<PAGE>
As filed with the Securities and Exchange Commission on December 8, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of
The Securities Exchange Act of 1934
----------------
CVG Controlled Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4316614
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17221 Red Hill Avenue
Irvine, California 92614
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code:
(949) 250-2500
----------------
Securities to be registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which
to be registered each class is to be registered
------------------- ------------------------------
<S> <C>
Common Stock, par value $1.00 New York Stock Exchange
Series A Junior Participating Preferred New York Stock Exchange
Stock Purchase Rights (currently traded
with Common Stock)
</TABLE>
----------------
Securities to be registered pursuant to Section 12(g) of the Act: None.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ANNEX I
THE INFORMATION CONTAINED IN THIS INFORMATION STATEMENT IS SUBJECT TO
COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO CVG CONTROLLED
INC.'S COMMON STOCK HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. THESE SECURITIES WILL NOT BE ISSUED BEFORE THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS INFORMATION STATEMENT SHALL NOT CONSTITUTE
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THESE SECURITIES.
<PAGE>
EXPLANATORY NOTE
This Registration Statement on Form 10 has been prepared on a prospective
basis on the assumption that, among other things, the distribution and the
related transactions contemplated to occur prior to or contemporaneously with
the distribution will be consummated as contemplated by the information
statement which is a part of this Registration Statement. There can be no
assurance, however, that any or all of such transactions will occur or will
occur as so contemplated. Any significant modifications or variations in the
transactions contemplated will be reflected in an amendment or supplement to
this Registration Statement.
<PAGE>
Baxter International Inc.
One Baxter Parkway
Deerfield, Illinois 60015
847.948.2000
[ ], 2000
To all Baxter International Inc. Stockholders:
I am pleased to inform you that on [ ], 2000, Baxter's board of directors
declared a stock dividend to achieve a distribution of all of the outstanding
shares of common stock of CVG Controlled Inc. to all Baxter stockholders of
record on [ ], 2000.
CVG is a new company, formed initially as a wholly owned subsidiary of
Baxter, and is comprised of Baxter's CardioVascular business. CVG is a leader
in providing a comprehensive line of products and services to treat late-stage
cardiovascular disease. The distribution is expected to make both Baxter and
CVG more competitive, giving each company more financial flexibility to invest
and grow. We believe the combined value of two separate, but stronger
companies will be greater than the value of Baxter as a whole today.
Following the distribution, Baxter will continue to focus on providing
critical medical therapies that improve the lives of millions of people
worldwide. We intend to invest more resources in our Blood Therapies, I.V.
Systems/Medical Products and Renal businesses. These investments will further
enhance our ability to bring new products to market and to expand globally. If
you are a Baxter stockholder of record at the close of business on [ ], 2000,
the record date for the distribution, you will receive one share of CVG common
stock for every [six] shares of Baxter common stock you own on that date. CVG
stock certificates will be distributed beginning [ ], 2000. No action is
required on your part to receive your CVG stock.
The attached information statement, which is being mailed to all Baxter
stockholders, describes the distribution in detail and contains important
information about CVG, including financial statements.
Sincerely,
Harry M. Jansen Kraemer, Jr.
Chairman and Chief Executive Officer
<PAGE>
[CVG Controlled Inc. letterhead]
[ ], 2000
Dear CVG Controlled Inc. Stockholder:
It is my pleasure to welcome you as a stockholder of CVG Controlled Inc. We
are a leader in providing a comprehensive line of therapies and services to
treat late-stage cardiovascular disease, and a significant portion of our
current products and services occupy market-leading positions. CVG operates in
four main product lines: cardiac surgery, critical care, vascular and
perfusion products and services.
I invite you to learn more about CVG in the attached information statement.
We expect that operating as an independent company focused on late-stage
cardiovascular disease therapy will accelerate the speed of innovation of our
business. We also expect that it will allow us to significantly expand our
product development pipeline, and pursue attractive opportunities to expand
our offerings and operations through acquisitions and strategic alliances.
Ultimately, we anticipate that this will lead to innovative, diversified and
improved treatment options for patients suffering from late-stage
cardiovascular disease. As a more aggressive competitor, we believe that we
can accelerate our future growth rate.
In 1998, we achieved net revenues of $865 million, an amount that will make
us the largest company focused exclusively on the late-stage cardiovascular
disease market. We expect that CVG's common stock will be listed and traded on
the New York Stock Exchange and that its stock symbol will be [" "].
Our management team is eager to distinguish CVG through continued strong
leadership and solid financial performance. We are pleased that you, as a
stockholder of CVG, will participate in our mission.
Sincerely,
Michael A. Mussallem
Chairman and Chief Executive Officer
<PAGE>
Information Contained Herein is Subject to Completion or Amendment
Preliminary Copy Dated December 8, 1999
INFORMATION STATEMENT
[LOGO]
CVG CONTROLLED INC.
Common Stock
We are providing this information statement
to you as a stockholder of Baxter
International Inc. in connection with the
distribution by Baxter to its stockholders of
all of the outstanding shares of CVG common
stock. CVG will conduct the business
currently performed by Baxter's
CardioVascular group.
Consider carefully the
risk factors beginning
on page 7 of this
information statement.
Stockholder approval
of the distribution of
CVG common stock is
not required. We are
not asking you for a
proxy and we request
that you do not send
us a proxy. Also, you
are not required to
make any payment for
the shares of CVG
common stock that you
will receive.
It is expected that the distribution will be
made on [ ], 2000, to holders of record
of Baxter common stock on [ ], 2000. If
you are a Baxter stockholder at the close of
business on the record date, you will receive
one share of CVG common stock for every [six]
shares of Baxter common stock you hold on
that date. Certificates for the shares will
be mailed to you, or your brokerage account
will be credited for the shares, on or about
[ ], 2000. Fractional shares will not be
issued and you will receive a check or a
credit to your brokerage account for the cash
equivalent of any fractional shares you
otherwise would have received in the
distribution. You will not be required to pay
anything for the shares of CVG common stock
to be distributed to you, nor will you be
required to surrender or exchange your shares
of Baxter common stock or take any other
action in order to receive CVG common stock.
This information
statement is not an
offer to sell, or a
solicitation of any
offer to buy, any
securities of CVG
Controlled Inc. or
Baxter International
Inc.
Application has been made to list the CVG
common stock on the New York Stock Exchange
under the symbol "[ ]."
The information contained in this information statement is subject to
completion or amendment. A registration statement on Form 10 relating to CVG's
common stock has been filed with the Securities and Exchange Commission. These
securities will not be issued before the registration statement becomes
effective.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the CVG common stock, or determined
that this information statement is truthful or complete. Any representation to
the contrary is a criminal offense.
The date of this information statement is [ ], 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
SUMMARY.................................................................... 1
CVG's Business........................................................... 1
Questions and Answers About CVG and the Distribution..................... 2
Summary Historical Financial Data........................................ 5
Summary Unaudited Pro Forma Financial Data............................... 6
RISK FACTORS............................................................... 7
Risks Related to CVG's Business.......................................... 7
Risks Related to the Health Care Industry................................ 11
Risks Related to CVG's Separation from Baxter............................ 13
Risks Related to Ownership of CVG's Common Stock......................... 14
FORWARD-LOOKING STATEMENTS................................................. 15
CVG'S BUSINESS............................................................. 16
Overview................................................................. 16
Business Strategy........................................................ 16
CVG's Product and Service Offerings...................................... 17
Cardiac Surgery.......................................................... 17
Critical Care............................................................ 19
Vascular................................................................. 20
Perfusion Products and Services.......................................... 20
Competition.............................................................. 21
Sales and Marketing...................................................... 21
Raw Materials and Manufacturing.......................................... 22
Quality Assurance........................................................ 22
Research and Development................................................. 23
Proprietary Technology................................................... 23
Government Regulation and Other Matters.................................. 24
Properties............................................................... 26
Employees................................................................ 26
CVG'S RELATIONSHIP WITH BAXTER AFTER THE DISTRIBUTION...................... 27
General.................................................................. 27
Reorganization Agreement................................................. 27
Tax Sharing Agreement.................................................... 29
Distribution Agreements.................................................. 29
Services and Other Agreements............................................ 29
THE DISTRIBUTION........................................................... 31
Background and Reasons for the Distribution.............................. 31
Manner of Effecting the Distribution..................................... 31
Important Federal Income Tax Consequences................................ 32
Market for CVG Common Stock.............................................. 33
Dividend Policy.......................................................... 34
Distribution Conditions and Termination.................................. 34
Opinions of Financial Advisors........................................... 35
SELECTED FINANCIAL DATA OF CVG............................................. 36
CVG'S UNAUDITED PRO FORMA FINANCIAL DATA................................... 37
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
CVG MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................. 41
Overview................................................................ 41
Results of Operations................................................... 42
Liquidity and Capital Resources......................................... 45
Euro Conversion......................................................... 46
New Accounting and Disclosure Standard.................................. 46
Currency Risk........................................................... 46
CVG MANAGEMENT............................................................ 47
Board of Directors...................................................... 47
Committees of the Board of Directors.................................... 48
Compensation of Directors............................................... 48
Executive Officers...................................................... 48
CVG EXECUTIVE COMPENSATION................................................ 50
1999 Compensation of Executive Officers................................. 50
Stock Option Grants..................................................... 51
Stock Option Exercises.................................................. 52
Pension Plan and Excess Pension Plan.................................... 52
Baxter Common Stock Held by CVG Employees............................... 53
Future Compensation of Executive Officers............................... 53
2000 Incentive Compensation Program..................................... 54
CVG Change of Control Plan.............................................. 56
CVG Retirement Plan for United States Employees......................... 57
Employee Stock Purchase Plan for United States Employees................ 58
Transition Options for Salaried Exempt Employees........................ 59
Initial Stock Option Grant for Salaried Employees Worldwide............. 59
Employee Stock Purchase Plan for Employees Outside the United States.... 59
Initial Stock Grant for Hourly Employees Outside the United States...... 59
Other Retirement Plans for Employees Outside the United States.......... 59
SECURITY OWNERSHIP OF CVG................................................. 60
DESCRIPTION OF CVG CAPITAL STOCK.......................................... 61
Authorized Capital Stock................................................ 61
CVG Common Stock........................................................ 61
CVG Preferred Stock..................................................... 61
CVG Rights Agreement.................................................... 61
CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF CVG'S CERTIFICATE OF
INCORPORATION AND BYLAWS AND OF DELAWARE LAW............................. 63
Certificate of Incorporation and Bylaws................................. 63
Delaware Law............................................................ 65
LIMITATION OF LIABILITY AND INDEMNIFICATIONOF CVG DIRECTORS AND OFFICERS.. 66
Limitation of Liability of Directors.................................... 66
Indemnification of Directors and Officers............................... 66
CVG 2001 ANNUAL MEETING OF STOCKHOLDERS................................... 67
ADDITIONAL INFORMATION.................................................... 67
INDEX TO COMBINED FINANCIAL STATEMENTS AND SCHEDULE....................... F-1
</TABLE>
ii
<PAGE>
SUMMARY
This summary highlights selected information from this information
statement, but does not contain all details concerning the distribution of the
CVG common stock to Baxter stockholders, including information that may be
important to you. To better understand the distribution, and the business and
financial position of CVG, you should carefully review this entire document.
References in this information statement to "CVG" mean CVG Controlled Inc., a
Delaware corporation, and its subsidiaries and affiliates following the
distribution. References in this information statement to the CardioVascular
business mean the CardioVascular business as conducted by Baxter for periods
prior to the distribution date. References in this information statement to
"Baxter" mean Baxter International Inc., a Delaware corporation, and its
subsidiaries and affiliates.
CVG's Business
CVG is a global leader in designing, developing, manufacturing and marketing
a comprehensive line of products and services to treat late-stage
cardiovascular disease. CVG's product lines are grouped into four general
areas: cardiac surgery, critical care, vascular and perfusion products and
services. CVG also offers a diverse grouping of other product lines comprised
mostly of pharmaceuticals and select distributed products. CVG supplies its
products and services to customers in more than 80 countries, both through
direct sales and distribution relationships, and reported annual sales in 1998
of $865 million.
CVG's cardiac surgery product lines include products relating to heart valve
therapy, a left ventricular assist device, as well as cannulae and cardioplegia
products used during open heart surgery. CVG is the worldwide leader in the
development, marketing and sale of both tissue replacement heart valves and
heart valve repair products. CVG's critical care product offerings include
hemodynamic monitoring devices for measuring heart pressure and output during
surgical procedures and in post-surgical intensive care settings. CVG has been
a world leader in this area since the development of its Swan-Ganz catheter
more than 30 years ago. CVG's vascular products include a line of balloon-
tipped, catheter-based products, surgical clips and inserts, angioscopy
equipment and artificial implantable grafts. The perfusion products offered by
CVG include a diverse line of disposable and hardware products used during
cardiopulmonary bypass procedures, including oxygenators, blood containers,
filters and related devices and heart-lung machines. CVG also is the world's
leading provider of contract perfusion services with a staff of more than 400
clinical perfusionists who perform an aggregate of more than 50,000 perfusion
cases for open heart surgery per year.
CVG employs over 5,000 people and its products are manufactured throughout
the world, including Brazil, the Dominican Republic, Japan, The Netherlands,
Puerto Rico, Switzerland and the United States. CVG's headquarters are located
at 17221 Red Hill Avenue, Irvine, California 92614 and its telephone number is
949.250.2500. CVG was incorporated in Delaware in 1999.
As of the distribution date, Baxter will have transferred its CardioVascular
business to CVG, a newly formed Delaware corporation. Baxter will distribute
the shares of CVG common stock to Baxter stockholders on a proportionate basis
beginning on [ ], 2000.
The distribution of the shares of CVG common stock will be effective on the
distribution date. No vote of Baxter's stockholders is required to approve the
distribution of the CVG common stock.
1
<PAGE>
Questions and Answers about CVG and the Distribution
Why is Baxter separating Baxter is creating an independent, publicly traded
CVG? company for its CardioVascular business because its
management believes that the combined value of two
separate companies will be greater than the value
of Baxter as a whole today. CVG expects that the
distribution will allow it to compete more
effectively in the intensely competitive and
rapidly consolidating cardiovascular device
industry. CVG believes that as an independent
company, it will increase the level of funding of,
and commitment to, intense research and development
with a focus on enhancing its number and diversity
of new products. CVG also expects that it will be
more aggressive in pursuing acquisition and
strategic alliance opportunities as an independent
company with the ability to use its stock as
currency. Having a publicly traded equity security
will also enable CVG to better attract and retain
key employees by more directly linking its
employees' compensation with CVG's performance.
Following the distribution, Baxter intends to
invest more resources in its remaining core
businesses, which it expects will further enhance
its ability to successfully commercialize new
products and to expand its global markets.
What will the After the distribution, Baxter and CVG will be
relationship be between separate, publicly owned companies. Baxter and CVG
CVG and Baxter after the will enter into certain agreements to define their
distribution? ongoing relationship after the distribution. These
agreements also will allocate responsibility for
obligations both before and after the distribution
date. See "CVG's Relationship With Baxter After The
Distribution" beginning on page 27.
How will CVG be managed? CVG's management team will be essentially the same
operating management team as Baxter's
CardioVascular business had during the period prior
to the distribution. Michael A. Mussallem will be
the Chairman of the Board and Chief Executive
Officer of CVG. Mr. Mussallem has extensive
experience in the medical products and services
industry, having been with Baxter for over twenty
years. Mr. Mussallem will be supported by an
experienced management team that will include
Stuart L. Foster and Anita B. Bessler, who together
have spent in excess of 45 collective years in the
industry. See "CVG Management--Executive Officers"
beginning on page 48.
The CVG board of directors is expected to initially
consist of seven persons, including Mr. Mussallem
and six independent directors who will be
designated prior to or promptly following the
distribution. See "CVG Management--Board of
Directors" beginning on page 47.
When will the [ ], 2000. Baxter will distribute the shares
distribution happen? of CVG common stock on the distribution date, which
will be on or about [ ], 2000, to holders of
Baxter common stock on the record date.
2
<PAGE>
What is the record date [ ], 2000
for the distribution?
What do I have to do to Nothing. You are not required to take any action to
participate in the receive CVG common stock in the distribution. No
distribution? proxy or vote is necessary for the distribution. If
you own Baxter common stock as of the close of
business on the record date, shares of CVG common
stock will be mailed to you or credited to your
brokerage account on [ ], 2000. You do not need to
mail in Baxter common stock certificates to receive
CVG common stock certificates. The number of shares
of Baxter common stock you own will not change as a
result of the distribution.
How many shares of CVG Baxter will distribute one share of CVG common
common stock will I stock, along with associated preferred stock
receive? purchase rights, for every [six] shares of Baxter
common stock you own as of the close of business on
the record date. For example, if you own [150]
shares of Baxter common stock on the record date,
you will receive [25] shares of CVG common stock in
the distribution. Based on approximately
[291,708,000] shares of Baxter common stock that we
expect to be outstanding on the record date for the
distribution, Baxter will distribute a total of
approximately [48,618,000] shares of CVG common
stock.
Will Baxter distribute No. Baxter will not distribute any fractional
fractional shares? shares of CVG common stock. You will receive a
check or a credit to your brokerage account for the
cash equivalent of any fractional shares you
otherwise would have received in the distribution,
less applicable taxes. The amount of the cash
payment will depend upon the prices at which the
fractional shares are sold in the open market on or
about the distribution date.
Is the distribution The distribution is conditioned on Baxter receiving
taxable for United States a ruling from the United States Internal Revenue
federal income tax Service substantially to the effect that the
purposes? distribution will be tax-free to Baxter and to
Baxter's United States stockholders, except with
respect to cash paid in lieu of fractional shares
of CVG common stock. See "The Distribution--
Important Federal Income Tax Consequences"
beginning on page 32, for a more complete
discussion of the United States federal income tax
consequences of the distribution to holders of
Baxter common stock.
Will I be paid any CVG has no current plans to pay dividends following
dividends on the CVG the distribution. CVG will pay dividends on CVG
common stock? common stock only if declared by the CVG board of
directors in its sole discretion following the
distribution. The payment and level of cash
dividends, if any, will be based upon a number of
factors, including the operating results, cash flow
and financial requirements of CVG. See "The
Distribution--Dividend Policy" beginning on page
34.
Where will my shares of CVG expects that its common stock will be listed on
CVG common stock trade? the New York Stock Exchange under the symbol
[" "]. See "The Distribution--Market for CVG
Common Stock" beginning on page 33.
3
<PAGE>
What will happen to the Nothing. Baxter common stock will continue to be
listing of Baxter's listed on the NYSE under the symbol "BAX."
shares on the New York
Stock Exchange?
Will the distribution Yes. After the distribution, the trading price of
affect the trading price Baxter common stock is likely to be lower than the
of my Baxter common trading price immediately prior to the
stock? distribution. Moreover, the trading price of Baxter
common stock may fluctuate after the distribution
as the market evaluates the operations of Baxter
without the business of CVG. Until the market has
fully analyzed CVG's business, the prices at which
the CVG common stock trades may fluctuate
significantly. The combined market value of Baxter
common stock and CVG common stock may be less than,
equal to or greater than the market value of Baxter
common stock prior to the distribution. See "The
Distribution--Market for CVG Common Stock"
beginning on page 33.
Who do I contact for Before the distribution, you should direct
information regarding the inquiries relating to the distribution to:
distribution and CVG?
Baxter International Inc.
One Baxter Parkway
Deerfield, IL 60015
Attention: Investor Relations
847.948.2000
After the distribution, you should direct inquiries
relating to an investment in CVG common stock to:
CVG
17221 Red Hill Avenue
Irvine, California 92614
Attention: Investor Relations
949.250.2500
After the distribution, the transfer agent and
registrar for the CVG common stock will be:
[To be selected]
4
<PAGE>
Summary Historical Financial Data
The following table sets forth summary historical combined financial data
for CVG. The historical combined financial data of CVG are derived from the
"Combined Financial Statements," which are included elsewhere in this
information statement. See Note 3 to "Combined Financial Statements" and "CVG
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for discussions of the effect of CVG certain acquisitions on CVG's
revenues, expenses and financial position.
<TABLE>
<CAPTION>
For the nine
months ended For the years ended
September 30, December 31,
------------- ---------------------
1999 1998 1998 1997 1996
------ ------ ------ ------ ------
(in millions)
<S> <C> <C> <C> <C> <C>
Income Statement Data
Net sales............................. $ 672 $ 639 $ 865 $ 879 $ 837
Gross profit.......................... $ 328 $ 300 $ 399 $ 416 $ 395
Net income (a)........................ $ 62 $ 47 $ 62 $ (52) $ 87
Balance Sheet and Cash Flow Data
Cash flow provided from operations.... $ 107 $ 113 $ 176 $ 163 $ 185
Total assets.......................... $1,465 $1,483 $1,483 $1,526 $1,473
Other Data
EBITDA (a)(b)......................... $ 150 $ 131 $ 175 $ 197 $ 206
</TABLE>
- --------
(a) See Note 3 to "Combined Financial Statements" and "CVG Management's
Discussion and Analysis of Financial Condition and Results of Operations"
for additional information regarding the $132 million in-process research
and development charge in 1997 relating to the acquisition of Research
Medical, Inc.
(b) EBITDA, or earnings before interest, income taxes, depreciation and
amortization, is not a measure defined by generally accepted accounting
principles. EBITDA in 1997 excludes the $132 million in-process research
and development charge relating to the acquisition of Research Medical,
Inc.
5
<PAGE>
Summary Unaudited Pro Forma Financial Data
The following table sets forth summary unaudited pro forma financial data.
This data presents the combined results of CVG assuming that the transactions
contemplated by the distribution had been completed as of January 1, 1998. See
page 37 for computation of pro forma amounts, including descriptions of the pro
forma adjustments.
We have prepared the summary unaudited pro forma information utilizing the
historical combined financial statements of CVG. You should read this
information in conjunction with the historical combined financial statements
and notes to those statements, included elsewhere in this information
statement. The summary unaudited pro forma financial data does not purport to
be indicative of the results of CVG in the future or what the financial
position and results of operations would have been had CVG been a separate,
stand-alone entity during the periods shown.
<TABLE>
<CAPTION>
For the
nine
months
ended
September For the year ended
30, December 31,
--------- ------------------
1999 1998 1998
---- ---- ------------------
(in millions)
<S> <C> <C> <C>
Net sales.................................... $672 $639 $865
Gross profit................................. $326 $298 $396
Net income................................... $ 32 $ 21 $ 27
EBITDA (a)................................... $130 $111 $147
</TABLE>
- --------
(a) EBITDA, or earnings before interest, income taxes, depreciation and
amortization, is not a measure defined by generally accepted accounting
principles.
6
<PAGE>
RISK FACTORS
Consider carefully all of the information contained in this information
statement and, in particular, the following factors:
Risks Related to CVG's Business
If CVG does not introduce new products in a timely manner, its products may
become obsolete, and its operating results may suffer.
The cardiovascular products industry is characterized by rapid
technological changes, frequent new product introductions and evolving
industry standards. Without the timely introduction of new products and
enhancements, CVG's products will likely become technologically obsolete over
time, in which case CVG's revenue and operating results would suffer. The
success of CVG's new product offerings will depend on several factors,
including its ability to:
. properly identify and anticipate customer needs;
. innovate and develop new technologies and applications;
. successfully commercialize new technologies in a timely manner;
. manufacture and deliver products in sufficient volumes on time;
. differentiate CVG's offerings from competitors offerings; and
. price products competitively.
In addition, new technologies that CVG develops may not be accepted quickly
because of industry-specific factors, such as the need for regulatory
clearance, unanticipated restrictions imposed on approved indications,
entrenched patterns of clinical practice, uncertainty over third-party
reimbursement and clinicians' fears of malpractice suits.
Moreover, significant technical innovations generally will require a
substantial investment before CVG can determine the commercial viability of
these innovations. CVG may not have the financial resources necessary to fund
these technical innovations. In addition, even if CVG is able to successfully
develop enhancements or new generations of its products, these enhancements or
new generations of products may not produce revenue in excess of the costs of
development, and they may be quickly rendered obsolete by changing customer
preferences or the introduction by CVG's competitors of products embodying new
technologies or features.
CVG may incur product liability and professional liability losses and
insurance coverage may be inadequate or unavailable to cover these losses.
CVG's business exposes it to potential product liability risks that are
inherent in the design, manufacture and marketing of medical devices. CVG's
products are often used in surgical and intensive care settings with seriously
ill patients. In addition, some of the medical devices manufactured and sold
by CVG are designed to be implanted in the human body for long periods of
time. CVG could be the subject of product liability suits alleging that
component failures, manufacturing flaws, design defects or inadequate
disclosure of product-related risks or product-related information could
result in an unsafe condition or injury to patients. Product liability
lawsuits and claims, safety alerts or product recalls in the future,
regardless of their ultimate outcome, could have a material adverse effect on
CVG's business and reputation and on its ability to attract and retain
customers. In addition, CVG's perfusion services subsidiaries expose it to
medical malpractice risks. In recent years, physicians, hospitals and other
medical-service providers have become subject to an increasing number of
lawsuits alleging medical malpractice. Medical malpractice suits often involve
large claims and substantial defense costs.
7
<PAGE>
Upon the distribution, CVG will assume the defense of litigation involving
claims related to the CardioVascular business and will indemnify Baxter for
all related losses, costs and expenses. As part of its risk management
policies, CVG intends to seek third-party product liability and professional
liability insurance coverage. However, CVG is not certain that it will be able
to obtain product liability and professional liability insurance on
commercially reasonable terms, if at all. Furthermore, product liability
claims against CVG may exceed the coverage limits of any insurance policies or
cause CVG to record a self-insured loss. CVG maintains professional liability
insurance coverage for individuals employed by the subsidiary who perform
perfusion services, although the amount of that coverage may not be
sufficient. Further, even if any product liability or professional liability
losses are covered by a CVG insurance policy, these policies may have
substantial retentions or deductibles that provide that CVG will not receive
insurance proceeds until the losses incurred by CVG exceed the amount of those
retentions or deductibles. To the extent that any losses are below these
retentions or deductibles, CVG will be responsible for paying these losses. A
product liability or professional liability claim in an amount in excess of
applicable insurance could have a material adverse effect on CVG.
CVG may experience supply interruptions that could harm its ability to
manufacture products.
CVG uses a diverse and broad range of raw materials and other items in the
design and manufacture of its products. CVG's non-implantable products are
manufactured from man-made raw materials including resins, chemicals,
electronics and metals. CVG's heart valve therapy products are manufactured
from natural animal tissue and man-made materials. CVG purchases certain of
the materials and components used in the manufacture of its products from
external suppliers. In addition, CVG purchases certain supplies from single
sources for reasons of quality assurance, sole source availability, cost-
effectiveness or constraints resulting from regulatory requirements. CVG
maintains sizeable inventories for certain materials, including those that are
available only from a single vendor.
CVG works closely with its suppliers to assure continuity of supply while
maintaining high quality and reliability. Agreements with certain suppliers
can be terminated by either party upon short notice. The establishment of
additional or replacement suppliers for certain materials and components
cannot be accomplished quickly, due largely to the lengthy United States Food
and Drug Administration (FDA) approval system and the complex nature of
manufacturing processes employed by many suppliers. In an effort to reduce
potential product liability exposure, certain suppliers have announced that
they intend to limit or terminate sales of certain materials and parts to
companies that manufacture implantable medical devices. In the past, Baxter
has been required in specific instances to indemnify certain suppliers for its
CardioVascular business for product liability expenses. There can be no
assurance that an indemnity from CVG will be satisfactory to these suppliers.
If CVG is unable to obtain these raw materials or there is a significant
increase in the price of materials or components, its business could be
harmed.
CVG may not successfully identify and complete acquisitions or strategic
alliances on favorable terms or achieve anticipated synergies relating to any
acquisitions or alliances; CVG may be required to incur additional
indebtedness to fund any acquisitions.
As part of CVG's growth strategy, CVG intends to aggressively seek to
acquire complementary businesses, technologies, services or products and to
enter into strategic alliances. CVG may be unable to find suitable acquisition
candidates. Even if CVG identifies appropriate acquisition or alliance
candidates, CVG may be unable to complete such acquisitions on favorable
terms, if at all. In addition, the process of integrating an acquired
business, technology, service or product into CVG's existing business and
operations may result in unforeseen operating difficulties and expenditures.
Integration of an acquired company also may require significant management
resources that otherwise would be available for ongoing development of CVG's
business. Moreover, CVG may not realize the anticipated benefits of any
acquisition. Future acquisitions could also require issuances of equity
securities, the incurrence of debt, contingent liabilities or amortization
expenses
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related to goodwill and other intangible assets, any of which could harm CVG's
business. CVG currently does not have any current understandings, commitments
or agreements with respect to any material acquisition.
CVG also intends to pursue strategic alliances with third parties. CVG may
not identify appropriate partners with whom to form partnerships or strategic
alliances. Any alliances may not generate anticipated financial results.
CVG's business is subject to economic, political and other risks associated
with international sales and operations.
Because CVG sells its products in a number of foreign countries, its
business is subject to risks associated with doing business internationally.
CVG's net revenue originating outside of the United States, as a percentage of
CVG's total net revenue, was 41% in fiscal year 1998 and 43% for the nine
months ended September 30, 1999. CVG anticipates that revenue from
international operations will continue to represent a substantial portion of
its total revenue. In addition, many of CVG's manufacturing facilities and
suppliers are located outside of the United States. CVG management expects to
increase its sales efforts internationally, which could expose it to greater
risks associated with international sales and operations. Accordingly, CVG's
future results could be harmed by a variety of factors, including:
. changes in foreign medical reimbursement policies and programs;
. unexpected changes in foreign regulatory requirements;
. changes in foreign currency exchange rates;
. changes in a specific country's or region's political or economic
conditions, particularly in emerging regions;
. trade protection measures and import or export licensing requirements;
. potentially negative consequences from changes in tax laws;
. difficulty in staffing and managing foreign operations;
. differing labor regulations; and
. differing protection of intellectual property.
CVG will be subject to risks arising from currency exchange rate
fluctuations.
