In addition to the individual suits against the
company, a purported class action was filed on September 30, 1993, on behalf of
all U.S. residents with hemophilia (and their families) who were treated with
Factor Concentrates and who allegedly are infected with HIV as a result of the
use of such Factor Concentrates. This lawsuit was filed in the United States
District Court for the Northern District of Illinois (Wadleigh, et al., v.
Rhone-Poulenc Rorer, et al., U.S.D.C., N. Dist., Ill. 93C 5969). The court has
certified the class only for the purpose of determining whether the defendants'
actions were negligent. Baxter has also been named in three other purported
class actions, none of which have been certified and all of which have been
transferred to the MDL for discovery purposes.
Many of the cases and claims are at very preliminary stages, and the company
has not been able to obtain information sufficient to evaluate each case and
claim. In most states, the company's potential liability is limited by laws that
provide that the sale of blood or blood derivatives, including Factor
Concentrates, is not the sale of a "good," and thus is not covered by the
doctrine of strict liability. As a result, each claimant will have to prove that
his or her injuries were caused by the company's negligence. The Wadleigh case
alleges that
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the company was negligent in failing: to use available purification technology;
to promote research and development for product safety; to withdraw Factor
Concentrates once it knew or should have known of viral-contamination of such
concentrates; to screen plasma donors properly; to recall contaminated Factor
Concentrates; and to warn of risks known at the time the product was used. The
company denies these allegations and has filed a challenge to the class
proceedings.
The company believes that a substantial portion of the liability and defense
costs related to anti-hemophilic Factor Concentrate cases and claims will be
covered by insurance, subject to self-insurance retentions, exclusions,
conditions, coverage gaps, policy limits and insurer solvency. Most of the
company's insurers have reserved (i.e., neither admitted nor denied), and may
attempt to reserve in the future, the right to deny coverage, in whole or in
part, due to differing theories regarding, among other things, the applicability
of coverage and when coverage may attach. Zurich Insurance Co., one of the
company's comprehensive general liability insurance carriers has filed a suit in
Illinois, against the company seeking a declaratory judgment that the policies
it had issued do not cover the losses that the company has notified it of for a
number of reasons, including that Factor Concentrates are products, not
services, and are, therefore, excluded from the policy coverage, and that the
company has failed to comply with various obligations of tender, notice, and the
like under the policies. The company has filed suit in California against all of
the insurance companies that issued comprehensive general liability and excess
liability policies to the company for a declaratory judgment that the policies
of all of the carriers provide coverage. In that suit, the company also sued
Zurich for failure to defend it and Zurich and Columbia Casualty Company for
failure to indemnify it. Subsequently, the company's excess liability insurance
carriers also brought suit for a declaratory judgment as to the parties'
respective liabilities. The suit filed by Zurich has been stayed pending
resolution of the company's case against Zurich and its excess carriers. Zurich
has appealed that stay.
The company has notified its insurers concerning coverages and the status of
the cases. Also, some of the anti-hemophilic factor concentrates cases pending
against the company seek punitive damages and compensatory damages arising out
of alleged intentional torts. Depending on policy language, applicable law and
agreements with insurers, the damages awarded pursuant to such claims may or may
not be covered, in whole or in part, by insurance. Accordingly, the company is
not currently in a position to estimate the amount of its potential future
recoveries from its insurers, but has estimated its recovery with respect to the
reserves it has established.
The company is vigorously defending each of the cases and claims against it.
The company will continue to seek ways to resolve pending and threatened
litigation concerning these issues through a negotiated resolution.
In the fourth quarter of 1993, the company accrued $131 million for its
estimated worldwide liability for litigation and settlement expenses involving
anti-hemophilic Factor Concentrate cases, and recorded a receivable for
insurance coverage of $83 million, resulting in a net charge of $48 million.
Upon resolution of any of the uncertainties concerning these cases, or if the
company, along with the other defendants, enters into a comprehensive settlement
of the class actions described above, the company may incur charges in excess of
presently established reserves. While such a future charge could have a material
adverse impact on the company's net income in the period in which it is
recorded, management believes that any outcome of this litigation will not have
a material adverse effect on the company's consolidated financial position.
