-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, lmVlwt9qtwo52l1I4oVN35iCdlZMXHGGwvuNJ39FWaUheftB9HRX6y47oySUgsTE WTwYPHrkb9fzajK5tcTzHA== 0000912057-94-000982.txt : 19940322 0000912057-94-000982.hdr.sgml : 19940322 ACCESSION NUMBER: 0000912057-94-000982 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAXTER INTERNATIONAL INC CENTRAL INDEX KEY: 0000010456 STANDARD INDUSTRIAL CLASSIFICATION: 2834 IRS NUMBER: 360781620 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-04448 FILM NUMBER: 94516972 BUSINESS ADDRESS: STREET 1: ONE BAXTER PKWY CITY: DEERFIELD STATE: IL ZIP: 60015 BUSINESS PHONE: 7089482000 MAIL ADDRESS: STREET 1: ONE BAXTER PARKWAY CITY: DEERFIELD STATE: IL ZIP: 60015 FORMER COMPANY: FORMER CONFORMED NAME: BAXTER TRAVENOL LABORATORIES INC DATE OF NAME CHANGE: 19880522 FORMER COMPANY: FORMER CONFORMED NAME: BAXTER LABORATORIES INC DATE OF NAME CHANGE: 19760608 10-K 1 10-K - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-4448 - -------------------------------------------------------------------------------- [LOGO] Baxter International Inc. - -------------------------------------------------------------------------------- DELAWARE 36-0781620 ------------------- ------------------------------ State of Incorporation I.R.S. Employer Identification No.
ONE BAXTER PARKWAY, DEERFIELD, ILLINOIS 60015 (708) 948-2000 -------------------------------------------------- Address, including zip code, and telephone number, including area code, of principal executive offices Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED - --------------------------------------------------------------- ----------------------------- Common stock, $1 par value New York Stock Exchange Midwest Stock Exchange Pacific Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange (currently traded with common stock) Midwest Stock Exchange Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in the definitive proxy statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the voting stock held by non-affiliates of the registrant (based on the per share closing sale price of $22.38 on March 1, 1994, and for the purpose of this computation only, the assumption that all registrant's directors and executive officers are affiliates) was approximately $6.1 billion. The number of shares of the registrant's common stock, $1 par value, outstanding as of March 1, 1994, was 276,729,809. DOCUMENTS INCORPORATED BY REFERENCE Those sections or portions of the registrant's 1993 annual report to stockholders and of the registrant's proxy statement for use in connection with its annual meeting of stockholders to be held on April 29, 1994, described in the cross reference sheet and table of contents attached hereto are incorporated by reference in this report. - -------------------------------------------------------------------------------- CROSS REFERENCE SHEET AND TABLE OF CONTENTS - --------------------------------------------------------------------------------
PAGE NUMBER OR (REFERENCE) (1) ---------------- Item 1. Business. (a) General Development of Business............................... 3(2) (b) Financial Information about Industry Segments................. 3(3) (c) Narrative Description of Business............................. 3(4) (d) Financial Information about Foreign and Domestic Operations and Export Sales............................................ 8(5) Item 2. Properties........................................................ 8 Item 3. Legal Proceedings................................................. 8(6) Item 4. Submission of Matters to a Vote of Security Holders............... 13 Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters......................................................... 14(7) Item 6. Selected Financial Data........................................... 14(8) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 14(9) Item 8. Financial Statements and Supplementary Data....................... 14(10) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................ 14 Item 10. Directors and Executive Officers of the Registrant (a) Identification of Directors................................... 15(11) (b) Identification of Executive Officers.......................... 15 (c) Compliance with Section 16(a) of the Securities Exchange Act of 1934......................................................... 16(12) Item 11. Executive Compensation............................................ (13) Item 12. Security Ownership of Certain Beneficial Owners and Management.... (14) Item 13. Certain Relationships and Related Transactions.................... (15) Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 17 (a) Financial Statements.......................................... 19 (b) Reports on Form 8-K........................................... (c) Exhibits...................................................... 29 - ------------------------ (1) Information incorporated by reference to the Company's Annual Report to Stockholders for the year ended December 31, 1993 ("Annual Report") and the board of directors' proxy statement for use in connection with the Registrant's annual meeting of stockholders to be held April 29, 1994 ("Proxy Statement"). (2) Annual Report, pages 53-67, section entitled "Notes to Consolidated Financial Statements" and pages 35-46, section entitled "Financial Review." (3) Annual Report, pages 65-66, section entitled "Notes to Consolidated Financial Statements -- Segment Information." (4) Annual Report, pages 35-46, section entitled "Financial Review" and pages 65-66, section entitled "Notes to Consolidated Financial Statements -- Segment Information." (5) Annual Report, pages 65-66, section entitled "Notes to Consolidated Financial Statements -- Segment Information." (6) Annual Report, pages 61-64, section entitled "Notes to Consolidated Financial Statements -- Legal Proceedings." (7) Annual Report, page 67, section entitled "Notes to Consolidated Financial Statements -- Quarterly Financial Results and Market for the Company's Stock." (8) Annual Report, inside back cover, section entitled "Six-Year Summary of Selected Financial Data." (9) Annual Report, pages 35-46, section entitled "Financial Review." (10) Annual Report, pages 48-67, sections entitled "Report of Independent Accountants," "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Cash Flows," "Consolidated Statements of Stockholders' Equity" and "Notes to Consolidated Financial Statements." (11) Proxy Statement, pages 2-3, sections entitled "Board of Directors" and "Election of Directors." (12) Proxy Statement, page 17, section entitled "Section 16 Reporting." (13) Proxy Statement, pages 6-17, sections entitled "Compensation of Directors" and "Compensation of Named Executive Officers," and page 16, section entitled "Pension Plan and Excess Plan." (14) Proxy Statement, pages 18-20, section entitled "Ownership of Company Securities." (15) Proxy Statement, pages 10-11, section entitled "Mr. Tobin's Separation Agreement."