Approximately 43% of CVG's revenues for the nine months ended September 30,
1999 were generated from outside of the United States. Measured in local
currency, a substantial portion of CVG foreign-generated revenues were
generated in Europe (and primarily denominated in the Euro) and in Japan. The
United States dollar value of CVG foreign-generated revenues varies with
currency exchange rate fluctuations. Significant increases in the value of the
United States dollar relative to the Euro or the Japanese Yen, as well as
other currencies, could have a material adverse effect on CVG's results of
operations. The CardioVascular business has historically been considered in
Baxter's overall risk management strategy. As part of this strategy, Baxter
has used financial instruments to reduce its exposure to adverse movements in
currency exchange rates. As an independent company, CVG plans to implement a
hedging policy which will attempt to manage currency exchange rate risks to an
acceptable level based on management's judgment of the appropriate trade-off
between risk, opportunity and cost; however this hedging policy may not
successfully eliminate the effects of currency exchange rate fluctuations.
The conversion to the Euro has required CVG to modify its business operations
and if these modifications are not successful or if there are any negative
economic developments in the European Union, CVG's business may be negatively
affected.
On January 1, 1999, eleven member countries of the European Union
established fixed conversion rates between their existing currencies and one
common currency, the Euro. Uncertainties exist as to the effects the Euro may
have on CVG's European customers, as well as the impact of the Euro conversion
on the economies
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of the participating countries. Approximately 43% of CVG's revenues for the
nine months ended September 30, 1999 were derived from outside the United
States, a significant portion of which were generated in Europe and primarily
denominated in currencies linked to the Euro since January 1, 1999. Any
negative economic developments that occur in the combined European Union
economy and the possible devaluation of the Euro could have a material
negative impact on CVG's business.
Potential effects on CVG's operations include:
. the need to modify business systems to recognize the Euro as a functional
currency; and
. the competitive impact of cross-border price transparency, which may make
it more difficult for a business to charge different prices for the same
products on a country-by-country basis, particularly once the Euro
currency begins circulation in 2002.
CVG will continue to evaluate the impact of the introduction of the Euro as
CVG continues to expand its operations throughout Europe.
Fluctuations in CVG's quarterly operating results may cause CVG's stock price
to decline.
CVG's revenue and operating results may vary significantly from quarter to
quarter. A high proportion of CVG's costs are fixed, due in part to
significant sales, research and development and manufacturing costs. Thus,
small declines in revenue could disproportionately affect operating results in
a quarter, and the price of CVG common stock may fall. Other factors that
could affect quarterly operating results include:
. demand for and clinical acceptance of products;
. the timing and execution of customer contracts, particularly large
contracts that would materially affect CVG's operating results in a given
quarter;
. the timing of sales of products;
. changes in foreign currency exchange rates;
. unanticipated delays or problems in introducing new products;
. competitors' announcements of new products, services or technological
innovations;
. changes in CVG's pricing policies or the pricing policies of its
competitors;
. increased expenses, whether related to sales and marketing, raw materials
or supplies, product development or administration;
. adverse changes in the level of economic activity in the United States
and other major regions in which CVG does business;
. costs related to possible acquisitions of technologies or businesses;
. CVG's ability to expand its operations; and
. the amount and timing of expenditures related to expansion of CVG's
operations.
CVG's inability to protect its intellectual property could have a material
adverse effect on its business.
CVG's success and competitive position are dependent, in part, upon its
proprietary intellectual property. CVG relies on a combination of patents,
trade secrets and nondisclosure agreements to protect its proprietary
intellectual property, and will continue to do so. Although CVG seeks to
protect its proprietary rights through a variety of means, CVG cannot
guarantee that the protective steps it has taken are adequate to protect these
rights. Patents issued to or licensed by CVG in the past or in the future may
be challenged and held invalid or not infringed by third parties. Competitors
may also challenge CVG's patents.
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CVG will also rely on confidentiality agreements with certain employees,
consultants and other parties to protect, in part, trade secrets and other
proprietary information. These agreements could be breached and CVG may not
have adequate remedies for any breach. In addition, others may independently
develop substantially equivalent proprietary information or gain access to
CVG's trade secrets or proprietary information.
CVG will be required to spend significant resources to monitor and enforce
its intellectual property rights. CVG may not be able to detect infringement
and may lose its competitive position in the industry. In addition,
competitors may design around CVG's technology or develop competing
technologies. Intellectual property rights may also be unavailable or limited
in some foreign countries, which could make it easier for competitors to
capture increased market position.
Third parties may claim CVG is infringing their intellectual property, and
CVG could suffer significant litigation or licensing expenses or be prevented
from selling products.
During recent years, Baxter's competitors have been involved in substantial
litigation regarding patent and other intellectual property rights in the
medical device industry generally. In the future, CVG may be forced to defend
itself against claims and legal actions alleging infringement of the
intellectual property rights of others. Because intellectual property
litigation can be costly and time consuming, CVG's intellectual property
litigation expenses could be significant in the future. Adverse determinations
in any such litigation could subject CVG to significant liabilities to third
parties, could require CVG to seek licenses from third parties and could, if
such licenses are not available, prevent CVG from manufacturing, selling or
using certain of its products, any one of which could have a material adverse
effect on CVG.
Third parties could also obtain patents that may require CVG to either re-
design its products or, if possible, negotiate licenses to conduct its
business. If CVG is unable to re-design its products or obtain a license, CVG
may have to exit a particular product offering.
CVG has not previously operated as an independent company.
CVG does not have an operating history as an independent public company and
CVG's management has no experience, as a group, in operating CVG as a stand-
alone business. While CVG has been profitable as a part of Baxter, there is no
assurance that as a stand-alone company revenues and profits will continue at
the same level. For more information, see "Combined Financial Statements."
The agreements governing CVG's indebtedness will contain restrictive
covenants that may limit CVG's future financial flexibility.
In connection with the distribution, CVG will borrow approximately $[550]
million. This indebtedness is reflected in the pro forma financial information
presented elsewhere in this information statement. The debt agreements
relating to this indebtedness will contain restrictive covenants which may
limit or prohibit certain actions by CVG. For more information, see "CVG
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "CVG's Unaudited Pro Forma
Financial Data."
Risks Related to the Health Care Industry
CVG faces intense competition and consolidation within its industry, and if
CVG does not compete effectively, its business will be harmed.
The cardiovascular medical products industry is highly competitive. CVG
competes with many companies, some of which have longer operating histories,
better brand or name recognition and greater access to financial and other
resources than CVG. Furthermore, the industry is characterized by intensive
development efforts and rapidly advancing technology. CVG's present and future
products could be rendered obsolete or uneconomical
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by technological advances by one or more of CVG's current or future
competitors or by alternative therapies, including drug therapies. The future
success of CVG will depend, in large part, on its ability to anticipate
technology advances and keep pace with other developers of cardiovascular
therapies and services. In addition, the medical devices industry has been
consolidating and as a result, transactions with customers are larger, more
complex and tend to involve more long-term contracts. The enhanced purchasing
power of these larger CVG customers may also increase downward pressure on
product pricing. Competitive market forces may also adversely affect the
prices at which CVG sells its products.
Many existing and potential customers for CVG's products have combined to
form group purchasing organizations (GPOs). GPOs negotiate pricing
arrangements with medical supply manufacturers and distributors and these
negotiated prices are made available to a GPO's affiliated hospitals. If CVG
is not one of the providers selected by a GPO, CVG may be precluded from
making sales to members of a GPO for several years. Even if CVG is one of the
selected providers, CVG may be at a disadvantage relative to other selected
providers that are able to offer volume discounts based on purchases of a
broader range of medical equipment and supplies. Further, CVG may be required
to commit to pricing that has a material adverse effect on sales and profit
margins, the business, financial condition, and results of operations of CVG.
CVG and its customers are subject to various governmental regulations, and
CVG may incur significant expenses to comply with these regulations and
develop its products to be compatible with these regulations.
The medical devices manufactured and marketed by CVG are subject to
rigorous regulation by the FDA and numerous other federal, state and foreign
governmental authorities. The process of obtaining regulatory approvals to
market a medical device, particularly from the FDA and certain foreign
governmental authorities, can be costly and time consuming, and approvals
might not be granted for future products on a timely basis, if at all. Delays
in receipt of, or failure to obtain, approvals for future products could
result in delayed realization of product revenues or in substantial additional
costs which could have material adverse effects on CVG's business or results
of operations. In addition, there can be no assurance that CVG will be or will
continue to be in compliance with applicable FDA and other material regulatory
requirements. If the FDA were to conclude that CVG was not in compliance with
applicable laws or regulations, it could institute proceedings to detain or
seize CVG's products, issue a recall, impose operating restrictions, enjoin
future violations and assess civil penalties against CVG, its officers or its
employees and could recommend criminal prosecution to the Department of
Justice. Moreover, the FDA could proceed to ban, or request recall, repair,
replacement or refund of the cost of, any device or product manufactured or
distributed by CVG. Furthermore, both the FDA and foreign government
regulators have become increasingly stringent, and CVG may be subject to more
rigorous regulation by governmental authorities in the future.
If third-party payors decline to reimburse CVG customers for CVG products or
reduce reimbursement levels, CVG's ability to profitably sell its products
will be harmed.
CVG sells its products and services to hospitals, doctors and other health
care providers, all of which receive reimbursement for the health care
services provided to their patients from third-party payors, such as
government programs (both domestic and international), private insurance plans
and managed care programs. These third-party payors may deny reimbursement if
they determine that a device used in a procedure was not used in accordance
with cost-effective treatment methods, as determined by such third-party
payor, or was used for an unapproved indication. Third-party payors may also
decline to reimburse for experimental procedures and devices. Many of CVG's
existing and future products are cost-effective because they are intended to
reduce overall health care costs over a long period of time. CVG cannot be
certain whether these third-party payors will recognize these cost savings or
will merely focus on the lower initial costs associated with competing
therapies. If CVG's products are not considered cost-effective by third-party
payors, CVG's customers may not be reimbursed for CVG's products.
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In addition, third-party payors are increasingly attempting to contain
health care costs by limiting both coverage and the level of reimbursement for
medical products and services. There can be no assurance that levels of
reimbursement, if any, will not be decreased in the future, or that future
legislation, regulation or reimbursement policies of third-party payors will
not otherwise adversely affect the demand for and price levels of CVG's
products. In Japan, CVG's customers are reimbursed for CVG products under a
government-operated insurance system. Under this system, the Japanese
government annually reviews the reimbursement levels for products. If the
Japanese government decides to reduce reimbursement levels for CVG's products,
CVG's product pricing may be adversely affected.
Risks Related to CVG's Separation from Baxter
The distribution may become a taxable event as a result of subsequent actions
or events undertaken by CVG.
Although the distribution is expected to be free from United States federal
income tax as of the distribution date, it could be rendered taxable as a
result of subsequent actions or events. CVG has agreed not to undertake
specified actions and has agreed that under particular circumstances it will
indemnify Baxter for taxes, liabilities and associated expenses incurred as a
result of any such actions or events. For more information, see "CVG's
Relationship With Baxter After the Distribution--Reorganization Agreement."
After CVG's separation from Baxter, CVG may experience increased costs
resulting from decreased purchasing power, which could decrease its
profitability overall.
Prior to CVG's separation from Baxter, CVG was able to take advantage of
Baxter's size and purchasing power in procuring goods, services and
technology, such as computer software licenses. As a separate, stand-alone
entity, CVG may be unable to obtain goods, services and technology at prices
and on terms as favorable as those it obtained prior to the distribution.
CVG's new name is not yet recognized as a brand in the marketplace, and as a
result its product sales could suffer.
The loss of the "Baxter" brand name may hinder CVG's ability to establish
new relationships. In addition, CVG's current customers, suppliers and
partners may react negatively to the separation from Baxter. In connection
with CVG's separation from Baxter, CVG will change the brand name and some
associated trademarks and trade names under which CVG conducts its business.
This transition to a new name will occur rapidly in certain geographic regions
and over specified periods of time in other regions. CVG believes that sales
of its products have benefited from the use of the "Baxter" brand name. In
addition, although CVG believes that it will have all necessary rights to use
its new brand name, CVG's rights to use the name may be challenged by others.
CVG will need to fund its future capital requirements internally or obtain
third-party financing.
CVG believes that its capital requirements will vary greatly from quarter
to quarter, depending on, among other things, capital expenditures,
fluctuations in CVG's operating results, financing activities and build-up of
inventories. In the past, CVG's working capital requirements have been met
from internally-generated cash flow. CVG believes that the planned initial
debt financing, along with its future cash flow from operations, will be
sufficient to satisfy its working capital, capital expenditure and research
and development requirements for the foreseeable future. However, CVG may be
required or choose to obtain additional debt or equity financing in the
future, especially for significant acquisitions. Future equity financings
could be dilutive to the existing holders of CVG's common stock. Future debt
financings could involve restrictive covenants that limit CVG's ability to
take certain actions. To the extent CVG must obtain financing, CVG cannot
guarantee that financing will be available
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on favorable terms and any financing may not be at interest rates as favorable
as those historically enjoyed by Baxter. See "CVG Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The transitional services being provided to CVG by Baxter may be difficult to
replace without operational problems.
Baxter has agreed to provide certain administrative services to CVG in
various countries around the world. These services include information systems
and telecommunications, human resources, finance and accounting and other
administrative services. In most cases, either party will have the right after
21 months to terminate these arrangements either in whole or in part. If these
arrangements are terminated, CVG will need to seek alternative providers of
these services. CVG may experience operational problems if it is not able to
immediately replace these services or as CVG transitions to another provider's
systems. In addition, since the prices charged to CVG under these arrangements
are intended to approximate the costs of providing the services, the costs of
obtaining services from third parties upon any termination could be in excess
of the costs payable by CVG to Baxter.
Risks Related to Ownership of CVG's Common Stock
CVG's common stock has no prior market, and CVG cannot guarantee that CVG's
stock price will not decline after the distribution.
There has been no prior trading market for CVG's stock and there can be no
assurance as to the prices at which CVG's stock will trade before or after the
date of the distribution. Until the CVG common stock is fully distributed and
an orderly market develops, the prices at which the CVG common stock trades
may fluctuate significantly. Prices for the CVG common stock will be
determined in the trading markets and may be influenced by many factors,
including:
. the depth and liquidity of the market for CVG's stock;
. developments generally affecting the cardiovascular products market;
. investor perceptions of CVG and its business;
. the financial results of CVG;
. CVG's dividend policy; and
. general economic and industry conditions.
For more information, see "The Distribution--Market for CVG Common Stock."
In addition, the stock market, in general, frequently experiences extreme
volatility that is often seemingly unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
trading price of CVG common stock. In the past, securities class action
litigation often has been instituted against companies following periods of
volatility in the market price of their securities. Such litigation could
result in substantial costs and a diversion of management's attention and
resources.
CVG's charter documents and Delaware law contain provisions that may
discourage takeover attempts which could preclude CVG's stockholders from
receiving a change of control premium.
CVG's certificate of incorporation and bylaws and Delaware law contain
anti-takeover provisions that could have the effect of delaying or preventing
changes in control that a stockholder may consider favorable. The provisions
in CVG's charter documents include the following:
. a classified board of directors with three-year staggered terms;
. the ability of CVG's board of directors to issue shares of preferred
stock and to determine the price and other terms, including preferences
and voting rights, of those shares without stockholder approval;
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. stockholder action to be taken only at a special or regular meeting;
. advance notice procedures for nominating candidates to CVG's board of
directors or presenting matters at stockholder meetings;
. removal of directors only for cause; and
. super-majority voting requirements to amend the charter.
The foregoing could have the effect of delaying, deferring or preventing a
change in control of CVG, discouraging bids for CVG's common stock at a
premium over the market price or harming the market price of, and the voting
and other rights of the holders of, CVG's common stock. CVG also is subject to
Delaware laws that could have similar effects. One of these laws prohibits CVG
from engaging in a business combination with any significant stockholder for a
period of three years from the date the person became a significant
stockholder unless specific conditions are met. In addition, CVG has adopted a
stockholder rights plan. The preferred stock purchase rights under this plan,
if triggered, would cause substantial dilution to any person or group who
attempts to acquire a significant interest in CVG without advance approval of
CVG's board of directors. For more information, see "Description of CVG
Capital Stock" and "Certain Anti-Takeover Effects of Provisions of CVG's
Certificate of Incorporation and Bylaws and of Delaware Law."
FORWARD-LOOKING STATEMENTS
This information statement and other materials filed or to be filed by CVG
with the SEC (as well as information included in oral statements or other
written statements made, or to be made, by CVG) contain, or will contain,
disclosures which are "forward-looking statements." Forward-looking statements
include all statements that do not relate solely to historical or current
facts, and can generally be identified by the use of words such as "may,"
"believe," "will," "expect," "project," "estimate," "anticipate," "plan" or
"continue." These forward-looking statements address, among other things,
strategic objectives and the anticipated effects of the distribution. These
forward-looking statements are based on the current plans and expectations of
the management of CVG and are subject to a number of uncertainties and risks
that could significantly affect current plans and expectations and the future
financial condition and results of CVG. These factors include, but are not
limited to:
. the highly competitive nature of the health care industry;
. the efforts of insurers, health care providers and others to contain
health care costs;
. possible changes in United States or foreign programs that may further
limit reimbursements to health care providers and insurers;
. changes in federal, state or local regulation affecting the health care
industry;
. the possible enactment of federal or state health care reform;
. the departure of key executive officers from CVG;
. claims and legal actions relating to product liability;
. fluctuations in the market value of CVG common stock;
. changes in accounting practices;
. changes in general economic conditions and foreign currency
fluctuations;
. product demand and risks associated with industry acceptance;
. new product development and commercialization; and
. other risk factors described above.
As a consequence, current plans, anticipated actions and future financial
conditions and results may materially differ from those expressed in any
forward-looking statements made by or on behalf of CVG. You are cautioned not
to unduly rely on such forward-looking statements when evaluating the
information presented in this information statement.
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CVG'S BUSINESS
Overview
CVG is a global leader in providing a comprehensive line of products and
services to treat late-stage cardiovascular disease. CVG is the worldwide
leader in the design, development, manufacture and marketing of tissue heart
valves and heart valve repair products. Many products manufactured by CVG
occupy leading positions around the world. CVG's engineers and scientists work
closely with many leading clinicians, which has allowed CVG to develop and
commercialize new products and to pioneer new treatment techniques. CVG's
sales are categorized in four main product areas: cardiac surgery, critical
care, vascular and perfusion products and services. CVG is headquartered in
Irvine, California, and supplies its products and services to customers in
more than 80 countries, both through direct sales and distributor
relationships. In 1998, CVG reported sales of $865 million. CVG's products are
manufactured in locations throughout the world, including Brazil, the
Dominican Republic, Japan, The Netherlands, Puerto Rico, Switzerland and the
United States.
Cardiovascular disease is the number one cause of death in the world, and
is among the top three diseases in terms of health care spending in nearly
every country in the world. Around the world, more than $150 billion is spent
each year for the treatment of cardiovascular disease. Cardiovascular disease
is both progressive and pervasive; progressive, in that it tends to worsen
over time, and pervasive because it often affects an individual's entire
circulatory system. In its later stages, surgery frequently becomes the
preferred treatment option. In 1998, more than one million open heart
surgeries were performed worldwide; of these, approximately 64% were coronary
artery bypass graft (CABG) procedures, approximately 24% were heart valve
replacement or repair procedures, and approximately 12% were related to the
repair of congenital heart defects.
CVG expects the following factors to contribute to the growth in the number
of patients being treated for advanced late-stage cardiovascular disease:
. an increasing and aging population;
. the progressive nature of the disease; and
. continued economic development around the world, which permits more
resources to be dedicated to treating chronic health conditions.
Patients undergoing surgical treatment for cardiovascular disease are
likely to encounter a variety of CVG's products and services. For example, an
individual with a heart valve disorder may have a faulty valve re-shaped and
repaired with a CVG annuloplasty ring, or the surgeon may elect to remove the
valve altogether and replace it with one of CVG's handcrafted bioprosthetic
heart valves, which can be made of bovine or porcine tissue. If a patient
undergoes other types of open heart surgery, such as a CABG procedure, the
functions of their heart and lungs may be managed through the use of
disposable products and equipment offered in CVG's perfusion products line.
The perfusion process may be performed by a clinical perfusionist employed by
CVG's perfusion services, the largest organization of contract perfusionists
in the world. A patient with end-stage cardiovascular disease who is awaiting
a heart transplant may receive treatment from CVG's mechanical cardiac assist
system. If the circulatory problems are in the limbs rather than in the heart,
the patients' procedure may involve some of CVG's vascular products, which
include various types of balloon-tipped catheters that are used to remove
blood clots. Finally, virtually all high-risk patients in the operating room
or cardiac-care unit are candidates for having their cardiac function
monitored by CVG's critical care products.
Business Strategy
Treatment of cardiovascular disease represents a significant, growing
opportunity. CVG's strategy is to develop, manufacture and market products
that result in improved therapeutic outcomes for patients with late-stage
cardiovascular disease. CVG plans to aggressively expand its leading product
offerings and develop new products and therapies that improve the quality of
patient care and reduce overall treatment costs. The key aspects of CVG's
strategy include:
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Focus on Late-Stage Cardiovascular Disease Therapy. Cardiovascular
disease is the leading cause of death in the world. CVG has differentiated
itself from other competitors by focusing primarily on late-stage
treatments, which tend to rely more heavily on the use of devices and
implantables and less on behavior-modification or drug therapy. CVG
believes there will be significant opportunity for growth as the aging
global population increases and new technologies are developed.
Invest in Technological Innovation. Clinical performance historically
has been the primary driver of commercial success for products used to
treat cardiovascular disease. CVG's product portfolio includes many leading
technologies, and CVG has been credited with pioneering a variety of new
treatment techniques. CVG plans to increase investment in research and
development to enhance existing technologies and to develop and
commercialize new products and therapies.
Expand Global Sales. Continuing economic development around the world
and expanded global adoption of established medical procedures will provide
attractive growth opportunities for CVG. CVG expects to broaden its sales,
service and distribution channels globally to take advantage of these
opportunities. Currently, an estimated 43% of CVG's sales are derived from
outside of the United States.
Evaluate Attractive Investment Opportunities. CVG's operations generate
significant operating cash flow, some of which CVG plans to reinvest to
accelerate growth and maximize long-term return to its stockholders. CVG
plans to evaluate investment opportunities based on the incremental return
on invested capital in excess of CVG's weighted average cost of capital.
CVG believes that its stockholders will recognize the greatest appreciation
in value through investments which generate the highest incremental return.
Improve Existing Cost Structure. As an independent company, CVG will be
required to anticipate and react to market changes and eliminate
inefficient processes and unnecessary costs. CVG is already pursuing a
number of opportunities to improve its existing cost structure and plans to
continue identifying and implementing additional cost-savings initiatives.
Pursue Strategic Opportunities. The cardiovascular medical products
industry is undergoing significant consolidation. CVG plans to continue
pursuing attractive opportunities to expand its product offerings and
operations through acquisition. Possible acquisition candidates will have
innovative technology positions or well-established product franchises. In
addition, CVG will continue to critically assess all of its product lines
and offerings to ensure that each is contributing a return on invested
capital that meets CVG's short-term and long-term objectives.
CVG's Product and Service Offerings
CVG's comprehensive line of cardiovascular products and services are
categorized into four main areas:
. Cardiac Surgery, encompassing heart valve therapy products, mechanical
cardiac assist systems, and cannulae and cardioplegia;
. Critical Care, featuring cardiac monitoring systems and disposables used
to evaluate cardiac output and measure blood pressure;
. Vascular, which includes products used in peripheral vascular surgery,
surgical accessories, implantable grafts, and endovascular graft systems
for treating aortic aneurysms; and
. Perfusion Products and Services, comprised of oxygenators and related
disposables used during cardiopulmonary bypass, cardiopulmonary bypass
hardware and perfusion services.
Cardiac Surgery
Heart Valve Therapy
CVG is the world's leading manufacturer of tissue heart valves and valve
repair products, which are used to replace or repair a patient's diseased or
defective heart valve. CVG operates two world-class manufacturing facilities
in Irvine, California, and Horw, Switzerland, producing pericardial and
porcine valves from biologically inert animal tissue sewn onto proprietary
wireforms or stents.
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Each year, more than 270,000 patients worldwide have heart valve surgery.
The procedure can extend lives and provide a higher quality of life than many
patients have experienced in years. Depending on a patient's valve condition
as well as other factors such as overall health, age and physical activity
level, a surgeon may elect to replace a malfunctioning valve with a prosthetic
heart valve made either of metal or tissue, or may perform a surgical repair
of the heart valve, a procedure known as an annuloplasty.
CVG expects the number of valve procedures to continue to grow due, in
part, to an aging population; the high incidence in developing nations of
rheumatic fever, which often leads to valvular problems; and the global growth
of cardiovascular disease. Increased health care spending around the world,
and improved diagnostic techniques that allow physicians to detect valve
problems sooner, also are expected to contribute to an increasing number of
heart valve procedures. CVG has been a pioneer in the development and
commercialization of tissue valves and repair products and is the world's
leader in these areas.
Although patients of any age may require valve surgery, younger patients
are more likely to receive a human-donated hemograft, mechanical valve or
repair product, while older patients are more frequently candidates for tissue
valves. Tissue valves can offer considerable lifestyle advantages over
mechanical valves, in that mechanical valve patients must maintain a life-long
regimen of blood-thinning medications. These medications increase the
likelihood of bleeding and related complications, potentially impairing their
physical activity levels or impacting other health conditions. Implantation
rates for tissue valves are exceeding overall valve procedure growth, as
surgeons continue to demonstrate their preference for tissue valves for
certain types of patients.
The core of CVG's tissue product line is the Carpentier-Edwards pericardial
valve, made from the tissue that surrounds a cow's heart. The most widely
prescribed tissue heart valve due to its proven durability and performance is
the Carpentier-Edwards pericardial valve and is the only pericardial valve
available in the United States.
While stented tissue valves represent the vast majority of tissue implants
and the greatest opportunity for growth, some physicians may choose an
unstented porcine tissue valve for select patients. CVG introduced the Prima
Plus, the first stentless valve, nearly a decade ago and continues to offer
this product outside of the United States. CVG also offers mechanical valves,
including the Edwards MIRA bi-leaflet mechanical valve, and the Starr-Edwards
silastic ball valve which CVG launched in the 1960s as the first commercially
available artificial heart valve. The Prima Plus valve is currently in
clinical trials in the United States as part of the FDA approval process and
CVG is awaiting approval to commence clinical trials of the Edwards MIRA valve
in the United States.
In addition to its replacement valves, CVG is the worldwide leader in heart
valve repair products. Through extended product development, training and
promotion, CVG has been a major force in the rapid acceptance of heart valve
repair procedures, also known as annuloplasty, as an alternative to heart
valve replacement. Through its Carpentier-Edwards and Cosgrove-Edwards
annuloplasty systems, CVG offers the broadest offering of heart valve repair
products in the industry.
Mechanical Cardiac Assist
While tens of thousands of patients worldwide need heart transplants each
year, only a fraction--about 4,000 individuals--actually receive a donor
organ. The others must rely on continuous medication therapy or mechanical
assist while they wait for an organ.
CVG's Novacor Left Ventricular Assist System (LVAS) is a small,
electromechanical pump that takes over the hearts pumping function for end-
stage heart disease patients requiring a heart transplant. The device, which
is implanted in the abdomen and surgically attached to the heart's left
ventricle, is regulated by an external controller and battery pack that
automatically responds to a patient's changing heartbeat and circulatory
demands. The LVAS has been shown to add months, and in some cases years, to
patients' lives while they await their donor hearts.
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To date, more than 1,000 patients worldwide have received the Novacor LVAS.
Approved in Europe since 1994 as both a "bridge" for patients awaiting
transplant, as well as a permanent "alternative" to transplant, the Novacor
LVAS was approved in 1998 by the FDA for the "bridge" application only.
Although CVG considers the achievement of the "bridge" approval in the United
States to be a critical milestone toward gaining broader clinical acceptance
of mechanical assist systems, it recognizes the significantly greater patient
need in the "alternative" indication and continues to focus its resources on
pursuing this opportunity.
Cannulae and Cardioplegia
CVG, through the 1997 acquisition of Research Medical, Inc., is a leading
manufacturer of cannulae and cardioplegia products used during cardiac
surgery. Cannulae are various types of specialized tubing that are used in the
surgical field to transport blood from the heart to the cardiopulmonary pump
and oxygenator and to return the blood to the circulatory system. While there
are standard configurations of cannulae, many are custom-designed to suit
individual surgeons' requirements. CVG offers more than 1,200 types of
cannulae and accessories to facilitate the perfusion process.
CVG also offers cardioplegia products that are used to preserve the heart
muscle tissue during open heart surgery. Preservation is necessary because
during traditional open heart surgery, the heart is disconnected from the
body's circulatory system and unless some form of preservation or heart
cooling is employed, the heart tissue will be damaged. Through its close work
with clinicians, CVG helped pioneer a new methodology for administering
cardioplegia through a retrograde approach that delivers cardioplegia
solutions to the coronary sinus and venous side of the heart, thereby
bypassing the blocked coronary arteries.
CVG's more recent developments include a line of cannulae to facilitate
vacuum-assisted venous drainage during perfusion, and dispersion aortic
cannulae, which are used to reduce the pressure of blood flow returning to the
body in the wall of the aorta. CVG also has introduced a number of products to
facilitate coronary artery bypass surgery when it is performed on a beating
heart. Included among these products is the AnastaFlo coronary shunt, which is
used to redirect blood away from the suturing site, and the VisuFlo
humidifying blower, which keeps the surgical site dry and optimizes the
surgeon's visual field during a procedure.
Critical Care
CVG is also a world leader in hemodynamic monitoring systems that are used
to measure a patient's heart function in surgical and intensive care settings.
Hemodynamic monitoring enables a clinician to balance the oxygen supply and
demand of a critically ill patient. Failure to appropriately manage a
patient's hemodynamic needs can cause organ injury, organ failure, or death.
CVG's systems provide important added clinical value by serving as a
diagnostic tool that prompts clinicians to act when a patient's hemodynamic
balance becomes disrupted.