On February 21, 1994, the company began the voluntary withdrawal world-wide of
its Gammagard(R) IGIV (intravenous immune globulin) because of indications that
it might be implicated in Hepatitis C infections occurring in users of the
product. Gammagard is a concentration of antibodies derived from human plasma
and is used to treat immune-suppressed patients. A new immune globulin product,
Gammagard(R) S/D, produced with an additional viral inactivation process was
introduced by the company after licensure in the United States and certain other
countries.
As of December 31, 1994, the company had received reports of Hepatitis C
transmission from 219 patients. The exact cause for these reports has not been
determined; however, all reports have been associated with Gammagard injections
produced from plasma which was screened for antibodies to the Hepatitis C virus
through second generation testing. The number of patients receiving Gammagard(R)
IGIV produced from the second generation screened plasma is not yet known, nor
is the number of patients claiming exposure to Hepatitis C known.
62
<PAGE>
BAXTER INTERNATIONAL
As of December 31, 1994, 14 suits resulting from this incident have been
served on the company. Two suits have been filed as purported class actions,
Lowe v. Baxter, U.S.D.C., W.D. KY, C94-0125, and Mock v. Baxter, U.S.D.C., ID,
CIV-94-0524-S-LMV. The suits allege infection with the Hepatitis C virus from
the use of Gammagard(R). The company is defending these cases.
At this time the company cannot estimate its level of exposure to claims or
lawsuits stemming from the market withdrawal. The company does not, however, at
this time expect the exposure to have a material adverse effect on the company's
operations or its consolidated financial condition.
At the start of 1993, the company was a defendant in patent litigation brought
by Scripps Clinic and Research Foundation ("Scripps") and Rhone-Poulenc Rorer,
Inc. (formerly Rorer Group, Inc.) ("Rorer") in which the plaintiffs alleged that
the company's monoclonal anti-hemophilic Factor VIII and its Recombinate(TM)
Factor VIII infringed a patent. The company entered into a worldwide settlement
of the litigation with Scripps and Rorer. The settlement agreement required
Baxter to pay $105 million to Rorer to settle claims relating to certain anti-
hemophilic Factor VIII products.
As of December 31, 1994, the company has been named as a potentially
responsible party for cleanup costs at 15 hazardous waste sites. The company was
a significant contributor to waste disposed of at only one of these sites, the
Thermo-Chem site in Muskegon, Michigan. The company expects that the total
cleanup costs for this site will be between $44 million and $65 million, of
which the company's share will be approximately $5 million. This amount has been
reserved and is reflected in the company's financial statements.
In all of the other sites, the company was a minor contributor and does not
have information on the total cleanup costs. The company has, however, in most
of these cases been advised by the potentially responsible party of its roughly
estimated exposure at these sites. Those estimated exposures total approximately
$7 million. This amount has been reserved and reflected in the company's
financial statements.
The company is a defendant in a number of other claims, investigations and
lawsuits. Based on the advice of counsel, management does not believe that the
other claims, investigations and lawsuits individually or in the aggregate, will
have a material adverse effect on the company's operations or its consolidated
financial condition.
SEGMENT INFORMATION
Industry Segments
Baxter is a world leader in global manufacturing and distribution of health-care
products and services for use in hospitals and other health-care and industrial
settings. It offers a broad array of products and services. The company's
operations are reported in the following two industry segments:
Medical specialties
Baxter develops, manufactures and markets on a global basis highly specialized
medical products for treating kidney and heart disease and blood disorders and
for collecting and processing blood. These products include dialysis equipment
and supplies; prosthetic heart valves and cardiac catheters; blood-clotting
therapies; and machines and supplies for collecting, separating and storing
blood. These products require extensive research and development and investment
in worldwide distribution, marketing, and administrative infrastructure. The
company's International Hospital unit, which manufactures and distributes
intravenous solutions and other medical products outside the United States is
also included in this segment because it shares facilities, resources and
customers with the other medical specialty businesses in several locations
worldwide.
Medical/laboratory products and distribution
Baxter manufactures medical and laboratory supplies and equipment, including
intravenous solutions and pumps, surgical instruments and procedure kits, and a
range of disposable and reusable medical products. These self-manufactured
products, as well as a significant volume of third-party manufactured medical
products, are primarily distributed through the company's extensive distribution
system to U.S. hospitals, alternate-site care facilities, medical laboratories,
and industrial and educational facilities.