- -------------------------------------------------------------------------------- [LOGO] Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015 - -------------------------------------------------------------------------------- PART I - -------------------------------------------------------------------------------- ITEM 1. BUSINESS. (a) GENERAL DEVELOPMENT OF BUSINESS. Baxter International Inc. was incorporated under Delaware law in 1931. As used in this report, except as otherwise indicated in information incorporated by reference, "Baxter" means Baxter International Inc. and the "Company" means Baxter and its subsidiaries. The Company is engaged in the worldwide development, distribution and manufacture of a diversified line of products, systems and services used primarily in the health care field. Products are manufactured by the Company in 21 countries and sold in approximately 100 countries. Health care is concerned with the preservation of health and with the diagnosis, cure, mitigation and treatment of disease and body defects and deficiencies. The Company's more than 200,000 products are used primarily by hospitals, clinical and medical research laboratories, blood and dialysis centers, rehabilitation centers, nursing homes, doctors' offices and at home under physician supervision. The Company also distributes and manufactures a wide range of products for research and development facilities and manufacturing facilities. For information regarding acquisitions, investments in affiliates and divestitures, see the Company's Annual Report to Stockholders for the year ended December 31, 1993 (the "Annual Report"), page 54, section entitled "Notes to Consolidated Financial Statements -- Acquisitions, Investments in Affiliates, Divestitures and Discontinued Operations," which is incorporated by reference. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. Incorporated by reference from the Annual Report, pages 65-66, section entitled "Notes to Consolidated Financial Statements -- Segment Information." (c) NARRATIVE DESCRIPTION OF BUSINESS. Recent Developments In November 1993, the Company announced that its board of directors approved a series of strategic actions to improve shareholder value, to extend positions of leadership in health-care markets and to reduce costs. These actions are designed to make the Company's domestic medical/laboratory products and distribution segment more efficient and more responsive in addressing the sweeping changes occurring in the United States health-care system and accelerate growth of its medical specialties businesses worldwide. The Company recorded a $700 million pre-tax provision to cover costs associated with these restructuring initiatives. The actions include realigning the Company's United States sales organization; restructuring the distribution organization and investing in new systems to improve manufacturing and distribution efficiencies worldwide; seeking to divest its diagnostics-products manufacturing businesses and exiting selected non-strategic product lines in other businesses, as well as reducing corporate staff and layers of management to give business units more autonomy. These actions are expected to result in a reduction of the Company's worldwide work force by approximately 7 percent, or 4,500 positions, most of of which will occur over the next two to three years. The pre-tax restructuring charge of $700 million includes approximately $300 million for non-cash valuation adjustments as a result of the Company's decision to close facilities or exit non-strategic businesses and investments. The Company expects to spend approximately $400 million in cash related to the restructuring programs described above, with most of that expended over the next two to three years. In return, the 3 Company expects to generate annual pre-tax savings of approximately $100 million in 1994, $200 million in 1995, $275 million in 1996, $325 million in 1997 and exceeding $350 million in 1998. Management anticipates that these savings will be partially invested in increased research and development spending and the Company's expansion into growing international markets. There is fundamental change occurring in the United States health-care system and significant change occurring in the Company's marketplace. Competition among all health-care providers is becoming much more intense as they attempt to gain patients on the basis of price, quality and service. Each is under pressure to decrease the total cost of health-care delivery, and therefore, is looking for ways to reduce materials handling costs, decrease supply utilization, increase product standardization per procedure, and to closely control capital expenditures. There has been increased consolidation in the Company's customer base and by its competitors and these trends are expected to continue. In recent years, the Company's overall price increases have been below the increases in the Consumer Price Index, and these industry trends may inhibit the Company's ability to increase its supply prices in the future. On November 30, 1992, Baxter paid a dividend to its common stockholders of all the common stock of Caremark International Inc., formerly a wholly-owned subsidiary of the Company. Industry Segments The Company is a world leader in global manufacturing and distribution of health-care products and services for use in hospitals and other health-care and industrial settings. It offers a broad array of products and services. The Company announced a significant restructuring in the fourth quarter of 1993 designed to make the Company's domestic medical/laboratory products and distribution segment more efficient and more responsive in addressing the sweeping changes occurring in the United States health-care system and to accelerate growth of its medical specialties businesses worldwide. See "Recent Developments." As a consequence, the Company has redefined its industry segments to be consistent with its strategic direction and management process. The Company's operations are reported in the following two industry segments. Medical Specialties The Company develops, manufactures and markets on a global basis highly specialized medical products for treating kidney and heart disease and blood disorders and for collecting and processing blood. These products include dialysis equipment and supplies; prosthetic heart valves and cardiac catheters; blood-clotting therapies; and machines and supplies for collecting, separating and storing blood. These products require extensive research and development and investment in worldwide distribution, marketing, and administrative infrastructure. The Company's International Hospital unit, which manufactures and distributes intravenous solutions and other medical products outside the United States is also included in this segment because it shares facilities, resources and customers with the other medical specialty businesses in several locations worldwide. Medical/Laboratory Products and Distribution The Company manufactures medical and laboratory supplies and equipment, including intravenous fluids and pumps, diagnostic-testing equipment and reagents, surgical instruments and procedure kits, and a range of disposable and reusable medical products. These self-manufactured products, as well as a significant volume of third party manufactured medical products, are primarily distributed through the Company's extensive distribution system to United States hospitals, alternate-site care facilities, medical laboratories, and industrial and educational facilities. Information about operating results by segment is incorporated by reference from the Annual Report, pages 35-46, section entitled "Financial Review" and pages 65-66, section entitled "Notes to Consolidated Financial Statements -- Segment Information." Joint Ventures The Company conducts a portion of its