In addition, hemodynamic monitoring plays an important role in assuring
that the heart function of millions of patients who have pre-existing
cardiovascular conditions or other critical illnesses is optimized before they
undergo a surgical procedure. The vast majority of high-risk patients
undergoing open heart, major vascular, major abdominal, neurological, and
orthopedic procedures are candidates for CVG's bedside monitoring
technologies, which are often deployed before, during, and after surgery.
CVG is credited with pioneering the practice of hemodynamic monitoring with
the launch of the original Swan-Ganz catheter in the 1970s. Today, CVG's
extensive line of monitoring catheters and bedside patient monitoring
equipment continue to be considered the standard in critical care medicine.
CVG has played a major role in evolving critical care monitoring technologies,
selling more than 20 million catheters and monitors worldwide, with new
generations of products performing increasingly sophisticated functions.
CVG also is a global leader in the broader field of disposable pressure
monitoring devices and has introduced a line of innovative products enabling
closed-loop arterial blood sampling to protect both patients and clinicians
from the risk of infection.
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Recently CVG initiated the European launch of Vantex, the first anti-
microbial central venous catheter, manufactured from a patented, antimicrobial
material. Central venous catheters are the primary route for fluid and
medication delivery to patients undergoing major surgical procedures and/or
intensive care. Bloodstream infections related to central venous catheters
have increased significantly over the past 10 years, and addressing this life-
threatening and costly problem is another example of CVG's leadership in
critical care.
CVG recognizes that assessing a patient's physiological balance and
minimizing the risk of infection will remain fundamental requirements for
successful treatment of critically ill patients. CVG will continue to leverage
its strength in this area and explore further opportunities in the diagnostics
and therapeutic delivery areas.
Vascular
The pervasive nature of cardiovascular disease means that the conditions
that occur inside of the heart are often duplicated elsewhere in a patient's
body. Outside of the heart, the network of veins and arteries are collectively
referred to as the body's vascular system. Atherosclerotic disease is one
common circulatory condition which involves the thickening of blood-carrying
vessels and the formation of circulation-restricting plaque, clots, and other
substances, and often occurs concurrently in the vascular system as well as in
the heart. When the abdomen, arms or legs are impacted, the diagnosis is
usually peripheral vascular disease (PVD), which occurs in millions of
patients worldwide, and in very advanced cases, may lead to amputation of
patients' limbs.
CVG manufactures and sells a variety of products used to treat PVD,
including a line of balloon-tipped, catheter-based products, as well as
surgical clips and inserts, angioscopy equipment, and artificial implantable
grafts. CVG's Fogarty line of embolectomy catheters has been an industry
standard for removing blood clots from peripheral blood vessels for more than
30 years.
CVG is also working on a number of new innovative technologies to treat
PVD. For example, CVG's Side Branch Occlusion system was launched in 1998 to
help surgeons restore circulation in the legs. By working within the saphenous
veins, the system eliminates the traditional incision along the entire length
of the leg and the extensive complications usually associated with this
procedure.
Another significant area of interest and investment has been the
development of endovascular grafts. CVG has developed the Lifepath AAA System
to treat potentially life-threatening abdominal aortic aneurysms (AAA) with an
endovascular approach. An abdominal aortic aneurysm can form in the aorta, the
body's main circulatory channel, when a portion of the aortic wall becomes
weakened and begins bulging outward. Often, the aneurysm grows until it poses
a life-threatening risk of rupturing. The Lifepath AAA System treats abdominal
aortic aneurysm by inserting an endovascular graft which replaces the wall of
the aorta in the damaged area. By accessing and repairing the aneurysm from
within the aorta, rather than making a major incision that exposes most of the
body's internal organs, the endovascular procedure is less traumatic and
invasive than standard aortic repair surgery. The Lifepath AAA is approved for
commercial sale in Europe and Australia. It remains in clinical trials in the
United States, with an anticipated commercial approval within the next two
years.
Perfusion Products and Services
During the majority of open heart surgical procedures, a patient's heart is
stopped, and the body's blood flow and oxygenation needs are managed through a
series of pumps, tubing and filters attached to a cardiopulmonary bypass
machine. After the surgery is completed, the heart is revived after the normal
blood flow through the heart and lung is restored. The practice of bypassing
the heart and lungs externally during surgery is known as extracorporeal
circulation.
CVG develops, manufactures and markets a diverse line of disposable
products used during extracorporeal circulation, including oxygenators, blood
containers, filters and related devices. Many of the disposable products in
CVG's perfusion product line are coated with CVG's patented Duraflo heparin
treatment, which has been shown to improve the compatibility of medical
devices used in cardiopulmonary bypass procedures with a patient's blood.
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CVG recently expanded its offering of perfusion products to include
hardware with the acquisition of the COBE Century Heart Lung Machine business,
one of the most popular heart-lung machine systems for cardiopulmonary bypass.
CVG also recently acquired and now offers the Metaplus Blood Pump System, a
next-generation cardiopulmonary bypass circuit.
Although CVG had been manufacturing and distributing perfusion products for
years, it did not become active in the service side of the perfusion business
until 1996, when it merged two previously acquired contract perfusion service
companies, PSICOR, Inc. and SETA, Inc., into one company operating as an
indirect, wholly owned subsidiary of CVG. Through this subsidiary, coupled
with the addition of several smaller regional perfusion service providers in
the United States and Europe, CVG now owns or operates the world's largest
practice of contract perfusionists, employing more than 400 clinical
perfusionists who perform an aggregate of more than 50,000 perfusion cases for
open heart surgery per year in the United States. In all but one state, CVG's
perfusion services allow hospitals to purchase perfusion supplies and capital
equipment as well as contract for highly trained personnel who perform
perfusion during open heart and transplant surgeries, blood salvage, and
intra-aortic balloon pumping procedures.
Competition
The medical devices industry is highly competitive. CVG competes with many
companies ranging from small start-up enterprises to larger, established
companies with access to significant financial resources. Furthermore, rapid
product development and technological change characterize the market in which
CVG competes. The present or future products of CVG could be rendered obsolete
or uneconomical by technological advances by one or more of CVG's present or
future competitors or by other therapies, including drug therapies. CVG must
continue to develop and acquire new products and technologies to remain
competitive in the cardiovascular medical devices industry.
CVG believes that it competes primarily on the basis of product reliability
and performance, product features that enhance patient benefit, customer and
sales support, and cost-effectiveness.
The cardiovascular segment of the medical device industry is dynamic and
currently undergoing significant change due to cost-of-care considerations,
regulatory reform, industry and customer consolidation, and evolving patient
needs. The ability to provide cost-effective products and services that
improve clinical outcomes is becoming increasingly important for medical
device manufacturers.
CVG's products and services face substantial competition from a number of
companies. In cardiac surgery, the primary competitors include St. Jude
Medical, Inc., Medtronic, Inc., and Sulzer Medica, Ltd. In critical care,
CVG's principal competitors include Abbott Laboratories Inc. and Arrow
International, Inc., as well as a number of smaller companies. In vascular,
CVG's primary competitors include W.L. Gore and Associates, Inc. and Applied
Medical Resources Corporation. In perfusion products, CVG's major competitors
include Medtronic, Inc., Sorin Biomedica Ltd. and Terumo Corporation. In
addition, while CVG is also the leading contract supplier of perfusion
services in the United States, there are many small regional contract service
providers who compete with CVG for contracts in those hospitals that outsource
perfusion services.
Sales and Marketing
CVG has a number of broad product lines which require a sales and marketing
strategy that is tailored to its customers in order to deliver high quality,
cost-effective products and services to all of its customers worldwide. CVG's
portfolio includes some of the most respected product brands in cardiovascular
devices today, including Carpentier-Edwards, Cosgrove-Edwards, Duraflo,
Fogarty, Starr-Edwards and Swan-Ganz. Because of the diverse global needs of
the population that CVG serves, CVG's distribution system includes a direct
sales force and independent distributors. For the period ended September 30,
1999, approximately 12% of CVG's net sales were from sales to Allegiance
Corporation, which serves as a distributor of CVG products in the United
States. Allegiance distributes CVG products to a variety of customers,
including hospitals, surgical centers and other health care institutions. CVG
is not dependent on any single end-user customer and no single end-user
customer accounted for more than 10% of CVG's net sales in the period ended
September 30, 1999.
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Sales personnel work closely with the primary decision makers who purchase
CVG's products, whether they are physicians, material managers, nurses,
biomedical staff, hospital administrators or purchasing managers.
Additionally, CVG's sales force actively pursues approval of CVG as a
qualified supplier for hospital group purchasing organizations that negotiate
contracts with suppliers of medical products. CVG already has contracts with a
number of national buying groups and is working with a growing number of
regional buying groups that are emerging in response to cost containment
pressures and health care reform in the United States.
United States
In the United States, CVG sells substantially all of its products through
its direct sales force. For the period ended September 30, 1999, 57% of CVG's
sales were derived from sales to customers in the United States.
International
For the period ended September 30, 1999, 43% of CVG's sales were derived
internationally through its direct sales force and independent distributors.
CVG sells its products in more than 80 countries. Major international
countries in which CVG's products are sold include: Australia, Belgium,
Canada, France, Germany, Italy, Japan, The Netherlands, Spain and the United
Kingdom. The sales and marketing approach in international geographies varies
depending on each country's size and state of development. See "CVG's
Relationship with Baxter After the Distribution--Distribution Agreements."
Raw Materials and Manufacturing
CVG uses a diverse and broad range of raw and organic materials in the
design, development and manufacture of its products. CVG purchases certain of
the materials and components used in manufacturing its products from external
suppliers. In addition, CVG purchases certain supplies from single sources for
reasons of quality assurance, sole source availability, cost effectiveness or
constraints resulting from regulatory requirements.
Agreements with certain suppliers can be terminated by either party upon
short notice. The establishment of additional or replacement suppliers for
certain materials and components cannot be accomplished quickly due largely to
the lengthy FDA approval system and the complex nature of manufacturing
processes employed by many suppliers. CVG works closely with its suppliers to
assure continuity of supply while maintaining high quality and reliability.
CVG's non-implantable products are manufactured from man-made raw materials
including resins, chemicals, electronics and metal. Most of CVG's heart valve
therapy products are manufactured from natural tissues harvested from animal
tissue, as well as man-made materials. In an effort to reduce potential
product liability exposure, certain suppliers have announced that they intend
to limit or terminate sales of certain materials and parts to companies that
manufacture implantable medical devices.
In 1998, Congress enacted the Biomaterials Access Assurance Act to help
ensure a continued supply of raw materials and component parts essential to
the manufacture of medical devices by allowing for rapid dismissal of claims
against suppliers in product liability lawsuits if certain facts and
circumstances exist. This law has not yet had a material impact, and it is not
possible to assess the long-term impact it will have, on the continued
availability of raw materials. The inability to develop satisfactory
alternatives, if required, or a reduction or interruption in supply or a
significant increase in the price of materials or components could have a
material adverse effect on CVG's business.
Quality Assurance
CVG is committed to providing high quality products to its customers. To
meet this commitment, CVG has implemented modern quality systems and concepts
throughout the organization. The quality system starts with the initial
product specification and continues through the design of the product,
component specification processes and the manufacturing, sales and servicing
of the product. The quality system is designed to build in quality and to
utilize continuous improvement concepts throughout the product life.
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CVG's operations are certified under the applicable international quality
systems standards, such as ISO 9001, ISO 9002, EN46001 and EN46002. ISO 9001
and 9002 require, among other items, an implemented quality system that
applies to component quality, supplier control and manufacturing operations.
In addition, ISO 9001 and EN46001 require an implemented quality system that
applies to product design. These certifications can be obtained only after a
complete audit of a company's quality system has been conducted by an
independent outside auditor. These certifications require that CVG's
facilities undergo periodic reexamination.
Research and Development
CVG is engaged in ongoing research and development to introduce clinically
advanced new products, to enhance the effectiveness, ease of use, safety and
reliability of its existing products and to expand the applications of its
products as appropriate. CVG is dedicated to developing novel technologies
that will furnish health care providers with a more complete line of products
to treat late-stage cardiovascular disease.
CVG's research and development activities are carried out primarily in
facilities located in the United States. CVG's research and development staff
is focused on product design and development, quality, clinical research and
regulatory compliance. To pursue primary research efforts, CVG has developed
alliances with several leading research institutions and universities. CVG
also works with leading clinicians around the world in conducting scientific
studies on CVG's existing and developing products. These studies include
clinical trials which provide data for use in regulatory submissions and post-
market approval studies involving applications of CVG's products.
CVG spent $38 million on research and development (6% of total sales)
during the nine months ended September 30, 1999, approximately $56 million (7%
of total sales) in 1998 and approximately $53 million (6% of total sales) in
1997. These funds have been used primarily to develop new products and to
improve and expand the applications for existing products.
Proprietary Technology
Patents and other proprietary rights are important to the success of CVG's
business. CVG also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. CVG reviews third-party patents and patent
applications in an effort to develop an effective patent strategy, identify
licensing opportunities and monitor the patent claims of others.
The medical device industry has been engaged in substantial litigation in
recent years regarding patent and other intellectual property rights in the
medical device industry. From time to time, CVG may be subject to claims of,
and legal actions alleging, infringement of the patent rights of others. While
CVG has taken numerous steps to continuously review the patents of others with
regard to its products, there can be no assurance that all pertinent third-
party patents have been identified. An adverse outcome with respect to any one
or more of these claims or actions could have a material adverse effect on
CVG.
CVG owns numerous patents and has numerous patent applications pending in
the United States and in certain foreign countries that relate to aspects of
the technology used in many of its products. CVG's policy is generally to file
patent applications in the United States and certain foreign countries where
CVG believes it is commercially advantageous to do so. In addition, CVG is a
party to several license agreements with unrelated third parties pursuant to
which it has obtained, for varying terms, the exclusive or non-exclusive
rights to certain patents held by such third parties in consideration for
cross-licensing rights or royalty payments. CVG has also granted various
rights in its own patents to others under license agreements. There can be no
assurance that pending patent applications will result in issued patents.
Competitors may challenge the validity and enforceability of, or circumvent
these patents issued to or licensed by CVG. Such patents may also be found to
be not infringed and thus insufficiently broad to provide CVG with a
competitive advantage.
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CVG actively monitors the products of its competitors for possible
infringement of CVG's owned and/or licensed patents. Historically, litigation
has been necessary to enforce certain patent rights held by CVG and CVG plans
to continue to defend and prosecute its rights with respect to such patents.
However, CVG's efforts in this regard may not be successful. In addition,
patent litigation could result in substantial cost to and diversion of effort
by CVG. CVG also relies upon trade secrets for protection of its confidential
and proprietary information. Others may independently develop substantially
equivalent proprietary information and techniques, and third parties may
otherwise gain access to CVG's trade secrets.
It is CVG's policy to require certain of its employees, consultants and
other parties to execute confidentiality and invention assignment agreements
upon the commencement of employment or consulting relationships with CVG.
However, these agreements may not provide meaningful protection against, or
adequate remedies for, the unauthorized use or disclosure of CVG's trade
secrets.
CVG has the following registered trademarks and non-registered trademarks
that are referred to in this information statement:
Registered trademarks:
AnastaFlo(R) Duraflo(R) Novacor(R)
Bentley(R) Edwards MIRA(R) Starr-Edwards(R)
Carpentier-Edwards(R) Fogarty(R) Swan-Ganz(R)
Cosgrove-Edwards(R) Lifepath AAA(R) System Vantex(R)
Non-registered trademarks:
Century(TM) Metaplus(TM)
Edwards Prima Plus(TM) Side Branch Occlusion(TM)
Edwards Prima(TM) Plus System
Many of these trademarks have also been registered for use in certain
foreign countries where registration is available and CVG has determined it is
commercially advantageous to do so.
Government Regulation and Other Matters
Regulatory Approvals
In the United States, the FDA, among other government agencies, is
responsible for regulating the introduction of new medical devices. The FDA
regulates laboratory and manufacturing practices, labeling and record keeping
for medical devices, and review of required manufacturers' reports of adverse
experience to identify potential problems with marketed medical devices. Many
of the devices that CVG develops and markets are in a category for which the
FDA has implemented stringent clinical investigation and pre-market approval
requirements. The process of obtaining FDA approval to market a product can be
resource-intensive, lengthy and costly. FDA review may involve substantial
delays that adversely affect the marketing and sale of CVG's products. Any
delay or acceleration experienced by CVG in obtaining regulatory approvals to
conduct clinical trials or in obtaining required market clearances (especially
with respect to significant products in the regulatory process that have been
discussed in public announcements) may affect CVG's operations or the market's
expectations for the timing of such events and, consequently, the market price
for CVG's common stock.
The FDA has the authority to halt the distribution of certain medical
devices, detain or seize adulterated or misbranded medical devices, or order
the repair, replacement or refund of the costs of such devices. The FDA may
also require notification of health professionals and others with regard to
medical devices that present unreasonable risks of substantial harm to the
public health. The FDA may enjoin and restrain certain violations of the Food,
Drug and Cosmetic Act and the Safe Medical Devices Act pertaining to medical
devices, or initiate action for criminal prosecution of such violations.
Moreover, the FDA administers certain controls over the export of medical
devices from the United States and the importation of devices into the United
States.
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Medical device laws are also in effect in the other countries in which CVG
does business outside of the United States. These range from comprehensive
device approval requirements for some or all of CVG's medical device products
to requests for product data or certifications. The number and scope of these
requirements are increasing.
Health Care Initiatives
Government and private sector initiatives to limit the growth of health
care costs, including price regulation and competitive pricing, are continuing
in many countries where CVG does business, including the United States. As a
result of these changes, the marketplace has placed increased emphasis on the
delivery of more cost-effective medical therapies. Although CVG believes it is
well positioned to respond to changes resulting from this worldwide trend
toward cost containment, proposed legislation and/or changes in the
marketplace could have an adverse impact on future operating results.
Diagnostic-related groups' reimbursement schedules regulate the amount the
United States government, through the United States Health Care Financing
Administration, will reimburse hospitals and doctors for the in-patient care
of persons covered by Medicare. In response to rising Medicare and Medicaid
costs, several legislative proposals in the United States have been advanced
which would restrict future funding increases for these programs. While CVG
has been unaware of significant domestic price resistance directly as a result
of the reimbursement policies of diagnostic-related groups, changes in these
reimbursement levels and processes could have an adverse effect on CVG's
domestic pricing flexibility.
In keeping with the increased emphasis on cost-effectiveness in health care
delivery, the current trend among hospitals and other customers of medical
device manufacturers is to consolidate into larger purchasing groups to
enhance purchasing power. The medical device industry has also experienced
some consolidation, partly in order to offer a broader range of products to
large purchasers. As a result, transactions with customers are larger, more
complex and tend to involve more long-term contracts than in the past. The
enhanced purchasing power of these larger customers may also increase the
pressure on product pricing, although management is unable to estimate the
potential impact at this time.
Legal Matters
CVG operates in an industry susceptible to significant product liability
claims. In recent years, there has been an increased public interest in
product liability claims for implanted or other medical devices. These claims
may be brought by individuals seeking relief for themselves or, increasingly,
by groups seeking to represent a class. In addition, product liability claims
may be asserted against CVG in the future arising out of events not known to
management at the present time. Management believes that CVG's risk management
practices, including insurance coverage, are adequate to protect against
potential product and professional liability losses.
A subsidiary of Baxter is one of many defendants named in a qui tam
proceeding in the United States District Court for the District of
Massachusetts which is an action in which the plaintiff sues for the
government as well as itself. The plaintiff alleges that, beginning in 1991,
Baxter sold unidentified medical products to hospitals and caused the
hospitals to file false claims for reimbursement with the United States
government. Although the Department of Justice, through the United States
Attorney's office, filed with the District Court its "Notice of Election to
Decline to Intervene", the plaintiff has chosen to proceed with the lawsuit. A
motion to dismiss the case has been filed by all the manufacturing defendants,
which is pending before the court. It is unclear which of Baxter's products
are involved in the allegations of the complaint and whether products sold by
CVG are included.
Baxter is a defendant, along with other companies, in a lawsuit filed in
California arising under Proposition 65, a regulation which requires a
manufacturer to warn consumers of a product containing a substance known to
the state to cause cancer. The lawsuit alleges that Baxter failed to provide
an adequate and reasonable warning that certain of its products contain di-2-
ethylhexylphthalate (DEHP), which has been listed by the state of
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California as a carcinogen. DEHP is the plasticizer which makes polyvinyl
chloride tubing flexible. Baxter is aggressively defending this action. Some
of CVG's products may be the subject of this action.
In 1996, government authorities in Germany began an investigation into
certain business and accounting practices by heart valve manufacturers. As a
part of this investigation, documents were seized from CVG and certain other
manufacturers. Based upon currently available information, CVG does not expect
these investigations to have a materially adverse impact on the company's
financial position, results of operations or liquidity.
CVG is also subject to various environmental laws and regulations both
within and outside of the United States. The operations of CVG, like those of
other medical device companies, involve the use of substances regulated under
environmental laws, primarily in manufacturing and sterilization processes.
While it is difficult to quantify the potential impact of compliance with
environmental protection laws, management believes that such compliance will
not have a material impact on CVG's financial position, results of operations
or liquidity.
Properties
The locations and uses of the major properties of CVG are as follows:
<TABLE>
<C> <C> <S>
North America
Irvine, California (1) Headquarters, Research and Development,
Regulatory and Clinical Affairs and
Manufacturing
Oakland, California (2) Administrative, Research and Development,
Regulatory and Clinical Affairs and
Manufacturing
San Diego, California (2) Administrative, Service Center and Warehouse
Memphis, Tennessee (1) Distribution and Logistics
Midvale, Utah (1) Administrative, Research and Development,
Regulatory Affairs and Manufacturing
Haina, the Dominican Republic (2) Manufacturing
Anasco, Puerto Rico (2) Manufacturing
Europe
Maurepas, France (2) Administrative
Uden, The Netherlands (1) Warehouse, Distribution, Manufacturing and
Offices
Horw, Switzerland (2) Manufacturing
[ ], Switzerland (2) European Headquarters
South America
Sao Paulo, Brazil (2) Manufacturing
</TABLE>
- --------
(1) Owned property.
(2) Leased property.
The leases for the leased properties set forth above generally expire
within eight years. The leased properties range in size from approximately
19,000 square feet to 46,000 square feet with rents ranging from approximately
$1.00 to $4.00 per square foot. These leases generally are not renewable.
Certain of these leases will require the consent of the landlord for Baxter to
assign or sublease the property to CVG.
Employees
CVG employs over 5,000 employees worldwide, the majority of whom are
located at the company's headquarters in Irvine, California, and at its
manufacturing facility in Puerto Rico. Other major concentrations of employees
are located in Europe and Brazil. CVG emphasizes competitive compensation,
benefits, equity participation and work environment policies in its efforts to
attract and retain qualified personnel. None of CVG's North American employees
is represented by a labor union. In various countries outside of North
America, there are a limited number of employees who have relationships with
works councils or trade unions. CVG considers its relations with its employees
to be good.
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<PAGE>
CVG'S RELATIONSHIP WITH BAXTER AFTER THE DISTRIBUTION
General
Immediately prior to the distribution, CVG will be a wholly-owned
subsidiary of Baxter. After the distribution, Baxter will not have any
ownership interest in the common stock of CVG, which will be an independent,
publicly traded company and no Baxter directors will also be CVG directors.
Immediately prior to the distribution, Baxter and CVG will enter into
certain agreements to define their ongoing relationship after the distribution
and to allocate tax, employee benefits and certain other liabilities and
obligations arising from periods prior to the distribution date. These
agreements are being entered into between Baxter and CVG while CVG is still a
wholly owned subsidiary of Baxter, and certain terms of these agreements are
not the same as would have been obtained through negotiations with an
unaffiliated third party.
Reorganization Agreement
Baxter and CVG will enter into an Agreement and Plan of Reorganization (the
reorganization agreement) providing for, among other things, the principal
corporate transactions required to effect the separation of the CardioVascular
business from the remaining Baxter businesses and the distribution, and
certain other agreements governing the relationship between Baxter and CVG
after the distribution. The following description is intended as a summary of
the reorganization agreement. We encourage you to read, in its entirety, the
reorganization agreement, which is included as an exhibit to the registration
statement of which this information statement is a part.
Pursuant to the reorganization agreement, Baxter will transfer to CVG
substantially all of the assets, and CVG will assume substantially all of the
corresponding liabilities, of the CardioVascular business. See "CVG's
Business." The assets of the CardioVascular business will be transferred to
CVG on an "as is, where is" basis and no representations or warranties will be
made by Baxter with respect to the assets other than certain product-related
indemnities.
Subject to certain exceptions, the reorganization agreement will provide
for cross-indemnities principally designed to place financial responsibility
for the obligations and liabilities of the CardioVascular business with CVG
and financial responsibility for the obligations and liabilities of Baxter's
retained businesses and its other subsidiaries with Baxter. Specifically, CVG
has agreed to assume liability for, and to indemnify Baxter against, any and
all liabilities associated with the CardioVascular business, including any
litigation, proceedings or claims relating to the products and operations of
the transferred business whether or not the underlying basis for such
litigation, proceeding or claim arose prior to or after the distribution date.
See "CVG's Business--Government Regulation and Other Matters." Baxter has
agreed to indemnify CVG against any and all liabilities associated with
Baxter's retained businesses and its other subsidiaries.
The reorganization agreement will also provide that CVG will assume and
indemnify Baxter for all environmental liabilities that arise from or are
attributable to the operations of the CardioVascular business regardless of
when these liabilities arose. This includes, but is not limited to, off-site
waste disposal liabilities, except that Baxter will retain the liabilities
relating to two off-site disposal locations. In addition, Baxter has agreed to
indemnify CVG against any and all environmental liabilities associated with
the retained Baxter businesses and its other subsidiaries.
The reorganization agreement will also provide, among other things, that,
in order to avoid potentially adverse tax consequences relating to the
distribution, for a period of two years after the distribution, CVG will not:
(1) cease to engage in an active trade or business within the meaning of
the Internal Revenue Code of 1986, as amended;
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<PAGE>
(2) issue or redeem any share of stock of CVG, except for certain issuances
and redemptions for the benefit of CVG's employees, or to effect
acquisitions by CVG in the ordinary course of business, or in
connection with the issuance of any convertible debt by CVG, or in
accordance with the requirements for permitted purchases of CVG common
stock as set forth in Section 4.05(1)(b) of Revenue Procedure 96-30
issued by the IRS; or
(3) liquidate or merge with any other corporation;
unless, with respect to (1), (2) or (3) above, either (a) an opinion is
obtained from counsel to Baxter, or (b) a ruling is obtained from the IRS, in
either case to the effect that such act or event will not adversely affect the
federal income tax consequences of the distribution to Baxter or its
stockholders who receive CVG stock. CVG believes that these limitations will
not significantly constrain its activities or its ability to respond to
unanticipated developments. See "The Distribution--Important Federal Income
Tax Consequences."
The reorganization agreement will also provide that if, as a result of
certain transactions occurring after the distribution date involving either
the stock or assets of either CVG or any of its subsidiaries, or any
combination thereof, the distribution fails to qualify as tax-free under the
provisions of Section 355 of the United States tax code, CVG will indemnify
Baxter for all taxes, liabilities and associated expenses, including penalties
and interest, incurred as a result of such failure of the distribution to
qualify under Section 355 of the tax code. The reorganization agreement will
further provide that if the distribution fails to qualify as tax-free under
the provisions of Section 355 of the tax code, other than as a result of a
transaction occurring after the distribution date involving either the stock
or assets of CVG or any of its subsidiaries, or any combination of stock or
assets, then CVG will not be liable for those taxes, liabilities or expenses.
See "The Distribution--Important Federal Income Tax Consequences."
The reorganization agreement will also provide for the allocation of
benefits between Baxter and CVG under existing insurance policies after the
distribution date for claims made or occurrences prior to the distribution
date. The reorganization agreement also sets forth procedures for the
administration of insured claims. In addition, the reorganization agreement
provides that Baxter will use its reasonable efforts to maintain directors'
and officers' insurance at substantially the level of Baxter's current
directors' and officers' insurance policy for a period of three years with
respect to the directors and officers of Baxter who will become directors and
officers of CVG as of the distribution date for acts relating to periods prior
to the distribution date.
The reorganization agreement will provide that prior to the distribution
date the certificate of incorporation and bylaws of CVG will be substantially
in the forms attached as exhibits to the registration statement of which this
information statement is a part and that as of the distribution date the
directors of CVG will be the persons named in "CVG Management--Board of
Directors."
The reorganization agreement will also provide that each of Baxter and CVG
will be granted access to certain records and information in the possession of
the other. In addition, the reorganization agreement requires Baxter and CVG
to retain for a period of ten years following the distribution the information
in its possession relating to the other. After the ten year period, Baxter and
CVG must give prior notice to the other of their intention to dispose of such
information.
The reorganization agreement will also address the treatment of employee
benefit matters and other compensation arrangements for certain former and
current CVG employees and their beneficiaries and dependents, as well as
certain former employees of certain former CardioVascular businesses and their
beneficiaries and dependents (we refer to these persons collectively as the
CVG Participants). These provisions of the reorganization agreement
contemplate that CVG will establish certain profit sharing, retirement savings
and welfare plans effective on the distribution date. The reorganization
agreement will provide that the account balances (including outstanding loans)
of all CVG Participants in the Baxter International Inc. and Subsidiaries
Incentive Investment Plan, and the plan assets related to these liabilities,
will be transferred to
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CVG's new retirement savings plan. The reorganization agreement will also
generally provide that, after the distribution date, CVG will assume all
liabilities for benefits under any welfare plans related to CVG Participants,
other than certain claims incurred on or before the distribution date.
Moreover, the reorganization agreement will provide that, effective as of the
distribution date, CVG will become responsible for all other liabilities to
CVG Participants (including unfunded supplemental retirement benefits), other
than certain accruals under the Baxter Defined Benefit Excess Plan.
Finally, the reorganization agreement will provide that the distribution
will not be made until specified conditions are satisfied or waived by the
Baxter board of directors in its sole discretion. Even if all of the
conditions are satisfied, the reorganization agreement may be terminated and
the distribution abandoned by the Baxter board of directors, in its sole
discretion, without the approval of the Baxter stockholders, at any time prior
to the distribution date. See "The Distribution--Distribution Conditions and
Termination."