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial information by industry segments for the three years ended December
31, 1994, is summarized as follows (in millions):
<TABLE>
<CAPTION>
Medical/
laboratory General
Medical products and corporate Interest-
1994 specialties distribution and other net Total
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $3,557 5,767 -- -- $ 9,324
Pretax income (loss) $ 621 474 (101) (193) $ 801
Identifiable assets $3,212 4,091 2,699 -- $10,002
Capital expenditures $ 289 199 14 -- $ 502
Depreciation and amortization $ 176 295 53 -- $ 524
======================================================================================================================
1993
----------------------------------------------------------------------------------------------------------------------
Net sales $3,250 5,629 -- -- $ 8,879
Pretax income (loss) before restructuring and
litigation charges $ 605 422 (135) (192) $ 700
Restructuring and litigation charges $ (253) (550) (227) -- $(1,030)
----------------------------------------------------------------------------------------------------------------------
Pretax income (loss) $ 352 (128) (362) (192) $ (330)
Identifiable assets $2,946 4,788 2,811 -- $10,545
Capital expenditures $ 266 300 39 -- $ 605
Depreciation and amortization $ 170 253 71 -- $ 494
======================================================================================================================
1992
----------------------------------------------------------------------------------------------------------------------
Net sales $3,096 5,375 -- -- $ 8,471
Pretax income (loss) $ 556 512 (128) (187) $ 753
Identifiable assets $2,783 4,589 1,783 -- $ 9,155
Capital expenditures $ 259 365 16 -- $ 640
Depreciation and amortization $ 150 226 71 -- $ 447
=====================================================================================================================
</TABLE>
64
<PAGE>
BAXTER INTERNATIONAL
Geographic Segments
Financial information by geographic area for
the three years ended December 31, 1994, is
summarized as follows
(in millions):
<TABLE>
<CAPTION>
General
Other corporate and Inter-area
1994 United States Europe international interest-net eliminations Total
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Trade sales $6,831 1,245 1,248 -- -- $ 9,324
Inter-area sales $ 605 129 331 -- (1,065) --
----------------------------------------------------------------------------------------------------------------------------------
Total sales $7,436 1,374 1,579 -- (1,065) $ 9,324
Pretax income $ 453 251 393 (294) (2) $ 801
Identifiable assets $5,497 1,030 920 2,699 (144) $10,002
==================================================================================================================================
1993
Trade sales $6,581 1,177 1,121 -- -- $ 8,879
Inter-area sales $ 524 107 329 -- (960) --
----------------------------------------------------------------------------------------------------------------------------------
Total sales $7,105 1,284 1,450 -- (960) $ 8,879
Pretax income (loss) $ (211) 190 253 (554) (8) $ (330)
Identifiable assets $5,925 1,045 884 2,811 (120) $10,545
==================================================================================================================================
1992
Trade sales $6,215 1,227 1,029 -- -- $ 8,471
Inter-area sales $ 559 86 278 -- (923) --
----------------------------------------------------------------------------------------------------------------------------------
Total sales $6,774 1,313 1,307 -- (923) $ 8,471
Pretax income $ 504 260 311 (315) (7) $ 753
Identifiable assets $5,570 1,094 813 1,783 (105) $ 9,155
==================================================================================================================================
</TABLE>
Inter-area transactions are accounted for using arm's-length principles.
Identifiable assets are those assets associated with a specific industry segment
or geographic area. General corporate assets consist primarily of cash and
equivalents, the corporate headquarters facility and various other investments
and assets that are not specific to an industry segment or geographic area.
Goodwill and amortization have been allocated to industry segments as
applicable.