business through joint ventures, including a joint venture with Nestle, S.A. to develop, market and distribute clinical nutrition products worldwide. The Company also conducts a joint venture with International Business Machines Corporation to provide computer software 4 and services to hospitals and other health-care providers. These joint ventures are accounted for under the equity method of accounting and therefore, are excluded from the two industry segments in which the Company operates. Health Care Environment A decade ago, significant changes began taking place in the funding and delivery of health-care throughout the world. Continuing cost containment efforts by national governments and other health-care payors are restructuring health-care delivery systems; and accelerating cost pressures on hospitals are resulting in increased out-patient and alternate-site health-care service delivery and a focus on cost-effectiveness and quality. These forces increasingly shape the demand for, and supply of medical care. The changes in the United States market began when Congress adopted legislation to limit reimbursement for treatment of Medicare patients. The previous system reimbursed hospitals for the reasonable costs of services. Under the prospective reimbursement system, hospitals are reimbursed at a fixed rate based on the patient's particular diagnosis, regardless of actual costs incurred. Many private health-care payors have adopted similar reimbursement plans and are providing other incentives for consumers to seek lower cost care outside the hospital. Many corporations' employee health plans have been restructured to provide financial incentives for patients to utilize the most cost-effective forms of treatment (managed care programs, such as health maintenance organizations, have become more common); and physicians have been encouraged to provide more cost-effective treatments. With the change of administrations in Washington, and continuing throughout 1993, significant national attention is being focused on the costs and shortcomings of the United States' health-care financing and delivery system. Specifically, and as a result of this attention, the administration is in the process of proposing legislation aimed at restructuring health-care funding in the United States. Based on information presently available to the Company, there will be no material adverse impact upon the Company's business or financial condition if these measures are enacted. The Company continues to believe that its strategy of providing unmatched service to its health-care customers and achieving the best overall cost in its delivery of health-care products and services is compatible with any restructuring of the United States health-care system which may ultimately occur. The future financial success of suppliers, such as the Company, will depend on their ability to work with hospitals to help them enhance their competitiveness. The Company believes it can help hospitals achieve savings in the total supply system by automating supply-ordering procedures, optimizing distribution networks, improving materials management and achieving economies of scale associated with aggregating supply purchases. Methods of Distribution The Company conducts its selling efforts through its subsidiaries and divisions. Many subsidiaries and divisions have their own sales forces and direct their own sales efforts. In addition, sales are made to independent distributors, dealers and sales agents. Distribution centers, which may serve more than one division, are stocked with adequate inventories to facilitate prompt customer service. Sales and distribution methods include frequent contact by sales representatives, automated hospital communications via versions of the ASAP-R- automated purchasing system, circulation of catalogs and merchandising bulletins, direct mail campaigns, trade publications and advertising. The Company is expanding the use of versions of the ASAP system. These versions allow customers to order supplies directly using a telephone-linked terminal. The system can be tailored to individual customer needs, enabling hospitals, laboratories and other customers to order products in predetermined groupings, as well as individually. The ASAP system can also provide the customer with computerized price information and order confirmation. The Company's Corporate program provides large hospitals and multi-hospital systems with a single point of contact for all of the Company's products, services and special value-added programs. The Company is allied with other companies through its ACCESS-TM- program. Through this program, the Company provides its Corporate customers with products and services from leading companies in related industries which go beyond the Company's scope of proprietary product offerings. The Company maintains ACCESS alliances with a subsidiary of WMX Technologies, Inc. (formerly Waste Management of America, Inc.) for 5 handling and disposal of medical waste; with Comdisco, Inc. for high technology asset management and contingency services; with Kraft Foodservice Inc., a subsidiary of Kraft General Foods, Inc., to distribute and market a broad array of hospital food service products; with the Graphics and Technology Group, a division of North American Paper Company; and with various divisions of Trammell Crow Company for facilities management and real estate planning services. The Company's ValueLink-R- hospital inventory management service is designed to deliver health-care products in ready-to-use packaging directly to individual hospital departments on a "just-in-time" basis. As of the end of 1993, 53 hospitals were participating in the Company's ValueLink program. With ValueLink services, hospitals reduce their inventories and the related warehousing costs for medical-surgical supplies and rely on the Company for frequent, standardized deliveries and improved service levels. The Company has distribution facilities across the United States to serve the nation's hospitals. In late 1991, the Company developed the Quality Enhanced Distribution Services-TM- program, reducing the time it takes for a hospital to receive and store supplies and to process accounts payable. Based on each customer's unique requirements, the Company's products are delivered in a manner which facilitates efficient processing of products and related documents by the hospital's personnel. As a result, many hospital customers have been able to reduce the amount of labor associated with the receipt and storage of supplies. As of the end of 1993, 724 Enhanced Distribution Services initiatives were serving United States hospital customers. International sales and distribution are made in approximately 100 countries either on a direct basis or through independent local distributors. International subsidiaries employ their own field sales forces in Australia, Austria, Belgium, Brazil, Canada, China, Colombia, Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary Italy, Japan, Korea, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Republic of Ireland, Singapore, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom, Venezuela and Zimbabwe. In other countries, sales are made through independent distributors or sales agents. Raw Materials Raw materials essential to the Company's business are purchased worldwide in the ordinary course of business from numerous suppliers. The vast