Tax Sharing Agreement
Baxter and CVG will enter into a tax sharing agreement that allocates tax
liabilities and responsibilities between Baxter and CVG for various tax
matters, including (1) responsibility for tax audits for periods prior and
subsequent to the distribution date, (2) certain tax consequences of the
distribution and related transactions and (3) consolidated alternative minimum
tax and other tax credit carry-forwards as of the distribution date between
Baxter and CVG.
Distribution Agreements
Baxter and CVG will enter into a number of distribution agreements, to be
effective as of the distribution date, pursuant to which Baxter will serve as
the distributor of CVG products in Argentina, Australia, Greece, Ireland, New
Zealand and in certain Nordic countries. In most European countries, as well
as in India, Baxter's services will be limited to various physical
distribution services. In the other countries, Baxter will provide more
extensive sales and marketing assistance and will take legal title to products
before resale to the end customers. Baxter may also contract with third-party
distributors for the distribution of CVG products. In addition, in Russia and
the Czech Republic, Baxter will provide certain sales and marketing support
services to CVG but will not provide physical distribution services and will
not take title to products.
The initial term of the distribution agreements is generally less than two
years. The distribution agreements may be renewed upon the mutual agreement of
the parties. In the event of a change in control of one of the parties to the
distribution agreements, the other party to the agreement will have the right,
subject to certain notice periods and other restrictions, to terminate such
agreement prior to its normal expiration.
Under certain distribution agreements, CVG is required within the
applicable territories to distribute all covered products through Baxter,
subject to certain exceptions. In addition, in certain jurisdictions, Baxter
may not market, promote or solicit orders for any product that competes with
any covered product. Baxter may, however, take orders for, stock and sell
competing products in response to customer requests.
The compensation received by Baxter under the distribution agreements
generally will approximate or be based upon Baxter's direct and indirect costs
of distribution, plus, in the case of those territories where Baxter performs
more than mere physical distribution services, a margin comparable to the
amounts reflected in the pro forma financial statement of CVG contained
elsewhere in this document. See "CVG's Unaudited Pro Forma Financial Data" on
page 37.
Services and Other Agreements
Baxter and CVG will enter into several services agreements, to be effective
from and after the distribution date, pursuant to which Baxter will provide to
CVG certain administrative services that may be necessary for CVG to conduct
its business. Baxter will provide a variety of services to CVG, including
information systems
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<PAGE>
and telecommunications, human resources, finance and accounting and other
administrative services. These agreements will be for varying terms and,
subject to certain exceptions, are generally terminable by either party prior
to the date that is four months before the expiration date. Under certain
circumstances involving a change in control, CVG and Baxter may terminate the
agreements within a shorter timeframe. The agreements may be renewed upon
expiration by mutual agreement of the parties. The prices at which Baxter will
provide these services generally will be equal to or based on the actual cost
of rendering these services.
The CardioVascular business in Japan, including certain manufacturing
operations, will not be transferred to CVG at the time of the distribution due
to Japanese regulatory requirements and business culture considerations. It
will be operated pursuant to a joint venture under which a Japanese subsidiary
of Baxter will retain ownership of the business assets, but a subsidiary of
CVG will hold a 90% profit interest. CVG will have an option to purchase the
Japanese business assets, which option may be exercised no earlier than 26
months following the distribution date and no later than 60 months following
the distribution date. In addition, CVG and Baxter will have the opportunity
to terminate the joint venture in the event of the occurrence of certain
change of control events with respect to the other.
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THE DISTRIBUTION
Background and Reasons for the Distribution
Baxter is creating an independent, publicly traded company for its
CardioVascular business because it believes that the combined value of two
separate companies will be greater than the value of Baxter as a whole today.
CVG expects that the distribution will allow it to compete more effectively in
the intensely competitive and rapidly consolidating cardiovascular medical
device industry. Following the distribution, Baxter will have the ability to
invest more resources in its remaining core businesses, which it expects will
further enhance its ability to bring new products to market and to expand in
global markets.
Improved Ability to Compete in Cardiovascular Medical Device Industry
CVG will benefit from focusing on treating late-stage cardiovascular
disease. While CVG has developed leadership positions in several niche
segments of the cardiovascular medical device industry, its competitive
position is being challenged by larger and more focused "pure play"
competitors. As size, breadth and access to emerging technologies become more
important in the rapidly evolving and consolidating cardiovascular medical
device industry, CVG intends to accelerate its rate of innovation, and make a
significant contribution to its product development pipeline. CVG expects this
strategy to ultimately lead to the commercialization of more and improved
treatment options for CVG's customers and their patients. In addition, CVG
expects that it will increase funding of internal development and be more
aggressive in pursuing acquisition and strategic alliance opportunities. The
distribution will provide CVG with a publicly traded equity security that can
be used to provide it with more flexibility in making acquisitions.
Attraction and Retention of Key Employees
CVG's management believes that having a publicly traded equity security
will create a highly effective incentive tool for motivating senior management
and attracting and retaining talented employees at all levels of the company.
Following the distribution, the stock price of CVG will be heavily influenced
by the operational and financial performance of CVG. This direct link between
performance and stock price appreciation should create an effective incentive
system and should serve to enhance the levels of dedication, commitment and
productivity of the management and employees of CVG. The impact of this form
of incentive system on CVG's performance will grow as management and employee
ownership in the company increases through the use of stock options and
participation in stock incentive programs.
Capital Structure and Dividend Policy Optimization
The distribution will provide both Baxter and CVG the opportunity to create
capital structures and adopt dividend policies that best reflect the cash
flow, investment requirements, competitive landscape, stockholder expectations
and corporate strategy and business objectives of each company. By
appropriately tailoring the capital structures of Baxter and CVG, each should
be better able to pursue their strategic objectives while achieving the lowest
overall cost of capital consistent with the risk profiles and competitive
factors inherent in each business.
Manner of Effecting the Distribution
The general terms and conditions relating to the distribution are set forth
in the reorganization agreement between Baxter and CVG. See "CVG's
Relationship With Baxter After The Distribution--Reorganization Agreement."
On the distribution date, Baxter will effect the distribution by delivering
all of the outstanding shares of CVG common stock to First Chicago Trust
Company of New York, a division of EquiServe, as distribution agent, for
distribution to the holders of record of Baxter common stock at the close of
business on the record date. The
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distribution will be made on the basis of one share of CVG common stock for
every [six] shares of Baxter common stock.
The actual number of shares of CVG common stock that will be distributed
will depend on the number of shares of Baxter common stock outstanding on the
record date. The shares of CVG common stock will be validly issued, fully paid
and nonassessable, and the holders of such shares will not be entitled to
preemptive rights. See "Description of CVG Capital Stock." It is expected that
certificates representing shares of CVG common stock will be mailed to Baxter
stockholders on or about [ ], 2000.
Certificates or script representing fractional shares of CVG common stock
will not be issued to Baxter stockholders as part of the distribution.
Instead, each holder of Baxter common stock who would otherwise be entitled to
receive a fractional share will receive cash for those fractional interests
less applicable taxes. The distribution agent will, on or after the
distribution date, aggregate and sell all those fractional interests on the
open market at then market prices and distribute the aggregate proceeds
ratably to Baxter stockholders otherwise entitled to those fractional
interests. Baxter will pay all brokers' fees and commissions in connection
with the sale of fractional interests. See "The Distribution--Important
Federal Income Tax Consequences" for a discussion of the United States federal
income tax treatment of proceeds from fractional share interests.
Important Federal Income Tax Consequences
The distribution is conditioned on Baxter receiving a ruling from the IRS
substantially to the effect that, among other things, the distribution should
qualify as a tax-free spin-off to Baxter and to Baxter's United States
stockholders under the tax-free spin-off provisions (Section 355) of the
Internal Revenue Code of 1986, as amended.
The ruling is based on current provisions of the Internal Revenue Code,
existing regulations under the tax code and current administrative rulings and
court decisions, all of which are subject to change. We have not attempted to
comment on all federal income tax consequences of the distribution that may be
relevant to particular holders, including holders that are subject to special
tax rules such as dealers in securities, foreign persons, mutual funds,
insurance companies, tax-exempt entities, stockholders who acquire their CVG
common stock pursuant to the exercise of employee stock options or otherwise
as compensation and holders who do not hold their Baxter common stock as
capital assets. We urge holders of Baxter common stock to consult their own
tax advisors regarding the federal income tax consequences of the distribution
in light of their personal circumstances and the consequences under applicable
state, local and foreign tax laws.
Provided that the distribution qualifies as a tax-free distribution under
the tax-free spin-off provisions of the tax code, as expected based on the IRS
ruling, a Baxter stockholder should not recognize any income, gain or loss as
a result of the distribution, except, as described below, in connection with
fractional share proceeds from the deemed receipt and sale of any CVG common
stock:
1. A Baxter stockholder's aggregate tax basis for Baxter common stock on
which CVG common stock is distributed and the CVG common stock received
by such stockholder in the distribution (including any fractional shares
of CVG common stock to which such stockholder may be entitled) should be
the same as the basis of Baxter common stock held by such stockholder
immediately prior to the distribution;
2. A Baxter stockholder's aggregate tax basis should be allocated between
his or her Baxter common stock and CVG common stock received in the
distribution (including any fractional shares of CVG common stock deemed
received) in proportion to the fair market value of both the Baxter
common stock and CVG common stock on the distribution date;
3. A Baxter stockholder's holding period for the CVG common stock received
in the distribution (including any fractional shares of CVG common stock
to which such stockholder may be entitled) should include the holding
period of the Baxter common stock on which the distribution is made,
provided that such Baxter common stock is held as a capital asset by
such stockholder on the distribution date;
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4. A Baxter stockholder who receives fractional share proceeds as a result
of the sale of shares of CVG common stock by the distribution agent will
be treated as if such fractional share had been received by the
stockholder as part of the distribution and then sold by such
stockholder. Accordingly, such stockholder should recognize gain or loss
equal to the difference between the cash so received and the portion of
the tax basis in CVG common stock that is allocable to such fractional
share. Such gain or loss should be capital gain or loss, provided that
such fractional share was held by such stockholder as a capital asset at
the time of the distribution; and
5. Baxter should not recognize any gain or loss on the distribution.
If for any reason the distribution does not qualify as a tax-free spin-off
under Section 355 of the tax code, Baxter would be required to recognize gain
equal to the excess of the fair market value of the CVG common stock
distributed to its stockholders over Baxter's basis in the CVG common stock.
Baxter has agreed to indemnify CVG for any tax liability imposed on CVG or any
of its subsidiaries as a result of the distribution being determined to be a
taxable transaction other than due to any act or failure to act of CVG or any
of its subsidiaries. In addition, if the distribution fails to qualify as a
tax-free spin-off under Section 355 of the tax code, each Baxter stockholder
would be generally treated as if such stockholder had received a taxable
dividend in an amount equal to the fair market value of the CVG common stock
received.
Current United States Treasury Regulations require each Baxter stockholder
who receives CVG common stock pursuant to the distribution to attach to his or
her federal income tax return for the year in which the distribution occurs a
detailed statement setting forth data as may be appropriate in order to show
the applicability under Section 355 of the tax code to the distribution.
Baxter will provide the appropriate information to each stockholder of record
as of the record date.
Under the tax code, a holder of Baxter common stock may be subject, under
certain circumstances, to backup withholding at a rate of 31% with respect to
the amount of cash, if any, received as a result of the sale of fractional
share interests unless the holder provides proof of an applicable exemption or
correct taxpayer identification number, and otherwise complies with applicable
requirements of the backup withholding rules. Any amounts withheld under the
backup withholding rules are not additional tax and may be refunded or
credited against the holder's federal income tax liability, provided the
required information is furnished to the IRS.
Market for CVG Common Stock
There is no existing market for CVG common stock. CVG is seeking to list
its common stock on the NYSE. If the shares are accepted for listing, a "when-
issued" trading market for CVG common stock is expected to develop on or
shortly before the record date. The term "when-issued" means that shares can
be traded prior to the time certificates are actually available or issued. We
cannot predict the trading prices for CVG common stock before or after the
distribution date. Until the common stock is fully distributed and an orderly
market develops, the trading prices for CVG's common stock may fluctuate.
Prices for CVG common stock will be determined in the trading markets and may
be influenced by many factors, including:
. the depth and liquidity of the market for CVG common stock;
. developments generally affecting CVG's business;
. the impact of the factors referred to in "Risk Factors" beginning on page
7;
. investor perceptions of CVG and its business;
. the financial results of CVG;
. the dividend policy of CVG; and
. general economic and market conditions.
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We anticipate that CVG common stock will be traded on the NYSE under the
symbol "[ ]." The transfer agent and registrar for the CVG common stock will
be [ ].
As of November 1, 1999, Baxter had 59,360 stockholders of record. Except
for those stockholders who would be entitled to receive less than one share of
CVG common stock, and assuming that each stockholder is a stockholder of
record on the record date, each stockholder will become a stockholder of
record of CVG. For certain information regarding options and other equity-
based awards involving CVG common stock which may become outstanding after the
distribution, see "CVG Executive Compensation." Shares of CVG common stock
distributed to Baxter stockholders in the distribution will be freely
transferable under the Securities Act of 1933, except for shares of CVG common
stock received by persons who may be deemed to be affiliates of CVG. Persons
who may be deemed to be affiliates of CVG after the distribution generally
include individuals or entities that control, are controlled by or are under
common control with CVG and may include certain officers and directors, or
principal stockholders, of CVG. After CVG becomes a publicly traded company,
securities held by persons who are its affiliates will be subject to resale
restrictions under the Securities Act. Affiliates of CVG will be permitted to
sell shares of the entity of which such persons are affiliates only pursuant
to an effective registration statement or an exemption from the registration
requirements of the Securities Act, such as the exemption afforded by Rule 144
under the Securities Act.
Dividend Policy
CVG has no current plans to pay dividends following the distribution.
Dividends will be paid on CVG common stock only if declared by the CVG board
of directors in its sole discretion following the distribution. The payment
and level of cash dividends, if any, will be based upon a number of factors,
including the operating results, cash flow and financial requirements of CVG.
The actual amount and timing of dividends, if any, will depend on CVG's
financial condition, results of operations, business prospects, capital
requirements and any other matters as CVG's board of directors may deem
relevant.
Distribution Conditions and Termination
We expect that the distribution will be effective on the distribution date,
[ ], 2000, provided that, among other things:
1. the SEC has declared effective the registration statement on Form 10
under the Exchange Act, as amended, filed by CVG and no stop order
relating to the registration statement is in effect;
2. Baxter and CVG have received all necessary permits, registrations and
consents required under the securities or blue sky laws of states or
other political subdivisions of the United States in connection with the
distribution or these permits, registrations and consents have become
effective;
3. Baxter and CVG have received the favorable tax ruling from the IRS and
the ruling has not been revoked or modified in any material respect;
4. the NYSE has approved the CVG common stock for listing on the NYSE,
subject to official notice of issuance;
5. Baxter has completed the transfers of assets and liabilities to CVG
required to constitute CVG as described in this information statement;
6. no order, injunction or decree issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing
consummation of the distribution or any of the transactions related
thereto (including the transfers of assets and liabilities contemplated
by the reorganization agreement) is in effect; and
7. Baxter's board of directors has received opinions of its financial
advisors regarding the fairness of the distribution to stockholders of
Baxter.
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The fulfillment of the foregoing conditions will not create any obligation
on the part of Baxter to effect the distribution, and Baxter's board of
directors has reserved the right to amend, modify or abandon the distribution
and the related transactions at any time prior to the distribution date.
Opinions of Financial Advisors
Baxter has engaged Credit Suisse First Boston Corporation (CSFB) and J.P.
Morgan as financial advisors in connection with the distribution. We expect
that the Baxter board of directors will rely, in part, upon the receipt of the
opinions described below in deciding to formally declare the distribution
dividend.
We expect CSFB and J.P. Morgan to deliver to the Baxter board of directors
their written opinions, each dated [ ], 2000, regarding the fairness of
the distribution to stockholders of Baxter.
Each of CSFB and J.P. Morgan will receive customary fees, including
reimbursement of expenses, for its services as financial advisor related to
the distribution, a portion of which is contingent upon the consummation of
the distribution. Baxter also has agreed to indemnify each of CSFB and J.P.
Morgan against certain liabilities and expenses in connection with its
services as financial advisor.
CSFB and J.P. Morgan and their respective affiliates have acted, and may in
the future act, as underwriters for, and have participated as members of
underwriting syndicates with respect to, offerings of Baxter securities. CSFB
and J.P. Morgan have effected securities transactions for Baxter and performed
financial advisory services in connection with certain acquisitions and
dispositions by Baxter. CSFB and J.P. Morgan have received fees from Baxter in
the past for these services and may receive such fees in the future. Each of
CSFB and J.P. Morgan may in the future serve as an underwriter of CVG
securities.
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SELECTED FINANCIAL DATA OF CVG
The following table sets forth selected financial information with respect
to CVG. The information, relating to each of the years ended December 31, 1994
through 1998, has been derived from annual financial statements and related
notes found elsewhere in this information statement. The data for the nine
months ended September 30, 1999 and 1998 have been derived from unaudited
financial statements also appearing in this information statement. This
financial information for the nine months ended September 30, 1999 and 1998
includes all adjustments, consisting only of normal, recurring accruals that
are considered necessary for a fair presentation of combined operating results
for such interim periods. Results are not necessarily indicative of CVG's
performance as an independent company. The information set forth below should
be read in conjunction with "CVG Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the "Combined Financial
Statements" and related notes to the financial statements found elsewhere in
this information statement. Historical per share data for net income and
dividends have not been presented because CVG was not incorporated until
September 1999. Pro forma net income per share data is presented elsewhere in
this information statement. See Note 3 to the "Combined Financial Statements"
and "CVG Management's Discussion and Analysis of Financial Condition and
Results of Operations" for discussions of the effect of certain acquisitions
on CVG's revenues, expenses and financial position.
Selected Historical Financial Data
<TABLE>
<CAPTION>
As of or for
the nine
months ended As of or for the years ended
September 30, December 31,
------------- -----------------------------------
1999 1998 1998 1997 1996 1995 1994
------ ------ ------ ------ ------ ------ ------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data
Net sales.............. $ 672 $ 639 $ 865 $ 879 $ 837 $ 730 $ 632
Gross profit........... $ 328 $ 300 $ 399 $ 416 $ 395 $ 366 $ 306
Net income (a)......... $ 62 $ 47 $ 62 $ (52) $ 87 $ 66 $ 40
Balance Sheet Data
Total Assets........... $1,465 $1,483 $1,483 $1,526 $1,473 $1,390 $1,351
</TABLE>
- --------
(a) See Note 3 to the "Combined Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
for additional information regarding the $132 million in-process research
and development charge in 1997 relating to the acquisition of Research
Medical, Inc.
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CVG'S UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined statements of income and
unaudited combined condensed balance sheet present the combined results of CVG
and its financial position, assuming that the transactions contemplated by the
distribution had been completed as of January 1, 1998 for income statement
purposes and as of September 30, 1999 for balance sheet purposes.
The unaudited pro forma information has been prepared utilizing the
historical combined financial statements of CVG. You should read this
information in conjunction with the historical combined financial statements
and related notes included on pages F-1 to F-17 of this information statement.
We have included the unaudited pro forma financial data as required by the
rules and regulations of the SEC and it is for comparative purposes only. The
unaudited pro forma financial data does not purport to be indicative of the
results of CVG in the future or what the financial position and results of
operations would have been had CVG been a separate, stand-alone entity during
the periods shown.
Unaudited Pro Forma Combined Statement of Income
(in millions, except shares and per share information)
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
-----------------------------------------------
Pro Forma
Historical Adjustments Pro Forma
------------ ------------- ----------------
<S> <C> <C> <C>
Net sales...................... $672 $ -- $ 672
Costs and expenses
Cost of goods sold........... 344 2 (a) 346
Marketing and administrative
expenses ................... 176 18 (b) 194
Research and development
expenses.................... 38 -- 38
Interest, net................ -- 22 (c) 22
Goodwill amortization........ 26 -- 26
Other expense................ 3 -- 3
--------- --------- ----------------
Total costs and expenses....... 587 42 629
--------- --------- ----------------
Income (loss) before income
taxes......................... 85 (42) 43
Income tax expense (benefit)... 23 (12)(d) 11
--------- --------- ----------------
Net income (loss).............. $ 62 $(30) $ 32
========= ========= ================
Share information
Shares to be issued (e)...... [48,618,206]
================
Net income per share (e)..... $ [.66]
================
</TABLE>
Pro Forma Adjustments
(a) To reflect estimated incremental costs resulting from revised distribution
agreements with Baxter in certain foreign locations subsequent to the
distribution.
(b) To reflect estimated incremental costs associated with being an
independent, public company, including costs associated with corporate
administrative services such as tax, treasury, risk management and
insurance, legal, stockholder relations and human resources.
(c) To reflect the estimated interest expense which would have been incurred
by CVG based on the incurrence of $[550] million of debt at a weighted
average interest rate of 5.3%. An increase or decrease of 0.125 points in
the weighted average interest rate would result in an increase or decrease
in interest expense of approximately $1 million.
(d) To reflect the estimated tax impact at statutory rates, for pro forma
adjustments (a) through (c), as well as the estimated impact of different
tax rates available to CVG as a stand-alone company.
(e) Pro forma net income (loss) per share is computed as if the [48,618,206]
common shares of CVG, estimated to be issuable in the distribution, based
on an assumed exchange ratio of one to [six], had been outstanding for the
periods presented.
37
<PAGE>
Unaudited Pro Forma Combined Statement of Income
(in millions, except shares and per share information)
<TABLE>
<CAPTION>
Nine months ended September 30,
1998
------------------------------------
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ------------
<S> <C> <C> <C>
Net sales........................... $639 $-- $ 639
Costs and expenses
Cost of goods sold................ 339 2 (a) 341
Marketing and administrative
expenses......................... 164 18 (b) 182
Research and development expenses. 40 -- 40
Interest, net..................... -- 22 (c) 22
Goodwill amortization............. 26 -- 26
---- ---- ------------
Total costs and expenses............ 569 42 611
---- ---- ------------
Income (loss) before income taxes... 70 (42) 28
Income tax expense (benefit)........ 23 (16)(d) 7
---- ---- ------------
Net income (loss)................... $ 47 $(26) $ 21
==== ==== ============
Share information
Shares to be issued (e)........... [48,618,206]
============
Net income per share (e).......... $ [.43]
============
</TABLE>
Pro Forma Adjustments
(a) To reflect estimated incremental costs resulting from revised distribution
agreements with Baxter in certain foreign locations subsequent to the
distribution.
(b) To reflect estimated incremental costs associated with being an
independent, public company, including costs associated with corporate
administrative services such as tax, treasury, risk management and
insurance, legal, stockholder relations and human resources.
(c) To reflect the estimated interest expense which would have been incurred
by CVG based on the incurrence of $[550] million of debt at a weighted
average interest rate of 5.3%. An increase or decrease of 0.125 points in
the weighted average interest rate would result in an increase or decrease
in interest expense of approximately $1 million.
(d) To reflect the estimated tax impact at statutory rates, for pro forma
adjustments (a) through (c), as well as the estimated impact of different
tax rates available to CVG as a stand-alone company.
(e) Pro forma net income (loss) per share is computed as if the [48,618,206]
common shares of CVG, estimated to be issuable in the distribution, based
on an assumed exchange ratio of one to [six], had been outstanding for the
periods presented.
38
<PAGE>
Unaudited Pro Forma Combined Statement of Income
(in millions, except shares and per share information)
<TABLE>
<CAPTION>
Year ended December 31, 1998
------------------------------------
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ------------
<S> <C> <C> <C>
Net sales........................... $865 $-- $ 865
Costs and expenses
Cost of goods sold................ 466 3 (a) 469
Marketing and administrative
expenses......................... 222 25 (b) 247
Research and development expenses. 56 -- 56
Interest, net..................... -- 29 (c) 29
Goodwill amortization............. 34 -- 34
Other income...................... (6) -- (6)
---- ---- ------------
Total costs and expenses............ 772 57 829
---- ---- ------------
Income (loss) before income taxes... 93 (57) 36
Income tax expense (benefit)........ 31 (22)(d) 9
---- ---- ------------
Net income (loss)................... $ 62 $(35) $ 27
==== ==== ============
Share information
Shares to be issued (e)........... [48,618,206]
============
Net income per share (e).......... $ [.56]
============
</TABLE>
Pro Forma Adjustments
(a) To reflect estimated incremental costs resulting from revised distribution
agreements with Baxter in certain foreign locations subsequent to the
distribution.
(b) To reflect estimated incremental costs associated with being an
independent, public company, including costs associated with corporate
administrative services such as tax, treasury, risk management and
insurance, legal, stockholder relations and human resources.
(c) To reflect the estimated interest expense which would have been incurred
by CVG based on the incurrence of $[550] million of debt at a weighted
average interest rate of 5.3%. An increase or decrease of 0.125 points in
the weighted average interest rate would result in an increase or decrease
in interest expense of approximately $1 million.
(d) To reflect the estimated tax impact at statutory rates, for pro forma
adjustments (a) through (c), as well as the estimated impact of different
tax rates available to CVG as a stand-alone company.
(e) Pro forma net income (loss) per share is computed as if the [48,618,206]
common shares of CVG, estimated to be issuable in the distribution, based
on an assumed exchange ratio of one to [six], had been outstanding for the
periods presented.
39
<PAGE>
Unaudited Pro Forma Combined Balance Sheet
(in millions, except shares and per share information)
<TABLE>
<CAPTION>
September 30, 1999
------------------------------
Pro Forma Pro
Historical Adjustments Forma
---------- ----------- ------
<S> <C> <C> <C>
Current Assets
Accounts and other receivables, net of
allowances of $8 million at September 30,
1999......................................... $ 160 $-- $ 160
Inventories................................... 188 -- 188
Short-term deferred income taxes.............. 14 -- 14
Prepaid expenses.............................. 10 -- 10
------ ---- ------
Total current assets........................ 372 -- 372
------ ---- ------
Property, plant and equipment
Property, plant and equipment................. 493 -- 493
Accumulated depreciation and amortization..... (270) -- (270)
------ ---- ------
Net property, plant and equipment........... 223 -- 223
------ ---- ------
Other assets
Goodwill and other intangibles................ 854 -- 854
Other......................................... 16 -- 16
------ ---- ------
Total other assets.......................... 870 -- 870
------ ---- ------
Total assets.............................. $1,465 $-- $1,465
====== ==== ======
Current liabilities
Accounts payable and accrued liabilities...... $ 151 $ 2 $ 153
------ ---- ------
Total current liabilities................... 151 2 153
------ ---- ------
Long-term debt.................................. -- 550 (a) 550
------ ---- ------
Other non-current liabilities................... 52 -- 52
------ ---- ------
Stockholders' Equity
Investment by and advances from Baxter
International Inc............................ 1,289 (550)(a)
(739)(b) --
Common stock, $1 par value, authorized
[400,000,000] shares, outstanding
[48,618,206] shares.......................... -- 49 (b) 49
Other equity.................................. -- 688 (b) 688
Accumulated other comprehensive income (loss). (27) -- (27)
------ ---- ------
Total liabilities and stockholders' equity.... $1,465 $-- $1,465
====== ==== ======
</TABLE>
Pro Forma Adjustments
(a) To record the planned incurrence of an estimated $[550] million of debt.
(b) To reflect the anticipated distribution of [48,618,206] shares of common
stock at $1.00 par value share (at an assumed distribution ratio of one
share of CVG common stock for every [six] shares of Baxter common stock
held on the record date) and the elimination of Baxter's equity investment
effected by the anticipated distribution of all outstanding shares of CVG
stock to Baxter stockholders.
(c) To reflect the anticipated initial contribution of cash to hourly
employees worldwide to be held in a special stock account under the CVG
Retirement Plan. See further discussion on pages 57 and 59.
40
<PAGE>
CVG MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis presents the factors that had a
material effect on the results of operations of CVG during the years ended
December 31, 1998, 1997 and 1996, and during the nine-month periods ended
September 30, 1999 and 1998. Also discussed is CVG's financial position as of
December 31, 1998 and 1997, and September 30, 1999. You should read this
discussion in conjunction with the historical and unaudited pro forma combined
financial statements and related notes to the financial statements included
elsewhere in this information statement.
Overview
CVG is a global leader in providing a comprehensive line of products and
services to treat late-stage cardiovascular disease. CVG's sales are
categorized in four main product areas: cardiac surgery, critical care,
vascular, and perfusion products and services. See "CVG's Product and Service
Offerings" elsewhere in this information statement. In addition, CVG also
offers a diverse grouping of product lines comprised mostly of select
distributed products that are sold in international markets, and miscellaneous
pharmaceutical products. CVG is headquartered in Irvine, California, and
supplies its products and services to customers in more than 80 countries,
both through direct sales and distributor relationships. CVG's products are
manufactured in locations throughout the world, including Brazil, the
Dominican Republic, Japan, The Netherlands, Puerto Rico, Switzerland and the
United States.
CVG's cardiac surgery portfolio is comprised of products relating to heart
valve therapy, mechanical cardiac assist, and cannulae and cardioplegia
products used during open heart surgery. CVG is the world's leader, and has
been a pioneer in the development and commercialization of, tissue valves and
repair products used to replace or repair a patient's diseased or defective
heart valve. In the critical care area, CVG is a world leader in hemodynamic
monitoring systems that are used to measure a patient's heart function in
surgical and intensive care settings. CVG's vascular product lines include a
line of balloon-tipped, catheter-based products, surgical clips and inserts,
angioscopy equipment and artificial implantable grafts, as well as an
endovascular system that is used to treat less invasively life-threatening
abdominal aortic aneurysms. In the perfusion products and services category,
CVG designs, develops, manufactures and markets a diverse line of disposable
products used during cardiopulmonary bypass procedures, including oxygenators,
blood containers, filters and related devices, as well as bypass equipment.
CVG also is the world's leading provider of perfusion services, employing more
than 400 certified perfusionists who perform an aggregate of more than 50,000
perfusion cases for open heart surgery per year.