Foreign net sales (including U.S. export sales) and net assets (including
advances from the company and its subsidiaries) of all consolidated foreign
subsidiaries and branches located outside the U.S., its territories and
possessions for the three years ended December 31, 1994, are as follows (in
millions):
<TABLE>
<CAPTION>
1994 1993 1992
--------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign net sales $2,631 $2,428 $2,391
Foreign assets net of liabilities at end of year $1,308 $1,248 $1,287
==========================================================================
</TABLE>
65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERLY FINANCIAL RESULTS AND MARKET FOR THE COMPANY'S STOCK
<TABLE>
<CAPTION>
First Second Third Fourth Total
(Unaudited, in millions, except per share data) quarter quarter quarter quarter year
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994
Net sales $2,193 $2,316 $2,315 $2,500 $9,324
Gross profit 760 812 821 899 3,292
Net income (loss) 131 144 149 172 596
Per common share:
Net income .47 .52 .53 .61 2.13
Dividends .25 .25 .2625 .2625 1.025
Market price
High 24.75 26.75 28.75 28.88
Low 21.75 21.63 25.25 23.75
---------------------------------------------------------------------------------------------
1993
Net sales $2,041 $2,215 $2,228 $2,395 $8,879
Gross profit 748 802 805 867 3,222
Income from continuing operations before
cumulative effect of accounting changes 57 132 135 (592) (268)
Net income (loss) 127 132 135 (592) (198)
Per common share:
Income from continuing operations/1/ .20 .48 .49 (2.14) (.97)
Net income (loss) .45 .48 .49 (2.14) (.72)
Dividends .25 .25 .25 .25 1.00
Market price
High 32.75 30.63 29.00 24.75
Low 27.13 27.25 20.00 21.38
=============================================================================================
</TABLE>
(1) In the fourth quarter of 1993, the company recorded pretax charges of $925
million against earnings. The charges include $700 million to cover the
costs associated with restructuring initiatives (see "Restructuring
Charge" footnote) and a $225 million special charge for major litigation
(see "Legal Proceedings" footnote).
Baxter common stock is listed on the New York, Midwest and Pacific Stock
Exchanges, on The London Stock Exchange and on the Swiss stock exchanges of
Zurich, Basel and Geneva. The New York Stock Exchange is the principal market on
which the company's common stock is traded. On January 27, 1995, there were
approximately 77,800 holders of record of the company's common stock.
66
<PAGE>
SEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31 1994 1993/1/ 1992 1991 1990/2/ 1989 1988
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS Net sales $ 9,324 8,879 8,471 7,799 7,234 6,740 6,359
(in millions) Income (loss) from continuing operations $ 596 (268) 561 507 (24) 410 360
Net income (loss) $ 596 (198) 441 591 40 446 388
Depreciation and amortization $ 524 494 447 411 368 356 327
Research and development charges $ 343 337 317 288 262 245 237
-----------------------------------------------------------------------------------------------------------------------------------
CAPITAL EMPLOYED Working capital $ 1,574 1,489 1,221 1,470 1,007 1,378 1,233
(in millions) Capital expenditures/3/ $ 502 605 640 592 417 370 483
Net property, plant and equipment $ 2,562 2,655 2,647 2,387 2,122 2,058 1,983
Total assets $ 10,002 10,545 9,155 9,171 8,407 8,401 8,442
Net debt/4/ $ 2,401 3,143 2,901 2,336 2,143 2,388 2,661
Long-term obligations $ 2,341 2,800 2,433 2,246 1,727 2,048 2,311
Stockholders' equity -- continuing operations $ 3,720 3,185 3,795 4,086 3,877 4,032 3,750
-- discontinued operations $ -- -- -- 287 215 214 226
-- total $ 3,720 3,185 3,795 4,373 4,092 4,246 3,976
Total capitalization $ 6,061 5,985 6,228 6,619 5,819 6,294 6,287
-----------------------------------------------------------------------------------------------------------------------------------
PER COMMON Average number of common shares
SHARE outstanding (in millions)/5/ $ 280 277 279 280 253 248 243
Earnings (loss)
Continuing operations $ 2.13 (0.97) 1.99 1.73 (0.30) 1.37 1.21
Net income $ 2.13 (0.72) 1.56 2.03 (0.05) 1.50 1.31
Cash dividends declared $ 1.025 1.00 0.86 0.74 0.64 0.56 0.50
Market price -- high $ 28.88 32.75 40.50 40.88 29.38 25.88 26.13
Market price -- low $ 21.63 20.00 30.50 25.63 20.50 17.63 16.25
Net book value $ 13.18 11.52 13.59 14.45 13.45 13.49 12.61
-----------------------------------------------------------------------------------------------------------------------------------
PRODUCTIVITY Employees at year-end 53,500 60,400 61,300 60,400 60,600 61,000 61,500
MEASURES Sales per year-end employee $174,280 147,003 138,189 129,123 119,373 110,492 103,398
Operating assets per employee/6/ $112,430 101,043 96,988 90,613 82,937 82,000 76,407
-----------------------------------------------------------------------------------------------------------------------------------
GROWTH STATISTICS Net sales 5.0% 4.8 8.6 7.8 7.3 6.0 9.1
(percent change Income (loss) from continuing operations N/A (147.8)% 10.7 N/A (105.9) 13.9 19.6
from prior year) Cash dividends per common share 2.5% 16.3 16.2 15.6 14.3 12.0 13.6
Net book value per year-end common share 14.4% (15.2) (5.9) 7.4 (0.3) 7.0 7.0
-----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RETURNS Income from continuing operations as a
AND STATISTICS percent of sales 6.4% (3.0) 6.6 6.5 (0.3) 6.1 5.7
Return on average common stockholders'
equity -- continuing operations 17.3% (7.7) 14.7 13.3 (1.3) 10.9 10.1
Long-term debt as a percent of total
year-end capital 38.6% 46.8 39.1 33.9 29.7 32.5 36.8
===================================================================================================================================
</TABLE>
1. Results include a provision for restructuring charges of a pretax amount of
$700 million and a special charge for litigation of a pretax amount of $330
million.