majority of these materials are generally available, and no serious shortages or delays have been encountered. Certain raw materials used in producing some of the Company's products can be obtained only from a small number of suppliers. In some of these situations, the Company has long-term supply contracts with such suppliers, although it does not consider its obligations under such contracts to be material. The Company does not always recover cost increases through customer pricing due to contractual limits on such price increases. See "Contractual Arrangements." Patents and Trademarks The Company owns a number of patents and trademarks throughout the world and is licensed under patents owned by others. While it seeks patents on new developments whenever feasible, the Company does not consider any one or more of its patents, or the licenses granted to or by it, to be essential to its business. Products manufactured by the Company are sold primarily under its own trademarks and trade names. Some products purchased and resold by the Company are sold under the Company's trade names while others are sold under trade names owned by its suppliers. Competition The Company is a major factor in the distribution and manufacture of hospital and laboratory products and services and medical specialties. Although no single company competes with the Company in all of its industry segments, the Company is faced with substantial competition in all of its markets. Historically, competition in the health-care industry has been characterized by the search for technological and therapeutic innovations in the prevention, diagnosis and treatment of disease. The Company believes that it has benefited from the technological advantages of certain of its products. While others will 6 continue to introduce new products which compete with those sold by the Company, the Company believes that its research and development effort will permit it to remain competitive in all presently material product areas. The changing health-care environment in recent years has led to increasingly intense competition among health-care suppliers. Competition is focused on price, service and product performance. Pressure in these areas is expected to continue. See "Health Care Environment." In part through the 1993 restructuring program, the Company continues to increase its efforts to minimize costs and better meet accelerating price competition. The Company believes that its cost position will continue to benefit from improvements in manufacturing technology and increased economies of scale. The Company continues to emphasize its investments in innovative technologies and the quality of its products and services. Credit and Working Capital Practices The Company's debt ratings of A3 on senior debt by Moody's, A-by Standard & Poor's and A by Duff & Phelps were reaffirmed by each rating agency after the 1993 restructuring announcement. Standard & Poors and Duff & Phelps have indicated that continuation of these ratings in the future is dependent on the Company's successful implementation of the restructuring program announced in November 1993, and the reduction of its financial leverage which is expected to result from the planned divestiture of its diagnostics-products manufacturing businesses. Although the Company's credit practices and related working capital needs vary across industry segments, they are comparable to those of other market participants. Collection periods tend to be longer for sales outside the United States. Customers may return defective merchandise for credit or replacement. In recent years, such returns have been insignificant. Quality Control The Company places great emphasis on providing quality products and services to its customers. An integrated network of quality systems, including control procedures that are developed and implemented by technically trained professionals, result in rigid specifications for raw materials, packaging materials, labels, sterilization procedures and overall manufacturing process control. The quality systems integrate the efforts of raw material and finished goods suppliers to provide the highest value to customers. On a statistical sampling basis, a quality assurance organization tests components and finished goods at different stages in the manufacturing process to assure that exacting standards are met. Research and Development The Company is actively engaged in research and development programs to develop and improve products, systems and manufacturing methods. These activities are performed at 35 research and development centers located around the world and include facilities in Australia, Belgium, Germany, Italy, Japan, Malaysia, Malta, the Netherlands, Switzerland, the United Kingdom and the United States. Expenditures for Company-sponsored research and development activities were $337 million in 1993, $317 million in 1992 and $288 million in 1991. The Company's research efforts emphasize self-manufactured product development, and portions of that research relate to multiple product lines. For example, many product categories benefit from the Company's research effort as applied to the human body's circulatory systems. In addition, research relating to the performance and purity of plastic materials has resulted in advances that are applicable to a large number of the Company's products. Principal areas of strategic focus for research are treatments for kidney failure, blood disorders and cardiovascular disease. Government Regulation Most products manufactured or sold by the Company in the United States are subject to regulation by the Food and Drug Administration ("FDA"), as well as by other federal and state agencies. The FDA regulates the introduction and advertising of new drugs and devices as well as manufacturing procedures, labeling and record keeping with respect to drugs and devices. The FDA has the power to seize adulterated or misbranded drugs and devices or to require the manufacturer to remove them from the market and the 7 power to publicize relevant facts. From time to time, the Company has removed products from the market that were found not to meet acceptable standards. This may occur in the future. Similar product regulatory laws are found in most other countries where the Company does business. Environmental policies of the Company mandate compliance with all applicable regulatory requirements concerning environmental quality and contemplate, among other things, appropriate capital expenditures for environmental protection. Various non-material capital expenditures for environmental protection were made by the Company during 1993 and similar expenditures are planned for 1994. See Item 3. -- "Legal Proceedings." Employees As of December 31, 1993, the Company employed approximately 60,400 people, including approximately 35,500 in the United States and Puerto Rico. Contractual Arrangements A substantial portion of the Company's products are sold through contracts with purchasers, both international and domestic. Some of these contracts are for terms of more than one year and include limits on price increases. In the case of hospitals, clinical laboratories and other facilities, these contracts may specify minimum quantities of a particular product or categories of products to be purchased by the customer. (d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES. International operations are subject to certain