Cardiovascular disease is the leading cause of death in the world. CVG
believes that there is a continual and growing need for the treatment of
cardiovascular disease primarily due to the aging population, the progressive
nature of the disease, and the continued economic development of countries
around the world that allows for additional funds to be allocated for the
treatment of chronic health conditions. CVG's business strategy is to develop,
manufacture and market products and services that result in improved
therapeutic outcomes for patients with late-stage cardiovascular disease. CVG
plans to aggressively expand its leading product offerings and develop new
products and therapies that improve the quality of patient care and reduce
overall treatment costs.
The health care marketplace continues to be competitive. There has been
consolidation in CVG's customer base and among its competitors, which has
resulted in pricing and market share pressures. CVG has experienced increases
in its labor and material costs, which are primarily influenced by general
inflationary trends. Competitive market conditions have minimized inflation's
impact on the selling prices of CVG's products and services. Management
expects these trends to continue. CVG will continue to manage these factors by
capitalizing on its existing leading positions, developing new products and
services through further commitment to internal research and development
activities, investing capital and human resources to upgrade and expand
facilities, leveraging its cost structure and pursuing acquisitions and
strategic alliances.
41
<PAGE>
Results of Operations
Net Sales Trends
The following is a summary of domestic and international net sales:
<TABLE>
<CAPTION>
Nine months
ended Year ended
September 30, December 31,
------------- ------------------ -------
1999 1998 1998 1997 1996
------ ------ ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
United States................... $380 $378 $508 $515 $456
% increase/(decrease)......... 1% (1%) 13%
International................... 292 261 357 364 381
% increase/(decrease)......... 12% (2%) (4%)
------ ------ ---- ---- ----
Total net sales................. $672 $639 $865 $879 $837
% increase/(decrease)......... 5% (2%) 5%
====== ====== ==== ==== ====
</TABLE>
Fluctuations in net sales were primarily due to increases in sales of
cardiac surgery products offset by a decline in perfusion product sales and
perfusion service revenues as well as fluctuations in foreign currency
exchange rates. The fluctuations in foreign currency exchange rates were
primarily related to the movement of the U.S. dollar against major European
currencies and the Japanese Yen. Excluding the effects of foreign currency
exchange rate fluctuations, CVG's net sales worldwide increased 3% in the
period ended September 30, 1999, increased 1% in the year ended December 31,
1998 and increased 9% in the year ended December 31, 1997.
The impact of foreign currency exchange rate fluctuations on net sales is
not necessarily indicative of the impact on net income due to the
corresponding effect of foreign currency exchange rate fluctuations on
operating costs and expenses and CVG's hedging activities. For more
information, see "Currency Risk" below.
The following is a summary of net sales by product line:
<TABLE>
<CAPTION>
Nine months
ended Year ended
September 30, December 31,
--------------- ------------------
1999 1998 1998 1997 1996
------ ------ ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Cardiac surgery....................... $230 $ 202 $273 $247 $199
% increase/(decrease)............... 14% 11% 24%
Critical care......................... 176 161 221 227 241
% increase/(decrease)............... 9% (3%) (6%)
Vascular.............................. 45 44 60 57 59
% increase/(decrease)............... 2% 5% (3%)
Perfusion products and services....... 181 202 269 289 285
% increase/(decrease)............... (10%) (7%) 1%
Other................................. 40 30 42 59 53
% increase/(decrease)............... 33% (29%) 11%
------ ------ ---- ---- ----
Total net sales....................... $672 $ 639 $865 $879 $837
% increase/(decrease)............... 5% (2%) 5%
====== ====== ==== ==== ====
</TABLE>
Cardiac Surgery
Increased demand for CVG's heart valve therapy products is the primary
reason for the growth in sales for all periods presented. Sales growth in 1997
also benefited from the acquisition of Research Medical, Inc., as discussed
below, partially offset by the unfavorable impact of foreign currency exchange
rate fluctuations. Management expects that its heart valve therapy products
will continue to serve as the key driver of sales growth.
In March 1997, CVG acquired Research Medical, a leading manufacturer of
cannulae and cardioplegia products used during open heart procedures. CVG now
offers more than 1,200 types of cannulae and accessories.
42
<PAGE>
The acquisition of Research Medical accounted for approximately half of the
total sales growth of cardiac surgery products for the year ended December 31,
1997. For more information, see Note 3 to the "Combined Financial Statements."
Critical Care
The growth in 1999 was due primarily to an increased demand for disposable
pressure monitoring devices, the recent European launch of the first anti-
microbial central venous catheter and the favorable impact of foreign currency
exchange rate fluctuations. The decreases in 1998 and 1997 were due primarily
to the unfavorable impact of foreign currency exchange rate fluctuations.
Although critical care products have been, and are expected to continue to be,
significant contributors to CVG's total sales, CVG management believes that
future sales growth could be impacted by global pricing pressures and
potential reimbursement decreases in Japan.
Vascular
The sales growth in 1998 was due to new revenues generated from a third-
party arrangement involving CVG's proprietary PTFE (synthetic material)
technology and an increase in sales of CVG's Side Branch Occlusion System that
was introduced in July 1997. The Side Branch Occlusion System is an innovative
technology that helps vascular surgeons efficiently restore circulation in the
saphenous vein (a critical vein within the blood circulatory system located in
the legs) by effectively removing clots and other blockages within the vein
itself. Sales growth in 1998 and 1997 were affected by unfavorable foreign
exchange rate fluctuations.
CVG has made a significant commitment to the development of endovascular
grafts which are used to treat potentially life-threatening abdominal aortic
aneurysms (AAA) through a minimally invasive approach. In 1999, CVG
commercially launched its Lifepath AAA endovascular graft in Europe and
Australia which is expected to add to future sales growth. CVG is pursuing
clinical trials in the United States and expects to obtain FDA regulatory
approval within the next two years.
Perfusion Products and Services
Management believes that the decrease in sales of perfusion products and
services was due primarily to a continued slowing in the number of coronary
artery bypass graft procedures on a worldwide basis as well as significant
continuing pricing pressures. Management believes that the slowdown in the
number of traditional coronary artery bypass graft procedures has been caused
by increased acceptance of newer, less-invasive procedures such as coronary
stenting, which often eliminates or defers the need for cardiac surgery.
Additionally, there has been an increase in the number of heart surgeries
performed "off-pump" (the surgery is performed on a beating heart without
cardiopulmonary bypass) and this trend has reduced the need for perfusion
services and the use of many traditional perfusion products manufactured and
sold by CVG. Also, perfusion products and services sales declined when CVG
ceased distributing certain perfusion products in the United States on behalf
of Haemonetics, Inc. effective January 1, 1999. Net sales of product
distributed on behalf of Haemonetics, Inc. were approximately $20 million for
the year ended December 31, 1998.
Other
Other sales include a diverse grouping of product lines comprised primarily
of select distributed products that are sold in international regions, and
miscellaneous pharmaceutical products. This category of sales, which generally
represents less than ten percent of CVG's total sales, has fluctuated based on
the timing of new distribution agreements or the termination of existing
distribution agreements, foreign currency exchange rate fluctuations, and
other factors and events.
Gross Margin
<TABLE>
<CAPTION>
Nine months
ended
September 30, Year ended December 31,
-------------- -------------------------
1999 1998 1998 1997 1996
-------- ----- ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Gross margin percentage.......... 48.8% 46.9% 46.1% 47.3% 47.2%
Increase/(decrease)............ 1.9 pts. (1.2 pts.) 0.1 pts.
</TABLE>
43
<PAGE>
The gross margin percentage benefited in all periods from increased sales
of higher-margin cardiac surgery products partially offset by lower prices in
certain perfusion products and services lines. Foreign currency exchange rate
fluctuations had a favorable impact on CVG's gross margin, as a percentage of
sales, in 1999 and an unfavorable impact in 1998 and 1997. Also unfavorably
impacting the gross margin percentage in 1997 was the acquisitions of
perfusion services businesses, which have a lower gross margin percentage.
Future gross margins will continue to be impacted by competitive pricing
pressures, new product introductions, the mix of products and foreign currency
exchange rate fluctuations.
Marketing and Administrative Expenses
<TABLE>
<CAPTION>
Nine months
ended
September 30, Year ended December 31,
-------------- -----------------------
1999 1998 1998 1997 1996
-------- ----- -------- -------- -----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Marketing & administrative
expenses as a percentage of
sales........................... 26.2% 25.7% 25.7% 24.0% 23.2%
Increase....................... 0.5 pts. 1.7 pts. 0.8 pts.
</TABLE>
Marketing and administrative expenses increased as a percentage of sales in
the periods ended September 30, 1999 and September 30, 1998 due principally to
costs associated with increases in the number of dedicated sales
representatives around the world focused on the sale of cardiac surgery
products as well as investments associated with the commercial launch in
Europe and Australia of the Lifepath AAA endovascular graft. The increase in
1997 was primarily due to an increased investment in CVG's direct United
States field-sales force as a result of discontinuing sales of Research
Medical products through outside distributors following the acquisition of
Research Medical in March 1997.
Research and Development Expenses
<TABLE>
<CAPTION>
Nine months
ended Year ended
September 30, December 31,
-------------- --------------
1999 1998 1998 1997 1996
------ ------- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Research and development expenses.......... $ 38 $ 40 $ 56 $ 53 $ 49
% increase/(decrease).................... (5%) 6% 8%
Research and development expenses as a
percentage of sales....................... 5.7% 6.3% 6.5% 6.0% 5.9%
</TABLE>
Research and development expenses presented above exclude the in-process
research and development charge relating to the acquisition of Research
Medical in 1997, which is discussed in more detail in Note 3 to the "Combined
Financial Statements." As a percentage of sales, these expenses have remained
relatively constant over the periods presented.
CVG is engaged in ongoing research and development to introduce clinically
advanced new products, to maximize the effectiveness, ease of use, safety and
reliability of its existing products and to expand the applications of its
products as appropriate. CVG has a strong commitment to bolster its research
and development activities in the future with the goal of developing and
commercializing new innovative products and therapies that enhance performance
and patient quality of life and address cost-containment issues.
Goodwill Amortization
Goodwill amortization remained constant in the periods ended September 30,
1999 and December 31, 1998. Goodwill amortization increased 13% in the year
ended December 31, 1997 as a result of CVG's acquisition of Research Medical
in March 1997. For more information, see Note 3 to the "Combined Financial
Statements."
44
<PAGE>
Other Income and Expense
Other income in 1998 principally consisted of insurance proceeds associated
with hurricane damage at one of the company's manufacturing facilities, net of
a loss associated with the impairment of a minority equity investment. Other
income in 1996 consisted principally of a legal settlement related to a past
patent infringement, net of losses associated with the impairment of certain
minority equity investments.
Income before Taxes
As a result of the factors discussed above, excluding the charge for in-
process research and development in 1997, income before taxes increased 21% in
the nine-month period ended September 30, 1999, decreased 21% in the year
ended December 31, 1998 and decreased 8% in the year ended December 31, 1997.
Income Taxes
The effective income tax rate for CVG was approximately 27% in the nine-
month period ended September 30, 1999, 33% in the year ended December 31,
1998, 32% in the year ended December 31, 1997 (excluding the 1997 charge for
in-process research and development) and 31% for the year ended December 31,
1996. The reduction in the tax rate for the nine months ended September 30,
1999 was due primarily to more favorable tax grants in certain jurisdictions.
Net Income
Net income increased 32% in the nine months ended September 30, 1999,
decreased 23% in the year ended December 31, 1998 and decreased 8% in the year
ended December 31, 1997 (excluding the charge for in-process research and
development in 1997). These changes are consistent with the changes in income
before taxes and the changes in CVG's effective income tax rate, each as
discussed above.
Liquidity and Capital Resources
CVG management will assess CVG's liquidity in terms of its overall ability
to mobilize cash to support ongoing business levels and to fund its growth.
Historically, CVG has generated sufficient cash to satisfy its normal
operating cash and capital requirements and is expected to continue to do so
in the future.
Cash flow provided by operations for the first nine months of 1999
decreased approximately 5% due primarily to higher inventory levels, partially
offset by increased earnings and improved accounts receivable collections.
Cash flows provided by operations for 1998 increased approximately 8% due
primarily to improved accounts receivable collections, sales of certain
receivables of approximately $22 million and liability management, partially
offset by lower earnings. The decrease in cash flow provided by operations of
approximately 12% in 1997 was consistent with the decrease in earnings for the
same period, with changes in accounts receivable collections and liability and
other accounts management also impacting the operating cash flow results.
Uses of cash for investing activities included the acquisition of property,
plant and equipment and acquisitions. Capital expenditures have remained
fairly constant for all periods presented. Acquisition spending in 1998 and
1997 related primarily to the acquisition of Research Medical. Net cash
outflows for acquisitions in 1996 related principally to the acquisition of
certain perfusion services businesses, especially PSICOR, Inc., as further
discussed in Note 3 to the "Combined Financial Statements."
As of the distribution date, CVG expects to have revolving credit
facilities in place amounting to a minimum of $[550] million which will be
used to repay intercompany debt to Baxter, satisfy initial working capital
requirements and fund distributions from CVG's foreign operations to Baxter.
Assuming a debt level of $[550] million, CVG's debt as a percent of total
capital would have been 43.5% at September 30, 1999.
In addition to this short-term facility, CVG management believes that it
has sufficient cash flow from operations and financial flexibility to attract
long-term capital to fund short-term and long-term growth objectives. However,
no assurances can be given that such long-term capital will be available to
CVG on favorable terms or at all.
45
<PAGE>
Euro Conversion
On January 1, 1999, the European Economic and Monetary Union created and
introduced the Euro, the official single eurocurrency for the eleven
participating member countries. A transition period is currently in effect
which began January 1, 1999, and will continue through December 31, 2001,
during which period transactions will be executed in both the Euro and the
member country's individual currencies. Effective January 1, 2002, Euro bank
notes will be introduced and as of July 1, 2002, the Euro will be the sole
legal tender of the European Economic and Monetary Union countries.
CVG has appointed a team of individuals to address all issues associated
with the conversion to the Euro and expects to be prepared for such conversion
as of the designated dates. At the time CVG switches to using the Euro as the
sole functional currency for the affected regions, CVG will be required to
make certain modifications that are primarily related to information systems.
The costs associated with preparing for the conversion and continued use of
the Euro will be expensed as incurred and are not expected to be material to
CVG's financial position, results of operations or cash flows. The ultimate
impact on CVG's business, including the impact on the competitive environment
in which CVG operates, is currently unknown.
New Accounting and Disclosure Standard
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
effective for all quarters of fiscal years beginning after June 15, 2000. This
statement requires that all derivatives be recorded in the balance sheet as
either assets or liabilities and be measured at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. Management is in the process of
evaluating this standard and has not yet determined the future impact on CVG's
combined financial statements.
Currency Risk
CVG operates on a global basis and therefore is subject to the exposure
resulting from foreign currency exchange rate fluctuations. This exposure
arises from transactions denominated in foreign currencies, primarily from the
translation of results of operations from outside the United States.
Additionally, this exposure may change over time as the percentage of sales to
various countries and the currency exchange rate in those countries fluctuate.
For all periods presented, CVG has been considered in Baxter's overall risk
management strategy. As part of this strategy, Baxter managed its foreign
currency exchange rate risk to an acceptable level based on management's
judgment of the appropriate trade-off between risk, opportunity and costs.
With respect to CVG's currency risks, Baxter primarily utilized options to
hedge these exposures. For more information regarding these instruments, see
Note 6 to the "Combined Financial Statements."
As a stand-alone company, CVG's objective will be to manage its exposure to
foreign currency fluctuations to minimize the earnings and cash flow
volatility associated with foreign exchange rate changes. In order to reduce
the risk of foreign currency exchange rate fluctuations, CVG expects to
establish a policy of hedging a substantial portion of its expected foreign
currency denominated cash flow from operations. The instruments that CVG
expects to use for hedging will be readily marketable traded forward contracts
and options with financial institutions. CVG expects that the changes in fair
value of such contracts will have a high correlation to the price changes in
the related hedged cash flow. CVG does not expect that the risk of transaction
gains or losses from changes in the fair value of CVG's foreign exchange
position will be material because most transactions will occur in either the
functional currency or in a currency that has a high correlation to the
functional currency. The principal currencies that CVG expects to hedge are
the Japanese yen and the major European currencies, with any resulting gains
and losses on these contracts offsetting changes in the value of the related
exposures. CVG expects to enter into foreign currency transactions only to the
extent that foreign currency exposure exists. CVG does not plan on entering
into foreign currency transactions for speculative purposes.
46
<PAGE>
CVG MANAGEMENT
Board of Directors
Immediately after the distribution date, CVG expects that the CVG board of
directors will consist of the individuals named in the table below. The CVG
board of directors will be divided into three classes. Each director will
serve for a term expiring at the annual meeting of stockholders in the year
indicated below. For more information see "Certain Anti-Takeover Effects of
Provisions of CVG's Certificate of Incorporation and Bylaws and of Delaware
Law."
CVG will be managed under the direction of its board of directors. The CVG
board of directors will meet on a regular basis to review CVG's operations,
strategic and business plans, acquisitions and dispositions, and other
significant developments affecting CVG, and to act on matters requiring CVG
board approval. It will also hold special meetings when important matters
require CVG board action between scheduled meetings. Members of senior
management will be invited to CVG board meetings to discuss the progress of
and future plans relating to their areas of responsibility.
<TABLE>
<CAPTION>
Name/Age Term as Director Background
-------- ---------------- ----------
<C> <C> <S>
Michael A. Mussallem Expires [ ] Mr. Mussallem will be the Chairman of
Age 47 the Board and Chief Executive Officer of
CVG. He first joined Baxter in 1979 and
has been the Group Vice President of
Baxter's CardioVascular business since
1994 and Group Vice President of
Baxter's Biopharmaceutical business
since 1998.
Vernon R. Loucks Jr. Expires [ ] Mr. Loucks served as a director of
Age 65 Baxter from 1975 through December 1999,
including chairman of the Board since
1987. He was Chief Executive Officer of
Baxter from 1980 through 1998 and was
first elected as an officer of Baxter in
1975. Mr. Loucks is also a director of
Affymetrix Inc., Anheuser-Busch
Companies, Inc., Emerson Electric Co.,
GeneSoft, Inc. and The Quaker Oats
Company.
Philip M. Neal Expires [ ] Mr. Neal is President and Chief
Age 59 Executive Officer and a director of
Avery Dennison Corporation, a multi-
billion dollar Fortune 500 company that
manufactures and markets a wide range of
products for consumer and industrial
markets, including Avery-brand office
supplies and Fasson-brand self-adhesive
materials. Mr. Neal joined Avery
Dennison in 1974, served as President
and Chief Operating Officer from 1990
through April 1998, at which time he was
elected CEO. Mr. Neal serves as a
director of Independent Colleges of
Southern California and the Los Angeles
Area Chamber of Commerce, a trustee of
Pomona College and a Member of the Board
of Governors of Town Hall of California.
David E.I. Pyott Expires [ ] Mr. Pyott is President and Chief
Age 46 Executive Officer and a director of
Allergan, Inc., a global health care
company that provides eye care and
specialty pharmaceutical products
worldwide. Prior to joining Allergan in
1998, he was a division president of
Novartis AG, and before 1996 he held
various positions with Sandoz
International AG and Sandoz Nutrition
Corporation. He is also a member of the
board of directors of Avery Dennison
Corporation and the California
Healthcare Institute, serves on the
Executive Board of the Pharmaceutical
Research & Manufacturers of America and
is on the Executive Council of the
University of California-Irvine Graduate
School of Management.
</TABLE>
47
<PAGE>
Committees of the Board of Directors
To facilitate independent director review, and to make the most effective
use of the directors' time and capabilities, the CVG bylaws establish the
committees described below. The CVG board is permitted to establish other
committees from time to time as it deems appropriate.
The Audit and Public Policy Committee
The Audit and Public Policy Committee will review the scope of the audit by
the independent auditors, inquire into the effectiveness of CVG's accounting
and internal control functions, and recommend to the CVG board any changes in
the appointment of independent auditors which the committee may deem to be in
the best interests of CVG and its stockholders. The committee will also assist
the CVG board in establishing and monitoring compliance with the ethical
standards of CVG. The Audit and Public Policy Committee will also review the
policies of CVG to assure they are consistent with its social responsibility
to employees, customers and society, including policies relating to health and
safety and ethics. The committee will consist solely of directors who are
independent of management. Members of this committee are expected to be:
[ ]
The Compensation and Planning Committee
The Compensation and Planning Committee will determine the compensation of
officers and outside directors, other than the Chairman of the Board and Chief
Executive Officer (which will be determined by the CVG board), exercise the
authority of the CVG board concerning employee benefit plans and advise the
CVG board on other compensation and employee benefit matters. In addition, the
committee will make recommendations to the CVG board regarding candidates for
election as directors of CVG. The committee will also advise the board on
board committee structure and membership and corporate governance matters. The
committee will consist solely of directors who are independent of management.
Members of this committee are expected to be: [ ]
Compensation of Directors
Cash compensation of non-employee directors will consist of a $20,000
annual retainer. Chairpersons of committees will receive an additional annual
retainer of $5,000. Employee directors are not compensated separately for
their board or committee activities.
In addition, to align the directors' interests more closely with the
interest of all of CVG's stockholders, each non-employee director will receive
an additional annual retainer in the form of [ ] options to purchase CVG
common stock. All non-employee directors, serving as such on the distribution
date, will also receive a one-time restricted common stock grant equal to
[ ] shares of CVG common stock. The common stock will remain restricted
until the first anniversary of their election to the CVG board of directors
when it will vest entirely, if they remain on the board on such anniversary
date. Subsequent to the distribution date, each non-employee director will
receive [ ] options annually. [Terms of options to come]
Executive Officers
Set forth below is information with respect to those individuals who CVG
expects to serve as executive officers of CVG immediately following the
distribution. Those individuals named below who are currently officers or
employees of Baxter will resign from all positions with Baxter prior to or as
of the distribution date.
Michael A. Mussallem, age 47. Mr. Mussallem will be the Chairman of the
Board and Chief Executive Officer of CVG. Mr. Mussallem joined Baxter in 1979
and has been the Group Vice President of Baxter's CardioVascular business
since 1994 and Group Vice President of Baxter's Biopharmaceutical business
since 1998. During his tenure at Baxter, Mr. Mussallem has held a variety
positions with increased responsibility in engineering, product development
and senior management. He was appointed General Manager of Access
48
<PAGE>
Products in 1984, Vice President and General Manager of Pharmaceuticals in
1986, President of the Perfusion Products business in 1988 and President of
the Critical Care business in 1993. In 1994, Mr. Mussallem was named Group
Vice President for Baxter's Surgical Group. From 1996 until 1998, he was the
Chairman of Baxter's Asia Pacific Board overseeing Baxter operations
throughout Asia. Mr. Mussallem received his Bachelor of Science degree in
chemical engineering from Rose-Hulman Institute of Technology and was
conferred an honorary doctorate by his alma mater in 1999.
Stuart L. Foster, age 49. Mr. Foster will be the Corporate Vice President,
Global Operations of CVG. Mr. Foster joined Baxter's CardioVascular Group in
1994 as President of the Vascular business, and continues to hold that
position today. In 1997, his responsibilities increased to include global
oversight responsibilities for the Critical Care business. He is also
currently responsible for all international operations of the CardioVascular
business and leads the CardioVascular business' Technology Innovation Team.
Prior to joining Baxter, Mr. Foster was Chief Executive Officer and President
of Intramed Laboratories, which was acquired by Baxter in 1994. Prior to that,
he was an executive with SensorMedics Corporation, a medical device company
that he co-founded. Mr. Foster received his Bachelor of Science degree in
biomedical engineering from Rensselaer Polytechnic Institute and earned his
masters degree from the University of Southern California.
Anita B. Bessler, age 52. Ms. Bessler will be the Corporate Vice President,
Cardiac Surgery of CVG. Ms. Bessler joined Baxter in 1988 as Vice President
and General Manger of Sales and Marketing for Baxter's Hyland division. Prior
to her tenure with Baxter, from 1986 until 1988 she was Senior Executive Vice
President with the USV/Armour Pharmaceutical Division of Rhone Poulenc Rohrer.
From 1976 until 1986, Ms. Bessler held senior management positions with
Revlon's Healthcare Group. She is a member of the External Advisory Board of
the Department of Biomedical Engineering of the Cleveland Clinic Research
Institute. She is a graduate of Indiana University, where she earned a
Bachelor of Science degree in marketing and economics.
Richard L. Miller, age 51. Mr. Miller will be the Corporate Vice President,
Critical Care of CVG. Mr. Miller joined American Hospital Supply Corporation
in 1971, which was later acquired by Baxter, as a sales representative for
Scientific Products. Prior to his appointment as President of the Critical
Care business in 1999, he was President of Baxter's Health Systems from 1994
through 1997 and President, Corporate Health Systems, from 1997 through 1998.
During that time, Mr. Miller was a member of Baxter's North American Board and
also led Baxter's North American Sales and Marketing Taskforce. Mr. Miller
received a Bachelor of Arts in biology and chemistry from the University of
Colorado and earned an MBA from Portland University. He also served in the
United States Army Reserve from 1970 until 1976.
Robert C. Reindl, age 45. Mr. Reindl will be the Corporate Vice President,
Human Resources of CVG. From 1993 through 1997, Mr. Reindl was Vice President
of Baxter's Institute for Training and Development. In 1997, he became the
Vice President, Human Resources, for Baxter's CardioVascular business. From
1987 until 1993, Mr. Reindl was a manager with Arthur Andersen & Co., where he
consulted on a variety of human resource and organizational development
issues, as well as designed training programs focusing on time management,
communication, team building and interviewing. Prior to this, he was a
communications instructor at Marietta College and Ohio University. Mr. Reindl
earned his Bachelor of Science degree in communication from the University of
Wisconsin-Stevens Point and his masters degree from Bowling Green State
University in Ohio.
John H. Kehl, Jr., age 46. Mr. Kehl will be the Corporate Vice President,
Strategy & Business Development of CVG. Mr. Kehl has held various positions of
increasing responsibility at Baxter since joining its treasury department in
1975. In 1980, he was promoted to Manager of Investor Relations and
Communications and in 1985, assumed responsibility for directing all aspects
of Baxter's external communications. Mr. Kehl was appointed Vice President,
Controller for Baxter's CardioVascular business in 1988 with responsibility
for finance, information systems and business planning. He became Vice
President of Business Development in 1995, a position he continues to hold
today. In his current capacity, he leads all business development initiatives,
including strategy development and acquisition and divestiture activities. Mr.
Kehl has also served on Baxter's Japan Board that oversees all operations in
Japan. He earned his Bachelor of Arts degree in business and economics from
Loras College and received his MBA from Loyola University in Chicago.
49
<PAGE>
CVG EXECUTIVE COMPENSATION
1999 Compensation of Executive Officers
The following table shows the 1999 compensation for services rendered by
the Chairman of the Board and Chief Executive Officer of CVG and the
individuals who are expected to be the next four most highly compensated
executive officers of CVG (collectively, referred to as the "named executive
officers") based on their 1999 Baxter compensation, if any. The compensation
shown in this table was paid by Baxter or its subsidiaries for services
rendered to Baxter and its subsidiaries. References to "restricted stock" and
"stock options" mean restricted shares of Baxter common stock and options to
purchase Baxter common stock. Amounts shown are for each individual in his or
her last position with Baxter, and do not necessarily reflect the compensation
which these five individuals will earn in their new capacities as executive
officers of CVG.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
------------------------------------------
Annual Compensation Awards Payouts
---------------------- --------------------- -------
Restricted All
Stock Securities LTIP Other
Name and Principal Salary Bonus Other Award(s) Underlying Payouts Compensation
Position Year ($)(1) ($)(1) ($)(2) ($)(3) Options(4) ($)(5) ($)(6)
- ------------------ ---- ------- ------- ------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael A. Mussallem.... 1999 410,000 310,000 -- -0- 118,900 [ ] 16,788
Chairman of the Board &
Chief Executive Officer
Anita B. Bessler........ 1999 237,442 96,000 -- -0- 50,800 [ ] 6,914
Group Vice President
Stuart L. Foster........ 1999 236,231 96,000 -- -0- 50,800 [ ] 7,332
Group Vice President
Officer #4.............. 1999
Officer #5.............. 1999
</TABLE>
- --------
(1) Amounts shown include cash compensation earned by the named executive
officers during 1999, including amounts deferred at the election of those
officers. Bonuses are paid in the year following the year during which
they are earned. The bonuses shown for the named executive officers are
their target bonuses for 1999.
(2) As permitted by the SEC's rules, this column excludes perquisites and
other personal benefits for the named executive officer if the total
incremental cost in 1999 did not exceed the lesser of $50,000 or 10% of
the total of annual salary and bonus reported for the named executive
officer for 1999.
(3) Based on the $[ ] closing price of Baxter common stock on December
31, 1999, the number and value of the aggregate restricted stock holdings
of the named executive officers on that date are as follows: Mr.
Mussallem--15,918 shares $[ ]; Ms. Bessler--5,295 shares $[ ];
Mr. Foster--3,800 shares $[ ]; Officer #4--[ ] shares $[ ];
and Officer #5--[ ] shares $[ ]. No new grants of restricted
stock were made during 1999. Dividends are payable on all outstanding
shares of restricted stock held by all Baxter executives at the same rate
and time and in the same form in which dividends are payable on all
outstanding shares of Baxter common stock.
(4) No Stock Appreciation Rights (SARs) were granted by Baxter in 1999, and
there are no outstanding SARs held by any employee or director of CVG. The
number of options granted in 1999 includes the options granted and
exercised pursuant to Baxter's Shared Investment Plan, as described below
in footnote 4, to the "Option Grants Table" on page 51.
(5) Amounts shown represent the market value of earned restricted stock which
vested under Baxter's Long- Term Incentive Plan on December 31, 1999. The
vested shares were earned as of December 31, 1998.