2. Results include a provision for restructuring program costs of a pretax
amount of $562 million.
3. Includes additions to the pool of equipment leased or rented to customers.
4. Total debt and lease obligations net of cash and equivalents.
5. Excludes common stock equivalents.
6. Accounts receivable, notes and other current receivables, inventories and net
property, plant and equipment.
<PAGE>
Appendix of Graphs:
The following is a listing of the graphs contained within the Annual Report,
Pages 31-44, section entitled "Management's Discussion and Analysis" which is
incorporated by reference.
"OPERATIONAL CASH FLOW"
On page 32 of the annual report there is a graphical representation of the
internal performance measure of "Operational Cash Flow". The data points in
millions of dollars are as follows:
1992 207
1993 292
1994 954
NET DEBT
On page 32 of the annual report there is a graphical representation of Net Debt
balances. The data points in millions of dollars are as follows:
1992 2,901
1993 3,143
1994 2,401
MED/LAB SEGMENT NET SALES
On page 34 of the annual report there is a graphical representation of the
relationship between self-manufactured net sales and distributed net sales for
the Med/Lab segment. The data points in billions of dollars are as follows:
Self-Manufactured Distributed
Products Products
1992 3.2 2.2
1993 3.2 2.4
1994 3.1 2.7
MEDICAL SPECIALTIES NET SALES
On page 34 of the annual report there is a graphical representation of the
relationship between self-manufactured net sales and distributed net sales for
the Medical Specialties segment. The data points in billions of dollars are as
follows:
Self-Manufactured Distributed
Products Products
1992 2.7 0.4
1993 2.9 0.4
1994 3.2 0.4
Page 1
<PAGE>
MARKETING AND ADMINISTRATIVE EXPENSES
On page 35 of the annual report there is a graphical representation of total
company marketing and administrative expenses as a percentage of total company
net sales. The data points are as follows:
1990 21.3%
1991 21.1%
1992 21.2%
1993 21.2%
1994 19.9%
DIVIDENDS PER COMMON SHARE
On page 41 of the annual report there is a graphical representation of dividends
per common share. The data points in dollars are as follows:
1990 0.64
1991 0.74
1992 0.86
1993 1.00
1994 1.025
Page 2
<PAGE>
EXHIBIT 21
--------------------------------------------------------------------------------
SUBSIDIARIES OF THE COMPANY, AS OF FEBRUARY 22, 1995
<TABLE>
<CAPTION>
% Owned by
Organized under the immediate
Subsidiary laws of parent(1)(2)
-------------------------------------------------------------------------------
<S> <C> <C>
Baxter International Inc. (parent company).... Delaware
Baxter Healthcare Corporation................ Delaware 100
Baxter World Trade Corporation............... Delaware 100
Baxter Pharmacy Services Corporation........ Delaware 100(3)
Baxter Sales and Distribution Corporation.. Delaware 100
Baxter Healthcare Corporation of Puerto
Rico...................................... Alaska 100(3)
Baxter Healthcare (Holdings) Ltd. .......... United Kingdom 99(4)
Baxter Healthcare Limited.................. United Kingdom 99(4)
Baxter Healthcare S.A. ..................... Panama 100
Baxter Healthcare Pte. Ltd. ................ Singapore 100
Baxter World Trade S.A. ................... Belgium 52(4)
Baxter Limited.............................. Japan 100
Baxter Healthcare Pty. Ltd. ................ Australia 99(4)
Baxter A.G. ................................ Switzerland 99(4)
Baxter S.A. de C.V. ........................ Mexico 99(4)
Baxter Corporation ......................... Canada 100
-------------------------------------------------------------------------------
</TABLE>
Subsidiaries omitted from this list, considered in the aggregate as a single
subsidiary, would not constitute a significant subsidiary.