additional risks inherent in conducting business outside the United States, such as changes in currency exchange rates, price and currency exchange controls, import restrictions, nationalization, expropriation and other governmental action. Financial information is incorporated by reference from the Annual Report, pages 65-66, section entitled "Notes to Consolidated Financial Statements -- Segment Information." - -------------------------------------------------------------------------------- ITEM 2. PROPERTIES. The Company owns or has long-term leases on substantially all of its major manufacturing facilities. The Company maintains 48 manufacturing facilities in the United States, including nine in Puerto Rico, and also manufactures in Australia, Belgium, Brazil, Canada, Colombia, Costa Rica, the Dominican Republic, France, Germany, Italy, Japan, Malaysia, Malta, Mexico, the Netherlands, Republic of Ireland, Singapore, Spain, Switzerland and the United Kingdom. Many of the major manufacturing facilities are multi-product and manufacture items for both of the Company's industry segments. The Company owns or operates 98 distribution centers in the United States and Puerto Rico and 55 located in 22 foreign countries. Many of these facilities handle products for both of the Company's industry segments. The Company maintains a continuing program for improving its properties, including the retirement or improvement of older facilities and the construction of new facilities. This program includes improvement of manufacturing facilities to enable production and quality control programs to conform with the current state of technology and government regulations. Capital expenditures were $516 million in 1993, $537 million in 1992 and $503 million in 1991. In addition, the Company added to the pool of equipment leased or rented to customers, spending $89 million in 1993, $103 million in 1992 and $89 million in 1991. The Company's facilities are suitable for their respective uses and, in general, are adequate for the Company's current needs. - -------------------------------------------------------------------------------- ITEM 3. LEGAL PROCEEDINGS. As of December 31, 1993, the Company was a defendant, together with other defendants, in 3,445 lawsuits and had 1,425 pending claims from individuals, all of which seek damages for injuries allegedly caused by silicone mammary prostheses ("mammary implants") manufactured by the American Heyer- 8 Schulte division of American Hospital Supply Corporation ("American"). The Company's responsibility for mammary implants results from the American Heyer-Schulte division of American which manufactured these products from 1974 until 1984, at which time the products and related assets were sold to Mentor Corporation. American retained the product liability responsibility for products sold before the divestiture, and that responsibility was assumed by a subsidiary of the Company as part of its 1985 acquisition of American. The Company has not manufactured or sold this product since 1984 nor does it have any of the product in its inventory. The typical case or claim alleges that the individual's mammary implants caused one or more of a wide range of ailments, including non-specific autoimmune disease, scleroderma, lupus, rheumatoid arthritis, fibromyalgia, mixed connective tissue disease, Sjogren's Syndrome, dermatomyositis, polymyositis, and chronic fatigue. The comparable number of cases and claims was 137 as of December 31, 1991 and 1,612 as of December 31, 1992. In 1991, 76 cases and claims were disposed of; in 1992, 309 cases and claims were disposed of; and in 1993, 634 cases and claims were disposed of. Continuing publicity and action taken by the U.S. Food and Drug Administration limiting the use of gel-filled silicone mammary implants has caused a significant increase in the number of product liability cases concerning these products brought against the Company. In addition to the individual suits against the Company, a class action on behalf of all women with mammary implants filed against all manufacturers of such implants has been conditionally certified and is pending in the United States District Court for the Northern District of Alabama (DANTE, ET AL., V. DOW CORNING, ET AL., U.S.D.C., N. Dist., Ala., 92-2589; part of IN RE: SILICONE GEL BREAST IMPLANT PRODUCT LIABILITY LITIGATION, U.S.D.C., N. Dist. Ala., MDL 926, (U.S.D.C., N. Dist. Ala., CV 92-P-10000-S)). Another class action has been certified and is pending in state court in Louisiana (SPITZFADDEN, ET AL., V. DOW CORNING CORP., ET AL., Dist. Ct., Parish of Orleans, 92-2589). Baxter also has been named in three purported additional class actions, none of which is currently certified. (BARCELLONA, ET AL., V. DOW CORNING, ET AL., U.S.D.C., Mich., 9300 72045 DT and MOSS, ET AL., V. DOW CORNING, ET AL., U.S.D.C., Minn., 92-P-10560-S, both of which have been transferred to and are part of IN RE: SILICONE GEL BREAST IMPLANT PRODUCT LIABILITY LITIGATION, U.S.D.C., N. Dist. Ala., MDL-926 for discovery purposes, and DOE, ET AL., V. INAMED CORPORATION, ET AL., Circuit Ct., Dade County, Fla, 92-07034.) A suit seeking class certification on behalf of all residents of the Province of Ontario, Canada, who received Heyer-Schulte implants has also been filed (BURKE, V. AMERICAN HEYER-SCHULTE, ET AL., Ontario Prov. Court, Gen. Div., 15981/93.) Additionally, the Company has been served with a purported class action brought on behalf of children allegedly exposed to silicone in utero and through breast milk. (FEUER, ET AL., V. MCGHAN, ET AL., U.S.D.C., E. Dist. N.Y., 93-0146.) The suit names all mammary implant manufacturers as defendants and seeks to establish a medical monitoring fund. These implant cases and claims generally raise difficult and complex factual and legal issues and are subject to many uncertainties and complexities, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is brought, and differences in applicable law. Many of the cases and claims are at very preliminary stages, and the Company has not been able to obtain information sufficient to evaluate each case and claim. There also are issues concerning which of the Company's insurers is responsible for covering each matter and the extent of the Company's claims for contribution against third parties. The Company believes that a substantial portion of the liability and defense costs related to mammary implant cases and claims will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. Most of the Company's insurers have reserved (i.e., neither admitted nor denied), and may attempt to reserve in the future, the right to deny coverage, in whole or in part, due to differing theories regarding, among other things, the applicability of coverage and when coverage may attach. The Company has been, and will continue to be, engaged in active negotiations with its insurers concerning coverages and the potential settlement described below. Also, some of the mammary implant cases pending against the Company seek punitive damages and compensatory damages arising out of alleged intentional torts. Depending on policy language, applicable law and agreements with insurers, the damages awarded pursuant to such claims may or may not be covered, in whole or in part, by insurance. On February 7, 1994, the Company filed suit against all of the insurance companies which issued product liability 9 policies to American, American