50
<PAGE>
(6) Amounts shown represent matching contributions made under the Baxter
International Inc. and Subsidiaries Incentive Investment Plan (Baxter
Incentive Investment Plan), a tax-qualified section 401(k) profit sharing
plan, additional matching contributions in Baxter's deferred compensation
plan and the dollar value of split-dollar life insurance benefits. Those
three amounts, expressed in the same order as identified above, for the
named executive officers are as follows: Mr. Mussallem--$4,800, $11,988,
and $[ ]; Ms. Bessler--$4,800, $2,114, and $[ ]; Mr. Foster--
$4,800, $2,532, and $[ ]; Officer #4--$[ ], $[ ], and
[ ]; and Officer #5--$[ ], $[ ], and [ ].
Stock Option Grants
The following table contains information relating to the Baxter stock
option grants made in 1999 to the named executive officers.
Option Grants Table
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term
------------------------------------------- ----------------------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration 5% 10%
Name Granted (#) Fiscal Year (%)(1) ($/Sh)(2)(3) Date 0% ($) ($)(4)(5)(6) ($)(4)(5)(6)
---- ----------- ------------------ ------------ ---------- ------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mr. Mussallem........... 18,900 1.4 67.6875 2/13/09 -0- $ 2,083,835 $ 3,318,159
100,000 63.6250 5/3/99 -0- -- --
Ms. Bessler............. 10,800 .6 67.6875 2/13/09 -0- $ 1,190,763 $ 1,896,091
40,000 63.6250 5/3/99 -0- -- --
Mr. Foster.............. 10,800 .6 67.6875 2/13/09 -0- $ 1,190,763 $ 1,896,091
40,000 63.6250 5/3/99 -0- -- --
Officer #4..............
Officer #5..............
All Stockholders........ N/A N/A N/A N/A
All Optionees........... 8,600,000 100 Various Various -0- $948,199,923 $1,509,849,908
Optionee Gain as % of
All Stockholders' Gain. N/A N/A N/A N/A
</TABLE>
- --------
(1) In 1999, Baxter granted options on approximately 8.6 million shares of
Baxter common stock to approximately 3,700 employees at various exercise
prices at different times during the year.
(2) The exercise prices shown for the named executive officers are the closing
prices of Baxter common stock on the dates of the grants, which were
February 15, 1999 and May 3, 1999.
(3) The options shown in this table as granted to the named executive officers
at the exercise price of $67.6875 become exercisable three years from the
date of grant. The exercise price of the options may be paid in cash or in
shares of Baxter common stock. If specified corporate control changes
occur, all outstanding options will become exercisable immediately. The
options shown in this table as granted to the named executive officers at
the exercise price of $63.6250 were granted on May 3, 1999 pursuant to
Baxter's Shared Investment Plan. Under the Shared Investment Plan, the
named executive officers and 139 other Baxter executives exercised a one
day stock option to purchase a significant amount of Baxter common stock.
The stock option exercises were financed through full-recourse, personal
loans made by commercial banks. The loans are guaranteed by Baxter. More
information on the Shared Investment Plan is contained in Baxter's proxy
statement dated March [ ], 2000.
51
<PAGE>
(4) Potential realizable values are calculated net of the option exercise
price but before taxes associated with exercise. The assumed rates of
stock price appreciation are set by rules of the SEC governing proxy
statement disclosure and are not intended to forecast the future
appreciation of Baxter common stock.
(5) The potential realizable values for all stockholders were calculated on
the [ ] shares of Baxter stock outstanding on December 31, 1999. The
potential realizable values were calculated assuming the stockholders
purchased Baxter stock at $67.6875, the closing price on February 15,
1999. Because the Shared Investment Plan options were granted and
exercised at the closing price of Baxter stock on May 3, 1999, there was
no potential realizable value for the option term.
(6) The potential realizable values for all optionees were calculated based on
the approximately [] million options that were granted to employees of
Baxter at various exercise prices at different times during the year. The
potential realizable values were calculated assuming that all of the
options were granted at the $67.6875 exercise price.
Stock Option Exercises
The following table contains information relating to the exercise of Baxter
common stock options by the named executive officers in 1999, as well as the
number and value of their unexercised Baxter common stock options as of
December 31, 1999.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
Fiscal Year-End (#)(2) Fiscal Year End ($)(3)
Shares Acquired Value ------------------------- -------------------------
Name on Exercise (#)(1) Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------------ --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Mussallem........... 111,018 575,601 143,449 79,900 [ ] [ ]
Ms. Bessler............. 56,754 738,014 39,525 38,800 [ ] [ ]
Mr. Foster.............. 40,000 -0- 71,628 38,800 [ ] [ ]
Officer #4..............
Officer #5..............
</TABLE>
- --------
(1) The number of shares shown in these columns include the options granted
and exercised on May 3, 1999 pursuant to Baxter's Shared Investment Plan.
See footnote (4) to the Option Grants Table on page 51. Because those
options were granted and exercised at the closing price of Baxter common
stock on May 3, 1999, there was no value realized upon the exercise of
those options.
(2) The sum of the numbers under the Exercisable and Unexercisable columns of
this table represents each named executive officer's total number of
outstanding Baxter options.
(3) The dollar amounts shown under the Exercisable and Unexercisable columns
of this table represent the number of exercisable and unexercisable Baxter
options, respectively, which had an exercise price below the closing price
of Baxter common stock on December 31, 1999, which was $[], multiplied by
the difference between such closing price and the exercise price of the
Baxter options.
Pension Plan and Excess Pension Plan
The table on the following page shows estimated annual retirement benefits
payable to participants under the Baxter International Inc. and Subsidiaries
Pension Plan (Pension Plan) whose employment terminates at normal retirement
age (age 65). The Pension Plan's normal retirement benefit equals (1) 1.75% of
an employee's Final Average Pay multiplied by the employee's number of years
of benefit service, as defined by the Pension Plan, minus (2) 1.75% of an
employee's estimated primary social security benefit, multiplied by the
employee's years of benefit service, as defined by the Pension Plan. An
employee's Final Average Pay is equal to the average of an employee's five
highest consecutive calendar years of earnings out of his or her last ten
calendar years of
52
<PAGE>
earnings. In general, the earnings covered by the Pension Plan include salary,
annual cash bonuses and other regular pay. The figures shown include benefits
payable under the Pension Plan and Baxter's related defined benefit excess
pension plan. The estimates assume that benefit payments begin at age 65 under
a single life annuity form. The figures are net of the Social Security offset
specified by the Pension Plan's benefit formula and therefore do not include
Social Security benefits payable from the federal government. The estimated
primary Social Security benefit used in the calculations is that payable for
an individual attaining age 65 in 1999.
Although age 65 is the normal retirement age under the Pension Plan, the
Pension Plan has early retirement provisions based on a point system. Under
the point system, each participant is awarded one point for each year of
benefit service, as defined by the Pension Plan and one point for each year of
age. Participants who terminate employment after accumulating at least 65
points, and who wait to begin receiving their Pension Plan benefits until they
have 85 points, receive an unreduced Pension Plan benefit regardless of their
actual age when they begin receiving their Pension Plan benefits.
Pension Plan Table
<TABLE>
<CAPTION>
Estimated Annual Retirement Benefits
Years of Pension Plan
Final Average Pay(1)($) Participation(1)($)
----------------------- ---------------------------------------
10 15 20 25 30
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
100,000.......................... 14,500 21,700 29,000 36,200 43,400
200,000.......................... 32,000 48,000 64,000 80,000 95,900
300,000.......................... 49,500 74,200 99,000 123,700 148,400
400,000.......................... 67,000 100,500 134,000 167,500 200,900
500,000.......................... 84,500 126,700 169,000 211,200 253,400
600,000.......................... 102,000 153,000 204,000 255,000 305,900
700,000.......................... 119,500 179,200 239,000 298,700 358,400
800,000.......................... 137,000 205,500 274,000 342,500 410,900
900,000.......................... 154,500 231,700 309,000 386,200 463,400
</TABLE>
- --------
(1) As of December 31, 1999, the named executive officers' years of benefit
service and Final Average Pay for purposes of calculating annual
retirement benefits payable under the Pension Plan are as follows:
Mr. Mussallem--19 years and $544,908; Ms. Bessler--11 years and $269,068;
Mr. Foster--9 years and $255,804; Officer #4--[ ] years and $[ ]; and
Officer #5--[ ] years and $[ ].
Baxter Common Stock Held By CVG Employees
Baxter restricted common stock held by CVG employees will be [treatment to
be determined]. CVG employees holding Baxter stock options will, as of the
distribution date, be considered terminated and, as such, vesting and exercise
will be in accordance with the terms and conditions of the outstanding grants.
Future Compensation of Executive Officers
The compensation of CVG's executive officers for periods beginning on and
after the distribution date will be determined by the CVG board of directors
or its Compensation Committee.
Compensation Philosophy For Executive Officers
CVG expects that its philosophy will be to provide compensation
opportunities supporting CVG's business objectives and values. Forms and
levels of total compensation will be structured to be competitive when
compared to other companies of similar focus and size. These companies are
reported in surveys whose participants include many companies in the Fortune
500 as well as other companies with which CVG and its subsidiaries compete for
executive talent. This philosophy is intended to assist CVG in attracting,
retaining and motivating executives with superior leadership and management
abilities. Consistent with this philosophy, a total
53
<PAGE>
compensation structure will be determined for each officer, including Mr.
Mussallem, consisting primarily of salary, cash bonus, stock options and
benefits. The proportions of these elements of compensation will vary among
the officers depending upon their levels of responsibility. The senior
executive officers will receive a larger portion of their total compensation
through performance-based incentive plans, which place a greater percentage of
their compensation at risk while more closely aligning their interests with
the interests of CVG's stockholders.
CVG's philosophy with respect to the limitation on the tax-deductibility of
executive compensation will be to maximize the benefit of tax laws for CVG's
stockholders by seeking performance-based exemptions which are consistent with
CVG's compensation policies and practices. CVG will adopt performance goals
for the officer cash bonus plan which are expected to satisfy the
deductibility requirements with respect to any payments under those plans.
Compensation Elements
Salaries will be established each year at a level primarily intended to be
competitive at the 50th percentile with salaries of executive officers in
comparable companies. In addition, officer salaries will be based on the
officer's individual performance. Bonuses are intended to provide executive
officers with an opportunity to receive additional cash compensation but only
if they earn it through CVG's achievement of strong performance results as
measured by key financial indicators. Each year, a bonus target will be
established for each executive officer between the 50th and 75th percentile of
the market data of comparable companies. After year-end results are
calculated, each officer's bonus will be determined based on CVG's performance
against the key financial indicators established for the year. Achievement of
the performance objectives will determine an officer's opportunity to earn
bonus compensation either significantly above or below the bonus target.
Stock options will be granted under CVG's 2000 Incentive Compensation
Program and such other stock option plans that may be established, as
described below. They represent a vehicle for more closely aligning
management's and stockholders' interests, specifically motivating executives
to remain focused on the market value of CVG Stock.
The number of stock options granted to executive officers is expected to be
market-based. The intent is to provide an opportunity to earn stock-based
compensation at the 75th percentile compared to executives in comparable
companies.
2000 Incentive Compensation Program
CVG expects to adopt the CVG 2000 Incentive Compensation Program (Incentive
Program). The Incentive Program is expected to be approved by Baxter as sole
stockholder of CVG prior to the distribution.
General
The Incentive Program is designed to promote success and enhance the value
of CVG by linking participants' interests more closely to those of CVG
stockholders and by providing participants with an incentive for excellence.
The Incentive Program will be administered by the Compensation Committee of
CVG. The Compensation Committee must consist of two or more directors who
qualify as non-employee directors under Rule 16b-3 of the Securities Exchange
Act of 1934 and as outside directors under Section 162(m) of the Code.
Incentives may consist of the following: (a) stock options; (b) stock
appreciation rights; (c) restricted stock; (d) stock awards; (e) performance
shares; and (f) other incentives, including cash. Incentives may be granted to
any employee of CVG (including directors of CVG who are also employees of CVG)
selected from time to time by the Compensation Committee.
The number of shares of CVG common stock authorized for issuance (including
conversion for outstanding awards) under the Incentive Program will not exceed
[18.5]% of the outstanding shares of CVG common stock as of the distribution
date.
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<PAGE>
Stock Options
Under the Incentive Program, the Compensation Committee may grant non-
qualified and incentive stock options to eligible employees to purchase shares
of CVG common stock from CVG. The Incentive Program gives the Compensation
Committee discretion, with respect to any such stock option, to determine the
number and purchase price of the shares subject to the option, the term of
each option and the time or times during its term when the option becomes
exercisable, subject to the following limitations. No stock option may be
granted with a purchase price below the fair market value of the shares
subject to the option on the date of grant and the term may not exceed 10
years and one day from the date of grant. Except to the extent that the
Compensation Committee determines that another value is more appropriate given
the circumstances, the fair market value of shares on the date of a grant
shall mean the closing sale price of CVG common stock as reported on the New
York Stock Exchange composite reporting tape. No person may receive, in any
calendar year, stock options which, in the aggregate, represent more than
[1,000,000] shares of CVG common stock. The initial option grant to the named
executive officers will be as follows: Mr. Mussallem, [ ] shares; Ms.
Bessler, [ ] shares; Mr. Foster, [ ] shares; Officer #4, [ ] shares; and
Officer #5, [ ] shares.
Stock Appreciation Rights
SARs may be granted by the Compensation Committee pursuant to the Incentive
Program in such number and on such terms as the Compensation Committee may
decide, provided that the term of an SAR may not exceed 10 years and one day
from the date of grant. SARs may be granted together with or independently of
any stock option. SARs may be paid in CVG common stock or cash, as determined
by the Compensation Committee. No person may receive, in any calendar year,
SARs which, in the aggregate, represent more than [1,000,000] shares of CVG
common stock.
Restricted Stock
Restricted stock consists of the sale or transfer by CVG to an eligible
employee of one or more shares of CVG common stock which are subject to
restrictions on their sale or other transfer by the employee. The price, if
any, at which restricted stock will be sold will be determined by the
Compensation Committee, and it may vary from time-to-time and among employees
and may require no payment or be less than the fair market value of the shares
at the date of sale. All shares of restricted stock may be subject to the
attainment of performance goals under Section 162(m) of the tax code and other
restrictions as the Compensation Committee may determine. Subject to these
restrictions and the other requirements of the Incentive Program, a
participant receiving restricted stock will have the rights of a stockholder
(including voting and dividend rights) as to those shares only to the extent
the Compensation Committee designates such rights at the time of the grant.
Not more than [500,000] shares of CVG common stock may be issued in the form
of restricted stock under the Incentive Program.
Stock Awards
Stock awards consist of the transfer by CVG to an eligible employee of
shares of CVG common stock, without payment, as additional compensation for
his or her services to CVG or a subsidiary of CVG. Stock awards are subject to
the following limitations: No person subject to Section 16(a) of the Exchange
Act (executive officers of CVG) may receive a stock award, and no person
eligible to receive a stock award may receive a stock award representing more
than [50,000] shares of CVG common stock in any calendar year.
Performance Shares
Performance shares consist of the grant by CVG to an eligible employee of a
contingent right to receive payment of shares of CVG common stock. The
performance shares will be paid in shares of CVG common stock to the extent
performance goals set forth in the grant are achieved. All grants of
performance shares to a person subject to Section 16(a) of the Exchange Act
(executive officers of CVG) will be subject to the attainment of performance
goals under Section 162(m) of the tax code. The number of shares granted and
the performance goals will be determined by the Compensation Committee. No
person may receive in any calendar year performance shares which, in the
aggregate, represent more than [100,000] shares of CVG common stock.
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Other Incentives
Other incentives may consist of a payment in cash or stock by CVG to an
eligible employee as additional compensation for his or her services to CVG or
a subsidiary of CVG. The form, amount and the terms and conditions of other
incentives will be determined by the Compensation Committee.
Section 162(m) Performance Goals
Under the Incentive Program, grants of restricted stock, performance
shares, and other incentives (as defined in the Incentive Program) may be
subject to the attainment of performance goals under Section 162(m) of the tax
code. The regulations under Section 162(m) require the performance goals
related to grants under the Incentive Program to be approved separately by
CVG's stockholders. Performance goals for performance based grants may
include, but are not limited to, stock price, sales, return on equity, cash
flow, market share, earnings per share and/or costs.
Non-Transferability of Incentives
Unless otherwise determined by the Compensation Committee, no stock option,
SAR, restricted stock, performance share or other incentive granted under the
Incentive Program will be transferable by its holder, except in the event of
the holder's death, by will or the laws of descent and distribution. During an
employee's lifetime, an incentive may be exercised only by the employee or the
employee's guardian or legal representative. The Compensation Committee may
allow the limited transfer of an incentive to the immediate family of an
employee to facilitate estate planning.
Amendment of the Program
CVG's board of directors may amend or discontinue the Incentive Program at
any time. However, no amendment or discontinuance may adversely affect an
incentive previously granted. In addition, the board of directors may not
amend the Incentive Program without approval of CVG's stockholders to the
extent such approval is required by law, agreement or any exchange on which
CVG common stock is traded.
Acceleration of Incentives
In the event of a change in control of CVG (as specified in the Incentive
Program), the restrictions on all outstanding shares of restricted stock will
lapse immediately, all outstanding stock options and SARs will become
exercisable immediately and all performance goals will be deemed to be met at
target and payment made immediately.
Other CVG Stock Option Plans
CVG also expects to adopt one or more stock option plans to provide for the
grant of non-statutory stock options to certain consultants, independent
contractors and other persons who are not employees of CVG and its
subsidiaries.
CVG Change of Control Plan
CVG expects to adopt the CVG Change of Control Plan. Pursuant to agreements
entered into under this plan, employees selected to participate (including
each of the named executive officers) will be entitled to separation pay and
benefits following a change of control in CVG and the employee's subsequent
termination of employment unless such termination is voluntary and unprovoked
or results from death, disability, retirement or cause. The eligible
termination must occur within 24 months of the change of control or the
agreement is void. Mr. Mussallem will be permitted to terminate his employment
voluntarily at any time during the thirteenth month following a change of
control and collect the change of control separation pay and benefits. Each
agreement will continue for three years from the distribution date and
automatically extend for one year on each anniversary of the agreement, unless
CVG notifies the specific participant in writing that the agreement will not
be renewed.
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Under this plan, the separation pay will equal either three years'
annualized base salary and target cash bonus or two years' annualized base
salary and target cash bonus (as determined by the Compensation Committee in
its discretion depending on the employee's position). In addition, vesting of
all outstanding equity grants will be accelerated upon a change of control and
other terms and conditions will be governed by the provisions of the CVG 2000
Incentive Compensation Program.
In the event that any payments would be subject to an excise tax under the
tax code, CVG will pay an additional gross-up amount for any excise tax and
federal, state and local income taxes, such that the net amount of the
payments would be equal to the net payments after income taxes had the excise
tax and resulting gross-up not been imposed.
CVG Retirement Plan for United States Employees
CVG will adopt a tax-qualified defined contribution retirement plan (CVG
Retirement Plan) for its United States employees effective on the distribution
date. This plan will include a section 401(k) deferred compensation account
(401(k) account), a company matching contribution account, a performance
account for CVG's hourly manufacturing employees, an initial stock grant for
CVG's hourly employees and a transition account for each eligible employee, as
described below.
The defined contribution accounts for transferring employees under the
Baxter Incentive Investment Plan will be transferred to the CVG Retirement
Plan. The CVG Retirement Plan will establish a fund to hold the Baxter common
stock currently held on behalf of CVG employees in the Baxter Incentive
Investment Plan. The CVG Retirement Plan will allow participants to redirect
the balances of their CVG Retirement Plan accounts that are invested in the
Baxter common stock fund but not allow participants to direct that their plan
accounts make new investments in Baxter common stock within the CVG Retirement
Plan.
401(k) Account and Company Matching Contribution Account
Employees of CVG will be eligible to contribute to the CVG Retirement Plan
on or after the distribution date. Participants may elect to contribute, on a
before-tax basis, up to 15% of their annual eligible compensation as defined
by the CVG Retirement Plan to their 401(k) accounts. CVG will match the first
3% (from 1-3%) of the participant's annual eligible compensation contributed
to the plan on a dollar for dollar basis. CVG will match the next 2% (from 4-
5%) of the participant's annual eligible compensation to the plan on a 50%
basis.
Performance Account
Subject to the terms of the CVG Retirement Plan, hourly manufacturing
employees of CVG will be eligible to receive contributions to their
performance accounts under such plan. CVG will make discretionary
contributions to each performance account in an amount equal to a target of 3%
of the participant's annual eligible compensation based on achievement of
certain performance measures. Contributions will be made quarterly, in cash,
and will be invested according to each employee's current 401(k) account
investment elections if the employee is a participant in the 401(k); otherwise
the contributions will be invested in the CVG Common Stock Fund. Such
contribution will be immediately vested, and participants may elect to re-
invest them in any of the other funds within the Retirement Plan.
Initial Stock Grant Account
CVG will be awarding each hourly manufacturing employee a cash contribution
to be held in a special account under the CVG Retirement Plan. Such
contributions will be immediately invested in approximately [50] shares of CVG
common stock. The grant will be immediately vested, but the shares will not be
available for loan or withdrawals, and the special stock account may not be
reallocated to other funds within the 401(k) account until a participant
reaches age 59.
Transition Account
CVG has determined that it will facilitate the transition of certain longer
service employees from the Baxter Pension Plan to the CVG Retirement Plan by
offering some additional benefits to employees who meet specific age and
service criteria. Contributions to a transition account under the CVG
Retirement Plan will be made to
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five groups of salaried non-exempt and hourly manufacturing employees. These
contributions will be made in cash, and will be invested according to each
employee's current 401(k) account investment elections if the employee is a
participant in the 401(k); otherwise the contributions will be invested in the
CVG Common Stock Fund. They will be immediately vested, and participants may
elect to re-invest them in any of the other funds within the Retirement Plan.
Annual contributions will be made for eligible participants until the earlier
of when such participant terminates employment or reaches age 65.
Employees with 75 or more "points" (as determined under the terms of the
Baxter Pension Plan explained on page 52) as of the distribution date will
receive transition contributions equal to 5% of the participant's eligible
compensation.
Employees with 70-74 "points" as of the distribution date will receive
transition contributions equal to 3% of the participant's eligible
compensation.
Employees with 65-69 "points" as of the distribution date will receive
transition contributions equal to 2.5% of the participant's eligible
compensation.
Employees with 60-64 "points" and at least 10 years of "benefit service"
(as determined under the terms of the Baxter Pension Plan explained on page
52) as of the distribution date will receive transition contributions equal to
1% of the participant's eligible compensation.
Employees with 55-59 "points" and at least 10 years of "benefit service"
(as determined under the terms of the Baxter Pension Plan explained on page
52) as of the distribution date will receive transition contributions equal to
one-half of 1% of the participant's eligible compensation.
CVG Non-Qualified Plan
Federal income tax laws limit the amount CVG may contribute to the accounts
of certain highly compensated participants under the CVG Retirement Plan.
Federal income tax laws also limit the amount participants may contribute to
their accounts under the CVG Retirement Plan. CVG will adopt an unfunded non-
qualified excess plan (CVG Excess Plan) that will credit participants affected
by the limits with the amount of their contributions that the participants
would have contributed or that CVG would have contributed on their behalf to
the CVG Retirement Plan but for such limits.
Baxter Pension Plan
Eligible CVG employees (transferring employees) will continue to
participate for purposes of benefit accruals in the Baxter Pension Plan
through the distribution date. All benefit accruals for CVG United States
employees in the Baxter Pension Plan cease as of the distribution date and all
such employees will be fully vested in their accrued benefits under the
Pension Plan as of such date. CVG's United States employees with vested
accrued benefits in the Pension Plan will have those benefits maintained by
the Pension Plan until they are eligible or required to receive them according
to the terms of the Plan.
Employee Stock Purchase Plan for United States Employees
CVG will adopt an employee stock purchase plan for its United States
employees, as described in Section 423 of the tax code. All active employees
of CVG and its United States subsidiaries will be eligible to participate in
the Plan. The employee stock purchase plan will make available shares of CVG
common stock for purchase by eligible employees through payroll deductions at
a maximum rate of 12% of eligible compensation. The purchase price per share
will be equal to the lesser of 85% of the fair market value of CVG common
stock on the effective date of subscription or 85% of the fair market value of
CVG common stock on the date of purchase. Purchases will be made quarterly.
[400,000] shares will be reserved for issuance under this Plan.
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<PAGE>
Transition Options for Salaried Exempt Employees
CVG has determined that it will facilitate the transition of certain longer
service salaried exempt employees out of the Baxter Pension Plan by offering
additional stock options to salaried exempt employees who meet specific age
and service criteria. Transition stock options will be provided to five groups
of salaried exempt employees. Eligible employees will receive an annual grant
as described below, until the earlier of when the employee reaches age 65 or
terminates employment. The options will have a ten year term with three year
vesting.
Employees with 75 or more "points" (as determined under the terms of the
Pension Plan explained on page 52) as of the distribution date will receive an
annual transition option grant equal in value to 8% of the participant's
eligible compensation (based on a Black Scholes valuation of the options as of
the distribution date).
Employees with 70-74 "points" as of the distribution date will receive an
annual transition option grant equal in value to 6% of the participant's
eligible compensation.
Employees with 65-69 "points" as of the distribution date will receive an
annual transition option grant equal in value to 5.5% of the participant's
eligible compensation.
Employees with 60-64 "points" and at least 10 years of "benefit service"
(as determined under the terms of the Pension Plan explained on page 52) as of
the distribution date will receive an annual transition option grant equal in
value to 4% of the participant's eligible compensation.
Employees with 55-59 "points" and at least 10 years of "benefit service"
(as determined under the terms of the Pension Plan explained on page 52) as of
the distribution date will receive an annual transition option grant equal in
value to 3.5% of the participant's eligible compensation.
Initial Stock Option Grant For Salaried Employees Worldwide
CVG will be awarding each salaried exempt and each salaried non-exempt
employee [250] CVG stock options. This is a one-time stock option grant. The
options will have a ten year term and three year vesting.
Employee Stock Purchase Plan for Employees Outside the United States
Employees outside the United States are also eligible to participate in an
Employee Stock Purchase Plan. The terms of that plan mirror the stock plan
available to United States employees.
Initial Stock Grant for Hourly Employees Outside the United States
As noted above, hourly employees within the United States will receive a
one-time initial cash contribution which will be allocated to each employee's
401(k) account and immediately invested in approximately [50] shares of CVG
common stock. Hourly employees outside the United States will also receive an
identical contribution. Whether those shares can be allocated to the local
retirement plan for those employees will be determined on a country-by-country
basis.
Other Retirement Plans for Employees Outside the United States
Various other retirement plans will be offered to CVG employees outside the
United States according to the terms of local law and as supplemented by CVG.
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SECURITY OWNERSHIP OF CVG
The following table sets forth the beneficial ownership of CVG common stock
immediately following the distribution date based on an assumed exchange ratio
of [six] to one by each of CVG's directors, its Chief Executive Officer and
the executive officers who are expected to be CVG's four most highly
compensated executive officers in 2000 and all directors and executive
officers as a group, based upon information available to Baxter concerning
ownership of shares of Baxter common stock on October 31, 1999. The mailing
address of each of these individuals is c/o CVG Controlled Inc., 17221 Red
Hill Avenue, Irvine, California 92614. Except as otherwise noted, each
individual has sole investment and voting power with respect to the shares
listed.
<TABLE>
<CAPTION>
Number of Shares
Projected to be % of Shares
Name Beneficially Owned Outstanding
---- ------------------ -----------
<S> <C> <C>
Michael A. Mussallem...................... [48,066](1)
Vernon R. Loucks Jr....................... [127,953](2)
Philip M. Neal............................ [ ]
David E.I. Pyott.......................... [ ]
Director..................................
Director..................................
Director..................................
Anita B. Bessler.......................... [16,024]
Stuart L. Foster.......................... [19,928]
Executive Officer.........................
Executive Officer.........................
All directors and executive officers as a
group
( [ ] persons).........................
</TABLE>
- --------
(1) Includes shares held in joint tenancy with spouse over which the named
individual shares voting or investment power as follows: Mr. Mussallem
[3,963].
(2) Includes [625] shares not held directly by Mr. Loucks but held by his
spouse.
Based on information available to Baxter concerning the ownership of shares
of Baxter common stock at December 1, 1999, no person is projected to own
beneficially more than 5% of the outstanding CVG common stock immediately
following the distribution date.
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DESCRIPTION OF CVG CAPITAL STOCK
Authorized Capital Stock
The authorized capital stock of CVG will consist of 400,000,000 shares of
common stock, par value $1.00 per share, and 50,000,000 shares of preferred
stock, par value $.01 per share. Baxter will not issue any shares of CVG
preferred stock in connection with the distribution. Based on the number of
shares of Baxter common stock outstanding as of September 30, 1999, Baxter
will issue up to approximately [48,618,000] shares of CVG common stock to
Baxter stockholders in the distribution. All of the shares of CVG common stock
issued in the distribution will be validly issued, fully paid and non-
assessable. The following is a summary description of the capital stock of
CVG. For more complete information, you should read the proposed forms of the
amended and restated certificate of incorporation and amended and restated
bylaws of CVG that are included as exhibits to the registration statement of
which this information statement is a part.
CVG Common Stock
CVG stockholders are entitled to one vote for each share of common stock
held by that stockholder on all matters submitted to a vote of stockholders. A
majority of the votes cast is required for all actions to be taken by
stockholders, except for the election of directors which requires a plurality
of the votes cast, and amendments of certain provisions of the certificate of
incorporation and bylaws as described below under "Certain Anti-Takeover
Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware
Law--Certificate of Incorporation and Bylaws--Amendment of Certain Provisions
of the Certificate of Incorporation and Bylaws."
CVG stockholders will not have cumulative voting rights in the election of
directors. CVG stockholders will not have any preemptive, subscription,
redemption, sinking fund or conversion rights. CVG stockholders are entitled
to the dividends that may be declared by the CVG board out of funds legally
available for dividends, subject to preferences that may apply to holders of
any outstanding shares of CVG preferred stock. If there is a liquidation,
dissolution or winding-up of CVG, CVG will distribute the assets that are
legally available for distribution to stockholders ratably among the holders
of CVG common stock outstanding at that time, subject to prior distribution
rights of creditors and to the preferential rights of any outstanding shares
of CVG preferred stock.