* * * * *
(1) Including director's qualifying and other nominee shares.
(2) All subsidiaries set forth herein are reported in the Company's financial
statements through consolidations or under the equity method of accounting.
(3) Of Common stock.
(4) Remaining shares owned by the Company, its subsidiaries or employees.
<PAGE>
EXHIBIT 23
CONSENT OF PRICE WATERHOUSE LLP
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-8 (Nos. 2-82667, 2-
86993, 2-97607, 33-8812, 33-15523, 33-15787, 33-28428, 33-33750 and 33-54069),
on Form S-3 (Nos. 33-5044, 33-23450, 33-27505, 33-31388 and 33-49820) and on
Form S-4 (Nos. 33-808, 33-15357 and 33-53937) of Baxter International Inc. of
our report dated February 13, 1995 appearing on page 44 of the Annual Report to
Stockholders incorporated by reference herein. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which appears on page 19 of this Form 10-K.
PRICE WATERHOUSE LLP
Chicago, Illinois
March 24, 1995
<PAGE>
Exhibit 24
P O W E R O F A T T O R N E Y
Annual Report on Form 10-K
--------------------------
The undersigned director of Baxter International Inc., a Delaware corporation
(the "Company"), which proposes to file with the Securities and Exchange
Commission its annual report on Form 10-K for year ended December 31, 1994,
pursuant to the Securities Exchange Act of 1934, as approved by the Company's
principal executive and financial officers and controller, hereby appoints
Vernon R. Loucks Jr. for [him or her] and in [his or her] name as a director to
be [his or her] lawful attorney-in-fact, with full power (i) to sign and file
with the Securities and Exchange Commission the proposed report and (ii) to
perform every other act which said attorney-in-fact may deem necessary or proper
in connection with such report.
Executed by:
/s/ Silas S. Cathcart
/s/ John W. Colloton
/s/ Susan Crown
/s/ Mary Johnston Evans
/s/ Frank R. Frame
/s/ William B. Graham
/s/ David W. Grainger
/s/ Martha R. Ingram
/s/ Georges C. St. Laurent, Jr.
/s/ Arnold J. Levine
/s/ Monroe E. Trout, M.D.
/s/ Fred L. Turner
Dated: As of March 20, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED BALANCE SHEET AS OF 12/31/94 AND CONSOLIDATED STATEMENT
OF INCOME FOR YEAR ENDED 12/31/94 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<CASH> 471
<SECURITIES> 0
<RECEIVABLES> 1,955
<ALLOWANCES> 39
<INVENTORY> 1,537
<CURRENT-ASSETS> 4,340
<PP&E> 4,431
<DEPRECIATION> 1,869
<TOTAL-ASSETS> 10,002
<CURRENT-LIABILITIES> 2,766
<BONDS> 2,341
<COMMON> 288
0
0
<OTHER-SE> 3,432
<TOTAL-LIABILITY-AND-EQUITY> 10,002
<SALES> 9,324
<TOTAL-REVENUES> 9,324
<CGS> 6,032
<TOTAL-COSTS> 6,032
<OTHER-EXPENSES> 410<F1>
<LOSS-PROVISION> 14
<INTEREST-EXPENSE> 237
<INCOME-PRETAX> 801
<INCOME-TAX> 205
<INCOME-CONTINUING> 596
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 596
<EPS-PRIMARY> 2.13
<EPS-DILUTED> 2.11
<FN>
<F1> Includes R&D expense and goodwill amortization.
</FN>
</TABLE>