Heyer-Schulte and Baxter for a declaratory judgment that: the policies cover each year of injury or claim, the Company may choose among multiple coverages; coverage begins with the date of implant; and legal fees and punitive damages are covered. Representatives of the plaintiffs and defendants in these cases have negotiated a global settlement of the issues under the jurisdiction of the Court in the DANTE, ET AL. V. DOW CORNING, ET AL. case. The monetary provisions of the settlement proposal providing compensation for all present and future plaintiffs and claimants based on a series of specific funds and scheduled medical conditions have been agreed upon by most of the significant defendants and representatives of the plaintiffs. Under the proposal, the total of all of the specific funds, which would be paid-in and made available over approximately thirty years following final approval of the settlement by the Courts, is capped at $4.75 billion. The settling defendants have agreed to fund $4 billion of this amount. The Company's share of this settlement has been established by the settlement negotiations at $556 million. This settlement is subject to a series of court proceedings, including a court review of its fairness, and the opportunity for individual plaintiffs and claimants to elect to remove themselves from the settlement ("opt-out"). At present, the Company is not able to estimate the nature and extent of its potential future liability with respect to opt-outs. In the fourth quarter of 1993, the Company accrued $556 million for its estimated liability resulting from a potential global settlement of the mammary implant class action and recorded a receivable for estimated insurance recovery of $426 million, resulting in a net charge of $130 million. The reserves for the settlement do not include any provisions for opt-outs and are in addition to the general reserves for the mammary implant cases discussed below. In connection with its acquisition of American, the Company had established reserves at the time of the merger for product liability, including mammary implant cases and claims. At December 31, 1993, the reserve allocated to mammary implant cases and claims was approximately $42 million. Based on current information, management believes that this reserve represents the Company's minimum net exposure in connection with future mammary implant cases and claims beyond the effect of the global settlement described above. Upon resolution of any of the uncertainties concerning these cases, the Company may ultimately incur charges in excess of presently established reserves. While such a future charge could have a material adverse impact on the Company's net income in the period in which it is recorded, management believes that any outcome of this litigation will not have a material adverse effect on the Company's consolidated financial position. As of December 31, 1993, the Company was a defendant, together with other defendants, in 121 lawsuits, and has one pending claim, in the United States and Canada involving individuals who have hemophilia, or their representatives. Those cases and claim seek damages for injuries allegedly caused by anti-hemophilic factor concentrates VIII and IX derived from human blood plasma processed and sold by the Company. Furthermore, 58 lawsuits seeking damages based on similar allegations are pending in Ireland and Japan. The typical case or claim alleges that the individual with hemophilia was infected with HIV by infusing Factor VIII or Factor IX concentrates ("Factor Concentrates") containing HIV. The total number of cases and claims asserted against the Company as of December 31, 1991, was 16, and as of December 31, 1992, was 52. In 1991, 11 cases and claims were disposed of; in 1992, 9 cases and claims were disposed of; and in 1993, 11 cases and claims were disposed of. In addition to the individual suits against the Company, a purported class action was filed on September 30, 1993, on behalf of all U.S. residents with hemophilia (and their families) who were treated with Factor Concentrates and who allegedly are infected with HIV as a result of the use of such Factor Concentrates. This lawsuit was filed in the United States District Court for the Northern District of Illinois (WADLEIGH, ET AL., V. RHONE-POULENC RORER, ET AL., U.S.D.C., N. Dist., Ill. 93C 5969). A state-wide class action also has been filed on behalf of all New Jersey residents with hemophilia and HIV. (D.K., ET AL., V. ARMOUR PHARMACEUTICAL COMPANY, ET AL., Sup. Ct., Middlesex County, N.J., L8134-93.) Neither class action has yet been certified. Many of the cases and claims are at very preliminary stages, and the Company has not been able to obtain information sufficient to evaluate each case and claim. In most states, the Company's potential 10 liability is limited by laws which provide that the sale of blood or blood derivatives, including Factor Concentrates, is not the sale of a "good," and thus is not covered by the doctrine of strict liability. As a result, each claimant will have to prove that his or her injuries were caused by the Company's negligence. The WADLEIGH case alleges that the Company was negligent in failing: to use available purification technology; to promote research and development for product safety; to withdraw Factor Concentrates once it knew or should have known of viral contamination of such concentrates; to screen plasma donors properly; to recall contaminated Factor Concentrates; and to warn of risks known at the time the product was used. The Company denies these allegations and will file a challenge to the class proceedings later in 1994. The Company is not able to estimate the nature and extent of its potential or ultimate future liability with respect to these cases and claims, but as a result of settlement discussions and opinions of litigation counsel, has established the reserve described below. The Company believes that a substantial portion of the liability and defense costs related to anti-hemophilic factor concentrates cases and claims will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. Most of the Company's insurers have reserved (i.e., neither admitted nor denied), and may attempt to reserve in the future, the right to deny coverage, in whole or in part, due to differing theories regarding, among other things, the applicability of coverage and when coverage may attach. Zurich Insurance Co., one of the Company's comprehensive general liability insurance carriers, on February 1, 1994, filed a suit against the Company seeking a declaratory judgment that the policies it had issued do not cover the losses that the Company has notified it of for a number of reasons, including that Factor Concentrates are products, not services, and are, therefore, excluded from the policy coverage, and that the Company has failed to comply with various obligations of tender, notice, and the like under the policies. On February 8, 1994, the Company filed suit against all of the insurance companies which issued comprehensive general liability and product liability policies to the Company for a declaratory judgment that the policies for all of the excess carriers covered both products and services. In that suit, the Company also sued Zurich for failure to defend it and Zurich and Columbia Casualty Company for failure to indemnify it. The Company is engaged in notifying its insurers concerning