CVG Preferred Stock
Under the CVG certificate of incorporation, the CVG board is authorized to
provide for the issuance of CVG preferred stock, in one or more series. The
CVG board is authorized to determine the designations, voting powers,
preferences and rights of any series of preferred stock, and any
qualifications, limitations or restrictions of any series of preferred stock.
The CVG board expects to designate a series of preferred stock in connection
with the proposed rights agreement described below.
CVG Rights Agreement
Prior to the distribution, CVG expects that its board will adopt a rights
agreement between CVG and [ ], as rights agent. If adopted, the board will
cause CVG to issue one preferred share purchase right with each share of CVG
common stock issued at the close of business on the record date for the
distribution. Each right will entitle the registered holder to purchase from
CVG one one-hundredth of a share of Series A Junior Participating Preferred
Stock for $[ ], subject to the adjustments specified in the rights agreement.
The terms of the rights will be set forth in the rights agreement. The
description set forth below is intended as a summary of the rights and the
rights agreement. For more complete information, you should read the form of
rights agreement that is included as an exhibit to the registration statement
of which this information statement is a part.
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The rights become exercisable upon the earliest to occur of:
. 10 days after the first public announcement that any person or group of
affiliated or associated persons has acquired beneficial ownership of 15%
or more of the outstanding shares of CVG common stock, subject to certain
exceptions (an "Acquiring Person"); and
. 10 business days, unless delayed by the board, after the commencement by
any person of a tender or exchange offer if, upon the consummation of the
tender or exchange offer, that person would be the beneficial owner of
15% or more of the outstanding shares of CVG common stock.
The earliest of the dates specified in the preceding sentence is called the
"Rights Distribution Date."
Until the rights become exercisable, they will only be represented by the
stock certificates for the CVG common stock and will not trade independently,
but only with the associated shares of CVG common stock. If the rights become
exercisable, separate certificates representing the rights will be distributed
to holders and the rights will then trade independently from the CVG common
stock. Until a right is exercised, the holder of the right, as such, will have
no rights as a stockholder of CVG, including, without limitation, the right to
vote or to receive dividends. Preferred shares purchasable upon exercise of
the rights will not be redeemable. The rights are not exercisable until the
Rights Distribution Date. The rights will expire ten years from the date of
issuance, unless the expiration date is extended or unless the rights are
earlier redeemed or exchanged by CVG, as described below.
Because of the nature of the dividend, liquidation and voting rights of the
Series A preferred stock, the value of one one-hundredth interest in a share
of Series A preferred stock purchasable upon exercise of each right should
approximate the value of one share of CVG common stock. Each preferred share
will be entitled to a minimum preferential quarterly dividend payment of $1
per share and an aggregate dividend of 100 times the dividend declared per
share of CVG common stock. If there is a liquidation of CVG, the holders of
the preferred shares will be entitled to a minimum preferential liquidation
payment of $100 per share. Each preferred share will have 100 votes and will
vote together with the CVG common stock. Finally, if there is any merger,
consolidation or other transaction in which shares of CVG common stock are
exchanged, each preferred share will be entitled to receive 100 times the
amount received per share of CVG common stock. CVG will not issue fractional
shares of preferred stock, other than fractions that are integral multiples of
one one-hundredth of a share of preferred stock, which may, at CVGs election,
be evidenced by depositary receipts. In lieu of fractional shares, an
adjustment in cash will be made based on the market price of the preferred
shares on the last trading day prior to the date of exercise. The rights are
protected by customary anti-dilution provisions.
If any person or group of affiliated or associated persons becomes an
Acquiring Person, as defined in the rights agreement, each holder of a right,
other than rights beneficially owned by the Acquiring Person which will be
voided, will have the right to receive upon exercise of the right the number
of shares of CVG common stock having a market value of two times the exercise
price of the right. If CVG is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power are sold after a person or group of affiliated or associated persons has
become an Acquiring Person, each holder of a right will have the right to
receive, upon the exercise of the right, the number of shares of common stock
of the acquiring company that at the time of the transaction will have a
market value of two times the exercise price of the right.
At any time after any person or group of affiliates or associated persons
becomes an Acquiring Person and prior to the acquisition by such person or
group of 50% or more of the outstanding shares of CVG common stock, the CVG
board may exchange the rights, other than rights that have become void, in
whole or in part, at an exchange ratio of one share of CVG common stock, or
one one-hundredth of a preferred share, or of a share of a class or series of
CVG preferred stock having equivalent rights, preferences and privileges, per
right, subject to adjustment.
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In general, CVG may redeem the rights in whole, but not in part, at a price
of $.01 per right at any time until ten days following the first public
announcement that a person or group of affiliated or associated persons has
become an Acquiring Person. Immediately upon the board's authorization of a
redemption, the rights will terminate and the only right of the holders of the
rights will be to receive the redemption price.
The terms of the rights may be amended by the CVG board without the consent
of the holders of the rights. However, from and after such time as any person
or group of affiliated or associated persons becomes an Acquiring Person, the
CVG board may not amend the terms of the rights in a manner adversely
affecting the interests of the holders of the rights.
The rights will have an anti-takeover effect because the rights will cause
substantial dilution to a person or group that attempts to acquire CVG on
terms not approved by the CVG board. The rights should not interfere with any
merger or other business combination approved by the CVG board because the
rights may be redeemed by CVG until the tenth day following the first public
announcement that a person or group has become an Acquiring Person.
CERTAIN ANTI-TAKEOVER EFFECTS OF
PROVISIONS OF CVG'S CERTIFICATE OF INCORPORATION AND
BYLAWS AND OF DELAWARE LAW
Certificate of Incorporation and Bylaws
CVG's certificate of incorporation and bylaws contain provisions that could
make it more difficult to acquire CVG by means of a tender offer, proxy
contest or otherwise. The description set forth below is intended as a summary
only; for more complete information you should read the proposed forms of the
certificate of incorporation and the bylaws that are included as exhibits to
the registration statement, of which this information statement is a part.
Classified Board of Directors
CVG's certificate of incorporation provides that the CVG directors, other
than those who may be elected by the holders of any series of preferred stock
under specified circumstances, will be divided into three classes of
directors, with the classes to be as nearly equal in number as possible, and
with each class serving a staggered term. Immediately after the distribution,
the CVG board will consist of the persons referred to in "Management--
Directors." The certificate of incorporation provides that the term of office
of the first class will expire at the 2001 annual meeting of stockholders. The
term of office of the second class will expire at the 2002 annual meeting of
stockholders. The term of office of the third class will expire at the 2003
annual meeting of stockholders.
The classification of directors will make it more difficult for
stockholders to change the composition of the CVG board. At least two annual
meetings of stockholders, instead of one, will be required to change a
majority of the CVG board. Such a delay may help ensure that the CVG board, if
confronted by a stockholder's attempt to force a stock repurchase at a premium
above market price, a proxy contest or an extraordinary corporate transaction,
would have sufficient time to review the proposal as well as any available
alternatives to the proposal and to act in what they believe to be the best
interests of the stockholders. However, the classification provisions could
have the effect of discouraging a third party from initiating a proxy contest,
making a tender offer or otherwise attempting to obtain control of CVG, even
though such an attempt might be beneficial to CVG and its stockholders. In
addition, the classification of the CVG board could increase the likelihood
that incumbent directors will retain their positions. Finally, because the
classification provisions may discourage accumulations of large blocks of
CVG's stock by purchasers whose objective is to take control of CVG and remove
a majority of the CVG board, the classification of the CVG board could reduce
the likelihood of fluctuations in the market price of CVG common stock that
might result from accumulations of large blocks. Accordingly, stockholders
could be deprived of certain opportunities to sell their shares of CVG common
stock at a higher market price than they might otherwise obtain.
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Number of Directors; Filling Vacancies; Removal
CVG's certificate of incorporation provides that the CVG board will fix the
number of CVG directors, subject to any rights of holders of CVG preferred
stock to elect additional directors under specific circumstances. In addition,
the certificate of incorporation provides that any vacancy that results from
an increase in the number of directors or for any other reason may be filled
only by a majority of directors then in office, subject to any rights of
holders of CVG preferred stock. Accordingly, absent an amendment to the CVG
certificate of incorporation, the CVG board could prevent a stockholder from
increasing the size of the CVG board and filling the newly created
directorships with that stockholder's own nominees. Under Delaware General
Corporation Law, unless otherwise provided in the certificate of
incorporation, directors serving on a classified board may be removed by the
stockholders only for cause.
No Stockholder Action by Written Consent; Special Meetings
CVG's certificate of incorporation prohibits stockholder action by written
consent in lieu of a meeting. The bylaws provide that special meetings of the
stockholders may be called only by the chairman of the board or the secretary
or by resolution of the directors, and shall be called upon a request signed
by a majority of the directors.
The provisions of CVG's certificate of incorporation prohibiting
stockholder action by written consent may have the effect of delaying
consideration of a stockholder proposal until the next annual meeting unless a
special meeting is called at the request of a majority of the board. These
provisions would also prevent the holders of a majority of the voting power of
the voting stock from unilaterally using the written consent procedure to take
stockholder action. Moreover, a stockholder could not force stockholder
consideration of a proposal over the opposition of the CVG board by calling a
special meeting of stockholders prior to the time a majority of the board
believes such consideration to be appropriate.
Advance Notice of Stockholder Nominations and Stockholder Proposals Required
The CVG bylaws establish an advance notice procedure for stockholders to
make nominations of candidates for election as directors, or bring other
business before an annual meeting of stockholders.
The advance notice procedures provide that the only persons who are
eligible for election as CVG directors are those who are nominated by, or at
the direction of, the CVG board, or by a stockholder who has given timely
written notice to the secretary prior to the meeting at which directors are to
be elected. The advance notice procedures provide that at an annual meeting
the only business that may be conducted is that which has been brought before
the meeting by, or at the direction of, the CVG board or by a stockholder who
has given timely written notice to CVG's secretary of that stockholder's
intention to bring that business before the meeting. Under the advance notice
procedures, for a stockholder to timely provide notice of any stockholder
nominations at an annual meeting, CVG must receive the notice not less than 75
days nor more than 100 days prior to the first anniversary of the previous
year's annual meeting. However, if CVG advances the date of any other annual
meeting by more than 30 days from the anniversary date of the meeting, a
stockholder must provide notice not later than the 10th day after CVG mails or
publicly announces the notice of the date of the annual meeting. Under the
advance notice procedures, for a stockholder to timely provide notice of any
stockholder nominations at a special meeting at which directors are to be
elected, CVG must receive the notice not less than 75 days nor more than 100
days prior to the special meeting or by the 10th day after CVG publicly
announces the date of the special meeting.
A stockholder's notice to CVG proposing to nominate a person for election
as a director must contain certain information including, without limitation,
the name and address of the nominating stockholder, the class and number of
shares of stock of CVG that are owned by that stockholder and all information
regarding the proposed nominee that would be required to be included in a
proxy statement soliciting proxies for the proposed nominee. A stockholder's
notice to CVG relating to other proposed business must contain certain
information about the proposed business and about the proposing stockholder,
including, without limitation, a brief
64
<PAGE>
description of the business, the reasons for conducting the business at the
meeting, the name and address of the proposing stockholder, the class and
number of shares of stock of CVG beneficially owned by such stockholder and
any material interest of that stockholder in the business so proposed. If the
chairman of the board or other officer presiding at the meeting determines
that a person was not nominated or other business was not properly brought
before the meeting, that person will not be eligible for election as a
director or that business will not be conducted at the meeting, as the case
may be.
The advance notice procedures regarding election of directors afford CVG's
board an opportunity to consider the qualifications of the proposed nominees
and, to the extent deemed necessary or desirable by the CVG board regarding
other proposed business, provide a more orderly procedure for conducting
annual meetings of stockholders. In addition, these advance notice procedures
will provide the CVG board with an opportunity to inform stockholders in
advance of a meeting, to the extent deemed necessary or desirable by the CVG
board, of any business proposed to be conducted at the meeting and any board
recommendation regarding the proposed business, so that stockholders can
better decide whether to attend the meeting or to grant a proxy regarding the
disposition of the proposed business.
Although the bylaws do not give the CVG board any power to approve or
disapprove of stockholder nominations for the election of directors or other
proposals, they may preclude a contest for the election of directors or the
consideration of stockholder proposals if the proper procedures are not
followed. In addition, these procedures may discourage or deter a third party
from conducting a solicitation of proxies to elect its own slate of directors
or to approve its own proposal, without regard to whether consideration of
those nominees or proposals might be harmful or beneficial to CVG and its
stockholders.
Amendment of Certain Provisions of the Certificate of Incorporation and
Bylaws
Under Delaware General Corporation Law, the stockholders have the right to
adopt, amend or repeal the bylaws and, with the approval of the board of
directors, the certificate of incorporation of a corporation. In addition,
under Delaware General Corporation Law, if the certificate of incorporation so
provides, the bylaws may be adopted, amended or repealed by the board of
directors. CVG's certificate of incorporation provides that the affirmative
vote of the holders of at least 80% of the voting power of the outstanding
shares of voting stock, voting together as a single class, is required to
amend provisions of the certificate of incorporation relating to:
. the prohibition of stockholder action without a meeting;
. the number, election and term of CVG's directors;
. super-majority voting requirements to amend the charter; and
. the issuance of rights.
The bylaws may be amended by the CVG board or by the affirmative vote of
the holders of at least 80% of the voting power of the outstanding shares of
voting stock, voting together as a single class. These super-majority voting
requirements will have the effect of making more difficult any amendment by
stockholders of the bylaws or of any of the provisions of the certificate of
incorporation described above, even if a majority of CVG's stockholders
believe that an amendment would be in their best interests.
Delaware Law
Anti-Takeover Legislation
Section 203 of the Delaware General Corporation Law provides that, subject
to the exceptions specified in that section, a corporation may not engage in
any business combination with any interested stockholder for a three-year
period following the time that such stockholder becomes an interested
stockholder unless:
. prior to that time, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
65
<PAGE>
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced (excluding certain shares); or
. at or subsequent to that time, the business combination is approved by
the board of directors of the corporation and by the affirmative vote of
at least two-thirds of the outstanding voting stock that is not owned by
the interested stockholder.
Except as specified in Section 203 of the Delaware General Corporation Law,
an "interested stockholder" is defined to include:
. any person that is the owner of 15% or more of the outstanding voting
stock of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation, at any time within three years immediately
prior to the relevant date; and
. the affiliates and associates of any person described in the preceding
clause.
Under certain circumstances, Section 203 of the Delaware General
Corporation Law makes it more difficult for a person who would be an
interested stockholder to effect various business combinations with a
corporation for a three-year period. It is anticipated that the provisions of
Section 203 may encourage persons interested in acquiring CVG to negotiate in
advance with the CVG board, since those persons could avoid the stockholder
approval requirement if a majority of the directors then in office approves
either the business combination or the transaction that results in the
stockholder becoming an interested stockholder.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF CVG DIRECTORS AND OFFICERS
Limitation of Liability of Directors
CVG's certificate of incorporation provides that a director of CVG will not
be personally liable to CVG or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability:
. for any breach of the director's duty of loyalty to CVG or its
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law, which concerns
unlawful payments of dividends, stock purchases or redemptions; or
. for any transaction from which the director derived an improper personal
benefit.
While CVG's certificate of incorporation provides directors with protection
from awards for monetary damages for breaches of their duty of care, it does
not eliminate their duty of care. Accordingly, the certificate of
incorporation will have no effect on the availability of equitable remedies
such as an injunction or rescission based on a director's breach of his or her
duty of care. The provisions of the certificate of incorporation described
above apply to an officer of CVG only if he or she is a director of CVG and is
acting in his or her capacity as director, and do not apply to officers of CVG
who are not directors.
Indemnification of Directors and Officers
The CVG certificate of incorporation provides that each person who is, or
was, or has agreed to become a director or officer of CVG, and each person who
serves, or may have served, at the request of CVG as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, will be indemnified by CVG to the fullest extent permitted
from time to time by Delaware law, as the same exists or may hereafter be
amended. Directors and officers will not be indemnified with respect to an
action commenced by such directors or officers against CVG or by such
directors or officers as a derivative action.
66
<PAGE>
The certificate of incorporation of CVG provides that the right to
indemnification and the payment of expenses conferred in the certificate of
incorporation will not be exclusive of any other right which any person may
have or may in the future acquire under any agreement, vote of stockholders,
vote of disinterested directors or otherwise. The certificate of incorporation
permits CVG to maintain insurance on behalf of any person who is, or was, a
director, officer, employee or agent of CVG, or is serving at the request of
CVG as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss, whether or not CVG would have the power to indemnify such
person against that liability under the certificate of incorporation or
Delaware law.
CVG intends to obtain directors and officers liability insurance providing
coverage to its directors and officers.
CVG'S 2001 ANNUAL MEETING OF STOCKHOLDERS
The CVG bylaws provide that an annual meeting of stockholders will be held
each year on a date specified by the CVG board of directors. The first annual
meeting of CVG stockholders after the distribution is expected to be held on
May [ ], 2001. In order to be considered for inclusion in CVG's proxy
materials for the 2001 annual stockholders meeting, any proposals by
stockholders must be received at CVG's principal executive offices at 17221
Red Hill Avenue, Irvine, California 92614, prior to [ ], 2000. CVG
anticipates commencing the mailing of proxies for the 2001 annual stockholders
meeting on or about March [ ], 2001. In addition, stockholders at the CVG
2001 annual meeting may consider stockholder proposals or nominations brought
by a stockholder of record on the record date for the 2001 annual meeting, who
is entitled to vote at such annual meeting and who has complied with the
advance notice procedures established by the CVG bylaws. A stockholder
proposal or nomination intended to be brought before the CVG 2001 annual
meeting must be received by CVG's secretary on or after [ ], 2001 and on or
prior to [ ], 2001. See "Certain Anti-Takeover Effects of Provisions of CVG's
Certificate of Incorporation and Bylaws and of Delaware Law--Certificate of
Incorporation and Bylaws."
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement, of which this
information statement constitutes a part, under the Securities Exchange Act of
1934 with respect to the CVG common stock being received by Baxter
stockholders in the distribution. This information statement does not contain
all of the information set forth in the registration statement. For further
information with respect to our business and the common stock being received
by Baxter stockholders in the distribution, please refer to the registration
statement. While we have provided a summary of the material terms of the
contents of certain contracts and other documents, the summary does not
describe all of the details of the contracts and other documents. In each
instance where a copy of a contract or other document has been filed as an
exhibit to the registration statement, please refer to the registration
statement. Each statement in this information statement regarding a contract
or other document is qualified in all respects by such exhibit. You may read
and copy all or any portion of the registration statement at the offices of
the SEC at Judiciary Plaza, 450 Fifth Street, Washington, D.C. 20549, and
copies of all or any part of the registration statement may be obtained from
the Public Reference Section of the SEC, Washington, D.C. 20549 upon the
payment of the fees prescribed by the SEC. Please call the SEC at 1-800-SEC-
0330 for further information about the public reference rooms. The SEC
maintains a Web site, http://www.sec.gov, that contains reports, proxy and
information statements and other information regarding registrants, such as
Baxter and CVG, that file electronically with the SEC. Upon completion of this
offering, CVG will become subject to the information and periodic reporting
requirements of the Securities Exchange Act of 1934, and, in accordance
therewith, will file periodic reports, proxy statements and other information
with the SEC. These periodic reports, proxy statements and other information
will be available for inspection and copying at the SEC's public reference
rooms and the SEC's Web site.
67
<PAGE>
CVG intends to furnish its stockholders with annual reports containing
consolidated financial statements (beginning with fiscal year 2000) audited by
independent accountants.
You should rely only on the information contained in this information
statement and other documents referred to in this information statement.
Baxter and CVG have not authorized anyone to provide you with information that
is different. This information statement is being furnished by Baxter solely
to provide information to Baxter stockholders who will receive CVG common
stock in the distribution. It is not, and is not to be construed as, an
inducement or encouragement to buy or sell any securities of Baxter or CVG.
Baxter and CVG believe that the information presented herein is accurate as of
the date hereof. Changes will occur after the date hereof, and neither Baxter
nor CVG will update the information except to the extent required in the
normal course of their respective public disclosure practices and as required
pursuant to the federal securities laws.
68
<PAGE>
CVG CONTROLLED INC.
INDEX TO COMBINED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Combined Balance Sheets.................................................... F-3
Combined Statements of Income.............................................. F-4
Combined Statements of Cash Flows.......................................... F-5
Combined Statements of Equity and Comprehensive Income..................... F-6
Notes to CVG Controlled Inc. Combined Financial Statements................. F-7
Schedule II--Valuation and Qualifying Accounts............................. S-1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders of
Baxter International Inc.
In our opinion, the combined financial statements listed on the
accompanying index present fairly, in all material respects, the financial
position of CVG Controlled Inc. (the Company) at December 31, 1998 and 1997
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related combined financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
December 8, 1999
F-2
<PAGE>
CVG CONTROLLED INC.
COMBINED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
December 31,
September 30, --------------
1999 1998 1997
------------- ------ ------
(unaudited)
<S> <C> <C> <C>
Current assets
Accounts and other receivables, net of
allowances of $8 million at September 30, 1999
and December 31, 1998, and $6 million at
December 31, 1997............................. $ 160 $ 169 $ 189
Inventories.................................... 188 156 157
Short-term deferred income taxes............... 14 14 10
Prepaid expenses............................... 10 14 15
------ ------ ------
Total current assets......................... 372 353 371
------ ------ ------
Property, plant and equipment
Property, plant and equipment.................. 493 480 448
Accumulated depreciation and amortization...... (270) (253) (231)
------ ------ ------
Net property, plant and equipment............ 223 227 217
------ ------ ------
Other assets
Goodwill and other intangibles................. 854 886 918
Other.......................................... 16 17 20
------ ------ ------
Total other assets........................... 870 903 938
------ ------ ------
Total assets............................... $1,465 $1,483 $1,526
====== ====== ======
Current liabilities
Accounts payable and accrued liabilities....... 151 157 140
------ ------ ------
Total current liabilities.................... 151 157 140
------ ------ ------
Other noncurrent liabilities..................... 52 55 55
Contingencies and commitments....................
Equity........................................... 1,289 1,296 1,358
Accumulated other comprehensive income (loss).... (27) (25) (27)
------ ------ ------
Total liabilities and equity............... $1,465 $1,483 $1,526
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE>
CVG CONTROLLED INC.
COMBINED STATEMENTS OF INCOME
(in millions)
<TABLE>
<CAPTION>
Nine months
ended
September Years ended
30, December 31,
----------- ----------------
1999 1998 1998 1997 1996
----- ----- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales......................................... $ 672 $ 639 $865 $879 $837
Costs and expenses
Costs of goods sold............................. 344 339 466 463 442
Marketing and administrative expenses........... 176 164 222 211 194
Research and development expenses............... 38 40 56 53 49
In-process research and development............. -- -- -- 132 --
Goodwill amortization........................... 26 26 34 34 30
Other expense (income).......................... 3 -- (6) 1 (5)
----- ----- ---- ---- ----
Total costs and expenses.......................... 587 569 772 894 710
----- ----- ---- ---- ----
Income (loss) before income taxes................. 85 70 93 (15) 127
Income tax expense................................ 23 23 31 37 40
----- ----- ---- ---- ----
Net income (loss)................................. $ 62 $ 47 $ 62 $(52) $ 87
===== ===== ==== ==== ====
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE>
CVG CONTROLLED INC.
COMBINED STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
Nine months Years ended December 31,
ended ---------------------------
September 30, 1998 1997 1996
-------------- -------- -------- --------
(unaudited)
(Brackets denote cash outflows)
<S> <C> <C> <C> <C> <C>
Cash flow provided from operations
Net income (loss)............... $ 62 $ 47 $ 62 $ (52) $ 87
Adjustments
Depreciation and amortization. 65 61 82 80 79
In-process research and
development.................. -- -- -- 132 --
Other......................... 2 11 14 (3) 2
Changes in balance sheet items
Accounts receivable........... 8 2 9 (6) (15)
Inventories................... (22) (5) (1) 10 12
Accounts payable and accrued
liabilities.................. (6) (11) 6 4 7
Other......................... (2) 8 4 (2) 13
------ ------ -------- ------- --------
Cash flow provided by
operations..................... 107 113 176 163 185
------ ------ -------- ------- --------
Investment transactions
Capital expenditures............ (31) (28) (40) (42) (36)
Acquisitions (net of cash
received)...................... (7) (12) (12) (16) (119)
------ ------ -------- ------- --------
Investment transactions, net.... (38) (40) (52) (58) (155)
------ ------ -------- ------- --------
Financing transactions
Advances from (payments to)
Baxter International Inc., net. (69) (73) (124) (105) (30)
------ ------ -------- ------- --------
Financing transactions, net..... (69) (73) (124) (105) (30)
------ ------ -------- ------- --------
Change in cash and equivalents.... -- -- -- -- --
Cash and equivalents at beginning
of period........................ -- -- -- -- --
------ ------ -------- ------- --------
Cash and equivalents at end of
period........................... $ -- $ -- $ -- $ -- $ --
====== ====== ======== ======= ========
Disclosure of noncash activity
Acquisition of business with
Baxter International Inc.
common stock................... $ -- $ -- $ -- $ 223 $ --
====== ====== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE>
CVG CONTROLLED INC.
COMBINED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
(in millions)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Comprehensive
Equity Income (Loss) Income (Loss)
------ ------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995............... $1,235 $--
Net income............................... 87 $ 87
----
Other comprehensive income (loss):
Currency translation adjustments....... (9)
Unrealized net gain on marketable
security, net of tax of $1............ 1
----
Other comprehensive income (loss).... (8) (8)
----
Advances from (payments to) Baxter
International Inc., net................. (30)
------ ----
Comprehensive income....................... $ 79
====
Balance at December 31, 1996............... 1,292 (8)
Net loss................................. (52) $(52)
----
Other comprehensive income (loss):
Currency translation adjustments....... (16)
Unrealized net loss on marketable
security, net of tax benefit of $2.... (3)
----
Other comprehensive income (loss).... (19) (19)
----
Advances from (payments to) Baxter
International Inc., net:
Cash................................... (105)
Acquisition of business with Baxter
International Inc. common stock....... 223
------ ----
Comprehensive income (loss)................ $(71)
====
Balance at December 31, 1997............... 1,358 (27)
Net income............................... 62 $ 62
----
Other comprehensive income:
Currency translation adjustments....... --
Unrealized net gain on marketable
security, net of tax of $1............ 2
----
Other comprehensive income........... 2 2
----
Advances from (payments to) Baxter
International Inc., net................. (124)
------ ----
Comprehensive income....................... $ 64
====
Balance at December 31, 1998............... 1,296 (25)
(Unaudited):
Net income............................... 62 $ 62
Other comprehensive income (loss)........ (2) (2)
Advances from (payments to) Baxter
International Inc., net................. (69)
------ ---- ----
Comprehensive income....................... $ 60
====
Balance at September 30, 1999.............. $1,289 $(27)
====== ====
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE>
CVG CONTROLLED INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
On July 11, 1999, the board of directors of Baxter International Inc.
(Baxter) approved a plan to spin off its CardioVascular business to Baxter
stockholders. Management expects that shares of the new cardiovascular
company, CVG Controlled Inc. (CVG or the company,) will be distributed to
Baxter stockholders (the distribution) in the second quarter of 2000 and that
the spin-off will be tax-free. The distribution will result in CVG operating
as an independent entity with publicly traded common stock.
CVG is a global leader in providing a comprehensive line of products and
services to treat late-stage cardiovascular disease. CVG's sales are
categorized in four main product areas: (a) cardiac surgery, (b) critical
care, (c) vascular and (d) perfusion products and services. In addition, CVG
also offers a diverse grouping of product lines comprised mostly of
pharmaceuticals and selected distributed products. CVG's cardiac surgery
portfolio is comprised of products relating to heart valve therapy, mechanical
cardiac assist, and cannulae and cardioplegia products used during open-heart
surgery. The critical care product category primarily includes hemodynamic
monitoring systems used to measure a patient's heart function in surgical and
intensive care settings. The vascular product area includes balloon catheter-
based products, surgical clips and inserts, angioscopy equipment, artificial
implantable grafts, and an endovascular system used for less-invasive
abdominal aortic aneurysms. The perfusion products and services area includes
disposable products used during cardiopulmonary bypass procedures and contract
perfusion services.
Baxter will have no ownership interest in CVG after the spin-off, but will
continue to conduct business pursuant to various agreements, which are
outlined in Note 7. However, unless released by third parties, Baxter will
remain liable for certain lease and other obligations and liabilities that are
transferred to and assumed by CVG. CVG will be obligated by the reorganization
agreement to indemnify Baxter against liabilities related to those transferred
obligations and liabilities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the combined financial statements.
These policies are in conformity with accounting principles generally accepted
in the United States (GAAP) and have been applied consistently in all material
respects. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements, the
reported amounts of revenues and expenses during the reporting period, and
related disclosures. Actual results could differ from those estimates.
Basis of presentation
The accompanying combined financial statements include those assets,
liabilities, revenues and expenses directly attributable to CVG's operations.
These financial statements have been prepared as if CVG had operated as a
free-standing entity for all periods presented. All material intercompany
balances have been eliminated. The combined financial statements include
allocations of certain Baxter corporate assets, liabilities and expenses to
CVG. These amounts have been allocated to the company on the basis that is
considered by management to reflect most fairly or reasonably the utilization
of the services provided to or the benefit obtained by the company. Management
believes the methods used to allocate these amounts are reasonable. However,
the financial information included herein does not necessarily reflect what
the financial position and results of operations of CVG would have been had it
operated as a stand-alone entity during the periods covered, and may not be
indicative of future operations or financial position.
Unaudited interim financial statements
In the opinion of management, the unaudited interim combined financial
statements reflect all adjustments necessary for a fair presentation of the
interim periods. All such adjustments are of a normal, recurring nature.
F-7
<PAGE>
CVG CONTROLLED INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year.