coverages and the potential settlement discussed below. Also, some of the anti-hemophilic factor concentrates cases pending against the Company seek punitive damages and compensatory damages arising out of alleged intentional torts. Depending on policy language, applicable law and agreements with insurers, the damages awarded pursuant to such claims may or may not be covered, in whole or in part, by insurance. Accordingly, the Company is not currently in a position to estimate the amount of its potential future recoveries from its insurers, but has estimated its recovery with respect to the reserves it has established. The National Hemophilia Foundation ("NHF") asked the U.S. commercial producers of anti-hemophilic factor concentrates (Alpha Therapeutics, Armour Pharmaceuticals, Baxter Healthcare Corporation and Miles Laboratories) to provide $1.5 billion as part of a fund for HIV positive hemophiliacs. The Company and some of the other producers made a counter-proposal that the NHF rejected. The Company is vigorously defending each of the cases and claims against it. At the same time, it is likely that the Company will continue to seek ways to resolve pending and threatened litigation concerning these issues through a negotiated resolution. In Canada, the provincial governments created a settlement fund to which all of the fractionators, including the Company, have contributed. The Company's contribution to the fund was approximately $3 million. Those Canadian claimants who avail themselves of this fund must sign releases in favor of the Company against further litigation. The period in which to file a claim against the fund expired on March 15, 1994. In the fourth quarter of 1993, the Company accrued $131 million for its estimated worldwide liability for litigation and settlement expenses involving anti-hemophilic Factor Concentrate cases, and recorded a receivable for insurance coverage of $83 million, resulting in a net charge of $48 million. The expense of the Canadian settlement is covered by this reserve. Upon resolution of any of the uncertainties concerning these cases, or if the Company, along with the other defendants, enters into a comprehensive settlement of the class actions described above, the Company may incur charges in excess of presently established reserves. While such a future charge could have a 11 material adverse impact on the Company's net income in the period in which it is recorded, management believes that any outcome of this litigation will not have a material adverse effect on the Company's consolidated financial position. Most of the individuals who served as directors of American in 1985, including Mr. Cathcart and Ms. Evans, who currently are directors of the Company, are defendants in a pending lawsuit filed as a derivative action. LEWIS V. BAYS, ET AL. was filed on March 23, 1990, in the Circuit Court of Cook County, Illinois. The plaintiffs allege breach of fiduciary duty claims relating to American's buyout of an agreement with Hospital Corporation of America ("HCA") in connection with the Company's merger with American in 1985. In November 1992, the Board of Directors appointed a special litigation committee consisting of three current directors of the Company who were neither directors of the Company nor American at the time of the merger. The special litigation committee was appointed to determine the best interests of the Company relating to this lawsuit, which seeks $200 million in damages from the individual defendants and HCA as well as other relief. On August 9, 1993, counsel for the special litigation committee filed a motion with the Court to dismiss this case on the basis that there is no merit to the claims against any defendant and that pursuing this litigation is not in the best interests of the Company or its stockholders. The proceedings on this motion have been stayed while the parties discuss the possibility of resolving the case without further court proceedings. On January 14, 1994, the parties in this case filed with the court a Memorandum of Understanding which provides a basis for resolving the case. The parties have undertaken proceedings necessary to demonstrate the fairness of the proposed settlement. It is anticipated that these actions will be completed by April 1994, following which the parties expect to sign a settlement agreement and present it to the court for approval. Management believes that the terms of any possible resolution will have not have a material adverse effect on the Company's results of operations or consolidated financial position. At the start of 1993, the Company was a defendant in patent litigation brought by Scripps Clinic and Research Foundation ("Scripps") and Rhone-Poulenc Rorer, Inc. (formerly Rorer Group, Inc.) ("Rorer") in which the plaintiffs alleged that the Company's monoclonal anti-hemophilic Factor VIII and its recombinant Factor VIII infringed a patent originally owned by Scripps and subsequently licensed to Rorer. Trial of this litigation before a judge without a jury was concluded in 1992. Before a ruling on the trial was received, the Company entered into a worldwide settlement of the litigation with Scripps and Rorer. The settlement agreement required Baxter to pay $105 million to Rorer to settle claims relating to certain anti-hemophilic Factor VIII products manufactured and sold prior to January 1, 1993. As part of this agreement, Baxter was also granted a non-exclusive sub-license for future use of the related patents. This license agreement is royalty-bearing when used in conjunction with the Company's monoclonally purified and Recombinant Factor VIII products. Baxter Healthcare Corporation ("BHC") has been named as a defendant in a purported class action on behalf of all medical and dental personnel in the State of California who suffered allergic reactions to natural rubber latex gloves and other protective equipment or who have been exposed to natural rubber latex products. (KENNEDY, ET AL., V. BAXTER HEALTHCARE CORPORATION, ET AL., Sup. Ct., Sacramento Co., Cal., #535632.) The case, which was filed in August 1993, alleges that users of various natural rubber latex products, including medical gloves made and sold by BHC and other manufacturers, suffered allergic reactions to the products ranging from skin irritation to systemic anaphylaxis. BHC filed a demurrer to the compliant, which was granted, and the Complaint was dismissed with leave to file an amended complaint. The amended complaint was filed in December 1993, and BHC has filed a demurrer to the Amended Complaint. Management believes that the outcome of this matter will not have a material adverse effect on the Company's results of operations or consolidated financial position. On August 13, 1993, the Company received a notice from the Department of Veterans Affairs ("DVA") suspending it from competing for, or receiving, new contracts with any agency within the Executive Branch of the Federal Government on the basis of the Company's guilty plea to an information charging it with one count of violating the Anti-boycott Statute by providing information to Arab League Boycott Officials. On the same day, the Company's subsidiary, BHC, received a notice from the DVA suspending it on the basis of the Company's plea, its commonality of management with, and its ownership by, the Company, and its alleged misrepresentation concerning the status of products on its Federal Supply Schedule Contracts with the government. 