Fiscal year of international operations
Certain operations outside the United States and its territories are
included in the combined financial statements on the basis of fiscal years
ending November 30 in order to facilitate timely combination.
Foreign currency translation
The results of operations for non-U.S. subsidiaries, other than those
located in highly inflationary countries, are translated into U.S. dollars
using the average exchange rates during the year, while assets and liabilities
are translated using period-end rates. Resulting translation adjustments are
recorded as currency translation adjustments within other comprehensive
income. Where foreign affiliates operate in highly inflationary economies,
non-monetary amounts are translated at historical exchange rates while
monetary assets and liabilities are translated at the current rate with the
related adjustments reflected in the combined statements of income.
Revenue recognition
The company's practice is to recognize revenues from product sales as
shipped and for services as performed. For certain products, the company
maintains consigned inventory at customer locations. For these products,
revenue is recognized at the time the company is notified that the inventory
has been used by the customer.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market value. Market value for raw materials is based on replacement costs
and, for other inventory classifications, on net realizable value.
Inventories consisted of the following:
<TABLE>
<CAPTION>
December
31,
September 30, ---------
1999 1998 1997
------------- ---- ----
(unaudited)
(in millions)
<S> <C> <C> <C>
Raw materials..................................... $ 33 $ 33 $ 34
Work in process................................... 37 36 33
Finished products................................. 118 87 90
---- ---- ----
Total inventories............................... $188 $156 $157
==== ==== ====
</TABLE>
Reserves for excess and obsolete inventory were approximately $13 million
at September 30, 1999, $10 million at December 31, 1998 and $13 million at
December 31, 1997.
Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization are principally calculated for financial reporting purposes on
the straight-line method over the estimated useful lives of the related
assets, which range from 20 to 50 years for buildings and improvements and
from three to 15 years for machinery and equipment. Leasehold improvements are
amortized over the life of the related facility leases or the asset, whichever
is shorter. Straight-line and accelerated methods of depreciation are used for
income tax purposes.
F-8
<PAGE>
CVG CONTROLLED INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
as of December 31 1998 1997
----------------- ---- ----
(in
millions)
<S> <C> <C>
Land.......................................................... $ 28 $ 20
Buildings and leasehold improvements.......................... 82 80
Machinery and equipment....................................... 274 264
Equipment with customers...................................... 81 73
Construction in progress...................................... 15 11
---- ----
Total property, plant and equipment, at cost.................. 480 448
Accumulated depreciation and amortization..................... (253) (231)
---- ----
Net property, plant and equipment............................. $227 $217
==== ====
</TABLE>
Depreciation expense was $35 million in 1998, and $33 million in 1997 and
1996. Repairs and maintenance expense was $10 million in 1998 and $7 million
in 1997 and 1996.
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
ranging from 15 to 40 years.
Other intangible assets include purchased patents, trademarks and other
identified rights and are amortized on a straight-line basis over their legal
or estimated useful lives, whichever is shorter (generally not exceeding 17
years).
Goodwill and other intangible assets are summarized as follows:
<TABLE>
<CAPTION>
as of December 31 1998 1997
----------------- ------ ------
(in millions)
<S> <C> <C>
Goodwill.................................................. $1,116 $1,107
Accumulated amortization.................................. (337) (303)
------ ------
Net goodwill.............................................. 779 804
------ ------
Other intangibles......................................... 184 180
Accumulated amortization.................................. (77) (66)
------ ------
Net other intangibles..................................... 107 114
------ ------
Goodwill and other intangibles............................ $ 886 $ 918
====== ======
</TABLE>
Management reviews the carrying amounts of goodwill and other intangibles
periodically and whenever events or changes in circumstances indicate that the
carrying amounts of an asset may not be recoverable. Based upon management's
assessment of the future undiscounted operating cash flows of acquired
businesses, the carrying values of goodwill and other intangibles at December
31, 1998, have not been impaired.
Income taxes
CVG's operations were historically included in Baxter's consolidated U.S.
federal and state income tax returns and in the tax returns of certain Baxter
foreign subsidiaries. The provision for income taxes has been determined as if
CVG had filed separate tax returns under its existing structure for the
periods presented. Accordingly, the effective tax rate of CVG in future years
could vary from its historical effective rates depending on CVG's future legal
structure and tax elections. All income taxes are settled with Baxter on a
current basis through the "Advances from (payments to) Baxter" account.
F-9
<PAGE>
CVG CONTROLLED INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Derivatives
For all periods presented, CVG has been considered in Baxter's overall risk
management strategy. Baxter's accounting policies with respect to derivatives
are summarized below as they apply to CVG.
Gains and option premiums relating to qualifying foreign currency hedges of
anticipated transactions are deferred and recognized in income as offsets of
gains and losses resulting from the underlying hedged transactions. Gains
relating to terminations of qualifying hedges are deferred and recognized in
income at the same time as the underlying hedged transactions. In
circumstances where the underlying anticipated transaction is no longer
expected to occur, any remaining deferred amounts are recognized immediately
in income. Foreign currency contracts not qualifying for hedge treatment are
marked to market at each balance sheet date with resulting gains and losses
recognized in earnings. Cash flows from derivatives are classified in the same
category as the cash flows from the related hedged activity. Foreign currency
financial instruments are used to hedge economic risks and are not used for
trading purposes.
Advances from (payments to) Baxter, net
Advances from (payments to) Baxter includes common stock, additional paid-
in capital and net intercompany balances with CVG which will be contributed at
the time of the spin-off.
Comprehensive income (loss)
Comprehensive income (loss) encompasses all changes in equity other than
those arising from transactions with stockholders, and consists of net income,
currency translation adjustments and unrealized net gains and losses on
marketable equity securities. The company does not provide for U.S. income
taxes on foreign currency translation adjustments since it does not provide
for such taxes on undistributed earnings of foreign subsidiaries. The net
unrealized gain on a marketable security of $2 million for 1998 (net-of-tax)
principally consisted of a reclassification adjustment for an impairment loss
included in net income during the year.
Recent accounting pronouncement
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (Statement No. 133) which was to be effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB
issued Statement No. 137, "Accounting for Derivative Instruments--Deferral of
the Effective Date of FASB Statement No. 133" (Statement No. 137). Statement
No. 137 deferred the effective date of Statement No. 133 to all fiscal
quarters of fiscal years beginning after June 15, 2000. Statement No. 133
requires that all derivatives be recorded in the balance sheet as either
assets or liabilities and be measured at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. Management is in the process of
evaluating this standard and has not yet determined the future impact on the
company's financial statements.
3. ACQUISITIONS
All acquisitions during the three years ended December 31, 1998 were
accounted for under the purchase method. Results of operations of acquired
companies are included in the company's results of operations as of the
respective acquisition dates. The purchase price of each acquisition was
allocated to the net assets acquired based on estimates of their fair values
at the date of the acquisition. The excess of the purchase price over the fair
values of the net tangible assets and liabilities and identifiable intangibles
acquired was allocated to goodwill.
Research Medical, Inc.
In March 1997, CVG acquired Research Medical, Inc. (Research Medical), a
manufacturer of specialized products used in open-heart surgery for
approximately $239 million. Approximately $223 million of the purchase
F-10
<PAGE>
CVG CONTROLLED INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
price was in the form of 4,801,711 shares of Baxter International Inc. common
stock, issued from treasury. As further discussed below, $132 million of the
purchase price was allocated to in-process research and development (IPR&D),
and, under generally accepted accounting principles, immediately expensed.
Approximately $40 million and $38 million of the purchase price was allocated
to existing product technology and goodwill, respectively, and is being
amortized on a straight-line basis over 14 years and 20 years, respectively.
In-Process Research and Development
The amount allocated to IPR&D was determined on the basis of an independent
appraisal using the income approach, which measures the value of an asset by
the present value of its future economic benefits. Estimated cash flows for
each project category were discounted to their present values at rates of
return that incorporate the risk-free rate, the expected rate of inflation,
and risks associated with the particular projects, including their stages of
completion. Projected revenue and cost assumptions were determined considering
the company's historical experience and industry trends and averages.
Approximately $76 million of the total IPR&D charge pertained to minimally
invasive surgical procedures, with the remainder relating principally to
heparin removal technology, autologous fibrin delivery kit and sealant
technologies, retrograde reprofusion system technologies and ischemic limb
reperfusion system technologies. The status of development, stage of
completion, assumptions, nature and timing of remaining efforts for
completion, risks and uncertainties, and other key factors varied by
individual project. Discount rates on individual projects ranged from 14
percent to 20 percent. Material net cash inflows for the most significant
projects were forecasted to commence between 1998 and 2000. Assumed research
and development expenditures prior to the various dates of product
introductions totaled approximately $2 million.
The products under development were at various stages of development, and
substantial further research and development, pre-clinical testing and
clinical trials would be required to determine their technical feasibility and
commercial viability. Any delay in the development, introduction or marketing
of the products under development could result either in such products being
marketed at a time when their cost and performance characteristics would not
be competitive in the marketplace or in a shortening of their commercial
lives. If the products are not completed on time, the expected returns on the
investment could be significantly and unfavorably impacted.
Subsequent to the date of acquisition of Research Medical and based on an
analysis of the costs versus potential future benefits of continuing the
projects, several of the research and development projects in-process at
acquisition date were terminated. Such projects related principally to heparin
removal technology, autologous fibrin delivery kit and sealant technologies,
retrograde reprofusion system technologies and ischemic limb reperfusion
system technologies. The total IPR&D charge recorded at acquisition date
relating to these projects subsequently terminated totaled approximately $56
million.
Acquisition reserves
Approximately $14 million of reserves were established with respect to the
acquisition of Research Medical. Of this total, approximately $1 million was
reserved to eliminate 17 positions at Research Medical, principally in the
sales and marketing and research and development functions, and approximately
$13 million was established principally to terminate certain distribution
contracts relating to the acquired company. The reserves were fully utilized
as of December 31, 1998 and such utilization was in accordance with the
original plans.
Pro forma information (unaudited)
Excluding the IPR&D charge, had the acquisition of Research Medical taken
place on January 1 of 1997, combined net sales and net income would not have
been materially different from the reported amounts and,
F-11
<PAGE>
CVG CONTROLLED INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
therefore, pro forma information is not presented. Excluding the IPR&D charge,
had the acquisition of Research Medical taken place on January 1 of 1996, the
company's combined pro forma net sales and net income in 1996 would have been
$876 million and $91 million, respectively.
PSICOR, Inc.
In January 1996, the company acquired PSICOR, Inc., a contract perfusion
services company, for approximately $84 million. Approximately $68 million of
the purchase price was allocated to goodwill and is being amortized on a
straight-line basis over 15 years.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
as of December 31 1998 1997
----------------- ---- ----
(in
millions)
<S> <C> <C>
Accounts payable, principally trade............................ $ 44 $ 43
Employee compensation and withholdings......................... 47 40
Property, payroll and other taxes.............................. 10 11
Other accrued liabilities...................................... 45 37
Other accounts payable......................................... 11 9
---- ----
Accounts payable and accrued liabilities..................... $157 $140
==== ====
</TABLE>
5. LEASE OBLIGATIONS
Certain facilities and equipment are leased under operating leases expiring
at various dates. Most of the operating leases contain renewal options. Total
expense for all operating leases was $8 million in 1998 and $9 million in 1997
and 1996.
Future minimum lease payments (including interest) under noncancelable
operating leases at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Operating
leases
-------------
(in millions)
<S> <C>
1999........................................................ $ 7
2000........................................................ 4
2001........................................................ 2
2002........................................................ 1
2003........................................................ 1
Thereafter.................................................. 1
---
Total obligations and commitments......................... $16
===
</TABLE>
6. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Concentrations of credit risk
In the normal course of business, CVG provides credit to customers in the
health-care industry, performs credit evaluations of these customers and
maintains reserves for potential credit losses which, when realized, have been
within the range of management's allowance for doubtful accounts.
F-12
<PAGE>
CVG CONTROLLED INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Foreign exchange risk management
For all periods presented, CVG has been considered in Baxter's overall risk
management strategy. As part of this strategy, Baxter uses certain financial
instruments to reduce its exposure to adverse movements in foreign exchange
rates. These financial instruments are not used for trading purposes. The
financial instruments contain credit risk in that the banking counterparty may
be unable to meet the terms of the agreements. Such risk is minimized by
limiting counterparties to major financial institutions and by management's
monitoring of credit risk. In addition, where appropriate, Baxter has arranged
collateralization and master-netting agreements to minimize the risk of loss.
As part of implementing its strategy, Baxter enters into foreign exchange
contracts, principally options, with terms generally less than two years, to
hedge anticipated but not yet committed sales expected to be denominated in
foreign currencies. Baxter has allocated to CVG the net income associated with
certain of such contracts in the amounts of $3 million, $3 million and less
than $1 million in 1998, 1997 and 1996, respectively. The approximate notional
amounts associated with the allocated portion of these foreign exchange
contracts was $177 million and $81 million at December 31, 1998 and 1997,
respectively. The allocations were determined based on CVG's hedged sales
relative to Baxter's total hedged sales, by applicable currency. With respect
to CVG's foreign currency exposures, Baxter principally hedges the Japanese
Yen and European currencies.
Fair values of financial instruments
<TABLE>
<CAPTION>
Carrying Approximate
amounts fair values
--------- ------------
as of December 31 1998 1997 1998 1997
----------------- ---- ---- ----- -----
(in millions)
<S> <C> <C> <C> <C>
Investments in affiliates........................ $ 1 $ 5 $ 1 $ 1
Foreign currency hedges.......................... 2 1 2 1
</TABLE>
The carrying values of accounts receivable and payable and accrued
liabilities approximate fair value due to the short-term maturities of these
assets and liabilities.
7. RELATED PARTY TRANSACTIONS
Baxter has provided to CVG certain legal, treasury, employee benefits,
insurance and administrative services. Charges for these services, which have
been recorded in cost of sales, marketing and administrative expenses and
research and development expenses, as applicable, are based on actual costs
incurred by Baxter and totaled $62 million, $63 million and $55 million in
1998, 1997 and 1996, respectively. The bases for the amounts charged to CVG
varied depending on the nature of the service, but generally were determined
using headcount, sales, payroll, square footage or other appropriate data, or
were determined based on actual utilization of services. Management believes
that the bases used for allocating services is reasonable. However, the terms
of these transactions may differ from those that would result from
transactions with unrelated third parties or had CVG performed these functions
on their own.
CVG participates in a centralized cash management program administered by
Baxter. Short-term advances from Baxter or excess cash sent to Baxter has been
treated as an adjustment to the "Advances from (payments to) Baxter, net"
account through the balance sheet date. No interest is charged on this
balance.
Effective on the distribution date, Baxter and CVG will enter into a series
of administrative services agreements pursuant to which Baxter and CVG will
continue to provide, for a specified period of time, certain administrative
services which each entity historically has provided to the other. These
agreements require both
F-13
<PAGE>
CVG CONTROLLED INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
parties to pay each other a fee which approximates the actual costs of these
services. Additionally, subsequent to the spin-off, CVG will have continuing
relationships with Baxter as a customer and supplier for certain products. See
"CVG's Relationship with Baxter after the Distribution." included elsewhere in
this Information Statement, for detailed descriptions of the related
agreements.
8. RETIREMENT AND OTHER BENEFIT PROGRAMS
CVG employees participated in Baxter-sponsored non-contributory, defined
benefit pension plans covering substantially all employees in the U.S. and
Puerto Rico and employees in certain other countries. The benefits were based
on years of service and the employee's compensation during 5 of the last 10
years of employment as defined by the plans. Baxter and CVG have announced
their intent to freeze benefits under the U.S. plan at the date of the spin-
off for CVG employees. CVG has also announced that it will not have a defined
benefit pension plan in the U.S. to replace the Baxter plan. The pension
liability related to CVG's U.S. employees' service prior to the spin-off date
will remain with Baxter. With respect to the Puerto Rico plan, Baxter plans to
transfer the assets and liabilities relating to CVG's employees to CVG at
spin-off date. CVG intends to continue to have a non-contributory, defined
benefit pension plan in Puerto Rico after the spin-off date.
Pension expense for the Baxter-sponsored plans in the U.S. and Puerto Rico
relating to CVG's employees was $4 million, $3 million and $4 million in 1998,
1997 and 1996, respectively. The assumed discount rate applied to benefit
obligations to determine 1998 and 1997 pension expense was 7.5% and 8.0%,
respectively. The assumed long-term rate of return on assets was 10.5% for
1998 and 1997. The assumed rate of compensation increase was 4.5% and 4.0% for
the U.S. and Puerto Rico plan, respectively, in both 1998 and 1997.
In addition to pension benefits, CVG participated in Baxter-sponsored
contributory health-care and life insurance benefits for substantially all
domestic retired employees. Baxter and CVG have announced that they will
freeze benefits under these plans at the date of the spin-off for CVG
employees. CVG has announced its intention not to establish new health-care
and life insurance plans for employees retiring subsequent to the spin-off
date. Expense associated with these benefits relating to CVG employees was
less than $1 million in each of the years 1998, 1997 and 1996.
Most U.S. employees have been eligible to participate in a qualified 401(k)
plan. Participants could contribute up to 12% of their annual compensation
(limited in 1998 to $10,000 per individual) to the plan and Baxter matched
participants' contributions, up to 3% of an individual participant's
compensation. Matching contributions relating to CVG employees were
approximately $3 million in 1998 and 1997, and $2 million in 1996.
9. OTHER EXPENSE (INCOME)
Components of other expense (income) are as follows:
<TABLE>
<CAPTION>
years ended December 31: 1998 1997 1996
------------------------ ---- ---- ----
(in millions)
<S> <C> <C> <C>
Asset dispositions and writedowns, net................... $ 6 $-- $11
Insurance and legal settlements.......................... (13) -- (18)
Foreign exchange......................................... 1 -- --
Other.................................................... -- 1 2
--- ---- ---
Total other expense (income)........................... $(6) $ 1 $(5)
=== ==== ===
</TABLE>
F-14
<PAGE>
CVG CONTROLLED INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
10. INCOME TAXES
Income before tax expense by category is as follows:
<TABLE>
<CAPTION>
years ended December 31: 1998 1997 1996
------------------------ ---- ---- ----
(in millions)
<S> <C> <C> <C>
U.S...................................................... $66 $(42) $ 90
International............................................ 27 27 37
--- ---- ----
Income before income tax expense....................... $93 $(15) $127
=== ==== ====
</TABLE>
Income tax expense by category and by income statement classification is as
follows:
<TABLE>
<CAPTION>
years ended December 31: 1998 1997 1996
------------------------ ---- ---- ----
(in millions)
<S> <C> <C> <C>
Current
U.S.
Federal.............................................. $16 $18 $13
State and local, including Puerto Rico............... 11 16 16
International.......................................... 4 7 12
--- --- ---
Current income tax expense............................... 31 41 41
--- --- ---
Deferred
U.S.
Federal.............................................. -- (3) (2)
State and local, including Puerto Rico............... -- (1) --
International.......................................... -- -- 1
--- --- ---
Deferred income tax expense.............................. -- (4) (1)
--- --- ---
Income tax expense....................................... $31 $37 $40
=== === ===
</TABLE>
The income tax shown above was calculated as if CVG were a stand-alone
entity.
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
years ended December 31: 1998 1997 1996
------------------------ ---- ---- ----
(in millions)
<S> <C> <C> <C>
Deferred tax assets
Accrued expenses..................................... $ 12 $ 8 $ 10
Other................................................ 2 2 2
---- ---- ----
Total deferred tax assets.......................... 14 10 12
---- ---- ----
Deferred tax liabilities
Asset basis differences.............................. 43 45 36
Other................................................ 1 1 --
---- ---- ----
Total deferred tax liabilities..................... 44 46 36
---- ---- ----
Net deferred tax liabilities........................... $(30) $(36) $(24)
==== ==== ====
</TABLE>
F-15
<PAGE>
CVG CONTROLLED INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
INCOME TAX EXPENSE
Income tax expense differs from income tax expense calculated by using the
U.S. federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
years ended December 31: 1998 1997 1996
------------------------ ---- ---- ----
(in millions)
<S> <C> <C> <C>
Income tax expense at statutory rate.................... $ 33 $ (5) $ 44
Tax-exempt operations................................... (12) (16) (19)
Nondeductible goodwill.................................. 12 12 11
State and local taxes................................... 4 4 4
Foreign tax expense..................................... (6) (4) --
In-process R&D expense.................................. -- 46 --
---- ---- ----
Income tax expense.................................... $ 31 $ 37 $ 40
==== ==== ====
</TABLE>
The company has manufacturing operations outside the United States, namely
in Puerto Rico and Switzerland, which benefit from reductions in local tax
rates under various tax incentives. As a result of the spin-off of the company
from Baxter and other actions, the company will seek to renegotiate these
existing tax incentives. It is expected that comparable tax grants will be
secured on a stand-alone basis in due course.
11. LEGAL PROCEEDINGS
Upon the distribution, CVG will assume the defense of litigation involving
cases and claims related to the CVG business. CVG has not been named as a
defendant in such matters but will be defending and indemnifying Baxter
Healthcare Corporation, as contemplated by the reorganization agreement, for
all related expenses and potential liabilities. It is possible that CVG may be
added as a defendant in existing cases and claims.
The cases and claims relate primarily to products and services currently or
formerly manufactured or performed, as applicable, by CVG. Such cases and
claims raise difficult and complex factual and legal issues and are subject to
many uncertainties and complexities, including, but not limited to, the facts
and circumstances of each particular case or claim, the jurisdiction in which
each suit is brought, and differences in applicable law. Accordingly, in
certain cases, CVG is not able to estimate the amount of its liabilities with
respect to such matters.
Upon resolution of any pending legal matters, CVG may incur charges in
excess of presently established reserves. While such a charge could have a
material adverse impact on CVG's net income or net cash flows in the period in
which it is recorded or paid, management believes that no such charge would
have a material adverse effect on CVG's combined financial position.
CVG believes that the liability and defense costs relating to its legal
matters will be within self-insured retentions or substantially covered by
insurance, subject to exclusions, conditions, policy limits and potential
insurer insolvency.
12. STOCK-BASED COMPENSATION PLANS
Certain employees of CVG participated in stock-based compensation plans
sponsored by Baxter. Such plans principally included fixed stock option plans
and employee stock purchase plans. Baxter applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for such plans. Accordingly, no compensation cost has been
recognized by Baxter for its fixed stock option plans and its stock purchase
plans. These plans are the sole responsibility of Baxter and, accordingly, no
information is presented herein.
F-16
<PAGE>
CVG CONTROLLED INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Concluded)
13. SEGMENT INFORMATION
The company manages its business on the basis of one reportable segment.
Refer to Note 1 for a description of the company's business. The company's
products and services share similar distribution channels and customers and
are sold principally to hospitals and physicians. Management evaluates its
various global product portfolios on a revenue basis, which is presented
below, and profitability is generally evaluated on an enterprise-wide basis
due to shared infrastructures. CVG's principal markets are the United States,
Europe and Japan.
Geographic area data includes net sales based on product shipment
destination and long-lived asset data is presented based on physical location.
<TABLE>
<CAPTION>
as of or for the year ended December 31 1998 1997 1996
--------------------------------------- ---- ---- ----
(in millions)
<S> <C> <C> <C>
Net Sales by Geographic Area
United States.............................................. $508 $515 $456
Japan...................................................... 138 154 166
Other countries............................................ 219 210 215
---- ---- ----
Totals................................................... $865 $879 $837
==== ==== ====
Net Sales by Major Product and Service Area
Cardiac Surgery............................................ $273 $247 $199
Vascular................................................... 60 57 59
Critical Care.............................................. 221 227 241
Perfusion Products and Services............................ 269 289 285
Other...................................................... 42 59 53
---- ---- ----
Totals................................................... $865 $879 $837
==== ==== ====
Long-Lived Assets by Geographic Area
United States.............................................. $198 $189 $171
Other countries............................................ 29 28 31
---- ---- ----
Totals................................................... $227 $217 $202
==== ==== ====
</TABLE>
Sales to Allegiance Corporation, a subsidiary of Cardinal Health, Inc.,
represented approximately 13 percent, 10 percent and six percent of the
company's total net sales in 1998, 1997 and 1996, respectively.
F-17
<PAGE>
SCHEDULE II
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
----------------------
Balance at Charged to Charged to Deductions Balance
beginning costs and other from at end of
of period expenses accounts(A) reserves period
---------- ---------- ----------- ---------- ---------
(In millions of dollars)
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1998:
Allowances for
doubtful accounts and
returns.............. $ 6 $ 8 -- $(6) $ 8
Inventory reserves.... 13 4 -- (7) 10
Litigation reserves... 1 1 -- (1) 1
Acquisition reserves.. 14 -- -- (14) --
---------------------------------------
Year ended December 31,
1997:
Allowances for
doubtful accounts and
returns.............. 6 6 (1) (5) 6
Inventory reserves.... 15 3 -- (5) 13
Litigation reserves... -- 1 -- -- 1
Acquisition reserves.. -- -- 14 -- 14
Deferred tax asset
valuation allowance.. 1 -- -- (1) --
---------------------------------------
Year ended December 31,
1996:
Allowances for
doubtful accounts and
returns ............. 6 5 -- (5) 6
Inventory reserves.... 11 7 -- (3) 15
Litigation reserves... -- 1 -- (1) --
Deferred tax asset
valuation allowance.. 2 -- -- (1) 1
---------------------------------------
</TABLE>
- --------
(A) Valuation accounts of acquired or divested companies and foreign currency
translation adjustments. Reserves are deducted from assets to which they
apply.
S-1
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
/s/ Michael A. Mussallem
By: ________________________________
Name: Michael A. Mussallem
Title: Chief Executive Officer
Date: December 8, 1999
<PAGE>
<TABLE>
<CAPTION>
(b) Exhibits
<C> <S>
3.1* Amended and Restated Certificate of Incorporation of CVG
3.2* Amended and Restated Bylaws of CVG
Certificate of Designation for CVG Series A Junior Participating
3.3* Preferred Stock
4.1* Specimen form of certificate representing CVG common stock
10.1* Form of Agreement and Plan of Reorganization, to be entered into
between CVG and Baxter International Inc.
Form of Tax Sharing Agreement, to be entered into between CVG and
10.2* Baxter International Inc.
10.3* Form of CVG 2000 Incentive Compensation Plan
10.4* Form of CVG Retirement Plan
10.5* Form of CVG Excess Plan
10.6* Form of Employee Stock Purchase Plan
10.7* Terms and Conditions of Transition Options
10.8* CVG Change of Control Plan
Rights Agreement between CVG Controlled Inc. and [ ] as Rights Agent,
10.9* dated as of [ ], 2000
10.10* Services and Distribution Agreement between CVG, as successor in
interest to Baxter Healthcare Corporation, and Allegiance Healthcare
Corporation, dated as of September 30, 1999.
21.1* Subsidiaries of CVG
27.1 Financial Data Schedule--September 30, 1999
27.2 Financial Data Schedule--September 30, 1998
27.3 Financial Data Schedule--December 31, 1998
27.4 Financial Data Schedule--December 31, 1997
27.5 Financial Data Schedule--December 31, 1996
</TABLE>
NOTE
*to be filed by amendment
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
condensed consolidated Balance Sheet as of September 30, 1999, and the condensed
consolidated Income Statement for the nine months ended September 30, 1999 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 168
<ALLOWANCES> 8
<INVENTORY> 188
<CURRENT-ASSETS> 372
<PP&E> 493
<DEPRECIATION> 270
<TOTAL-ASSETS> 1,465
<CURRENT-LIABILITIES> 151
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,262
<TOTAL-LIABILITY-AND-EQUITY> 1,465
<SALES> 672
<TOTAL-REVENUES> 672
<CGS> 344
<TOTAL-COSTS> 344
<OTHER-EXPENSES> 64<F1>
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 85
<INCOME-TAX> 23
<INCOME-CONTINUING> 62
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1> Includes Research and Development Expenses and Goodwill Amortization.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
condensed consolidated Income Statement for the nine months ended September 30,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 639
<TOTAL-REVENUES> 639
<CGS> 339
<TOTAL-COSTS> 339
<OTHER-EXPENSES> 66<F1>
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 70
<INCOME-TAX> 23
<INCOME-CONTINUING> 47
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1> Includes Research and Development Expenses and Goodwill Amortization.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
condensed consolidated Balance Sheet as of December 31, 1998 and the condensed
consolidated Income Statement for the twelve months ended December 31, 1998 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 177
<ALLOWANCES> 8
<INVENTORY> 156
<CURRENT-ASSETS> 353
<PP&E> 480
<DEPRECIATION> 253
<TOTAL-ASSETS> 1,483
<CURRENT-LIABILITIES> 157
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,271
<TOTAL-LIABILITY-AND-EQUITY> 1,483
<SALES> 865
<TOTAL-REVENUES> 865
<CGS> 466
<TOTAL-COSTS> 466
<OTHER-EXPENSES> 90<F1>
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 93
<INCOME-TAX> 31
<INCOME-CONTINUING> 62
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1> Includes Research and Development Expenses and Goodwill Amortization.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated Balance Sheet as of December 31, 1997 and the condensed
consolidated Income Statement for the twelve months ended December 31, 1997 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 195
<ALLOWANCES> 6
<INVENTORY> 157
<CURRENT-ASSETS> 371
<PP&E> 448
<DEPRECIATION> 231
<TOTAL-ASSETS> 1526
<CURRENT-LIABILITIES> 140
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1331
<TOTAL-LIABILITY-AND-EQUITY> 1526
<SALES> 879
<TOTAL-REVENUES> 879
<CGS> 463
<TOTAL-COSTS> 463
<OTHER-EXPENSES> 87<F1>
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (15)
<INCOME-TAX> 37
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (52)
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Includes Research and Development Expenses and Goodwill Amortization.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
condensed consolidated Income Statement for the twelve months ended December 31,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 837
<TOTAL-REVENUES> 837
<CGS> 442
<TOTAL-COSTS> 442
<OTHER-EXPENSES> 79<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 127
<INCOME-TAX> 40
<INCOME-CONTINUING> 87
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Includes Research and Development Expenses and Goodwill Amortization.
</FN>
</TABLE>