12 On the same day, Vernon R. Loucks Jr., chairman and chief executive officer of the Company, and James R. Tobin, the former president and chief operating officer of the Company, each received notices from the DVA proposing their individual debarments from competing for, or receiving, contracts on the basis of the Company's plea and on the assertion that each knew or should have known of the actions of the Company and its former senior vice president, secretary, and general counsel, G. Marshall Abbey, recited in the plea agreement. Mr. Abbey also received a notice of proposed debarment from the DVA. On December 21, 1993, the Company and the DVA reached an agreement to settle these proceedings. As a result, the Company and BHC were immediately reinstated as federal contractors by the DVA, and the suspensions imposed in August 1993, were lifted. The settlement agreement between Baxter, BHC, Messrs. Loucks and Tobin, and the DVA resolved all civil and administrative disputes involved in the suspension proceeding. The DVA also terminated debarment proceedings against Loucks and Tobin. As a part of the settlement, BHC agreed to provide the agency with $2.8 million in financial consideration over three years for past, present and future costs associated with the suspension proceedings, and establish a service center dedicated exclusively to federal accounts and staffed by customer-service representatives who will receive training emphasizing government-contracting regulations and federal procurement requirements. The payment and actions agreed to by Baxter, BHC, Messrs. Loucks and Tobin, and the DVA did not constitute an admission of liability or wrongdoing. All of the individuals who served as directors of the Company as of September 1, 1993, as well as Lester B. Knight, executive vice president of the Company, are named as defendants in a pending lawsuit ostensibly filed as a "demand excused" derivative action. SEIGEL V. LOUCKS, ET AL., was filed September 15, 1993, in the Court of Chancery in New Castle County, Delaware Cir. Ct., New Castle Co., Del., Cir. Act #13130. On October 24, 1993, a substantially identical complaint was filed in the same court by Bartholomew J. Millano. The two complaints have been consolidated. The plaintiffs allege, among other things, that the directors failed to oversee management in connection with actions which are the basis for the dispute between the Company and the DVA which are described above, failed to prevent such actions, and failed to create a compliance program to prevent or detect such actions. The complaint seeks to recover alleged damages incurred by the Company as the result of lost sales due to the proposed debarment discussed above, as well as the compensation paid to Messrs. Gantz, Knight, Loucks and Tobin since 1991. The Company and its directors have filed motions to dismiss the suit, have answered the complaint and have filed a counterclaim seeking to permanently bar and enjoin the plaintiff from prosecuting this case because her claims have been disposed of and barred in a prior suit against the Company. The Company has been named as a potentially responsible party for unsettled claims for cleanup costs at 18 hazardous waste sites. The Company was a significant contributor to waste disposed on only one of these sites, the Thermo-Chem site in Muskegon, Michigan. The company expects that the total cleanup costs for this site will be between $37 million and $82 million, of which the Company's share will be approximately $5 million. This amount has been reserved and reflected in the Company's financial statements. In all of the other sites, the Company was a minor contributor and, therefore, does not have information on the total cleanup costs. The Company has, however, in most of these cases been advised by the potentially responsible party of its roughly estimated exposure at these sites. Those estimated exposures total approximately $5 million. The Company is a defendant in a number of other claims, investigations and lawsuits. Based on the advice of counsel, management does not believe that the other claims, investigations and lawsuits individually or in the aggregate, will have a material adverse effect on the Company's operations or its consolidated financial condition. - -------------------------------------------------------------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 13 PART II - -------------------------------------------------------------------------------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Incorporated by reference from the Annual Report, page 67, section entitled "Notes to Consolidated Financial Statements -- Quarterly Financial Results and Market for the Company's Stock." - -------------------------------------------------------------------------------- ITEM 6. SELECTED FINANCIAL DATA. Incorporated by reference from the Annual Report, inside back cover, section entitled "Six-Year Summary of Selected Financial Data." - -------------------------------------------------------------------------------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Incorporated by reference from the Annual Report, pages 35-46, section entitled "Financial Review." Also incorporated by reference is the section of this Form 10-K, Part I captioned "Recent Developments," "Health Care Environment" and "Legal Proceedings" on pages 3 to 4, 5 and 9 to 13, respectively. - -------------------------------------------------------------------------------- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Incorporated by reference from the Annual Report, pages 48-67, sections entitled "Report of Independent Accountants," "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Cash Flows," "Consolidated Statements of Stockholders' Equity," and "Notes to Consolidated Financial Statements." - -------------------------------------------------------------------------------- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 14 PART III - -------------------------------------------------------------------------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. a) IDENTIFICATION OF DIRECTORS Incorporated by reference from the board of directors' proxy statement for use in connection with Baxter's annual meeting of stockholders to be held on April 29, 1994 (the "Proxy Statement"), pages X-X, sections entitled "Board of Directors" and "Election of Directors." b) IDENTIFICATION OF EXECUTIVE OFFICERS Following are the names and ages of the executive officers of Baxter International Inc. as of February 28, 1994, their positions with it and summaries of their backgrounds and business experience. All executive officers are elected or appointed by the board of directors and hold office until the next annual meeting of directors and until their respective successors are elected and qualified. The annual meeting of directors is held after the annual meeting of stockholders. WILLIAM B. GRAHAM, age 82, has been senior chairman of the board of directors since 1985. Mr. Graham became president of the Company in 1953 and chief executive officer in 1960 and continued in these positions until 1971. From 1971 to 1980 he was chairman of the board and chief executive officer, and thereafter he served as chairman until he became senior chairman. VERNON R. LOUCKS JR., age 59, has been chairman of the board of directors since 1987 and chief executive officer of Baxter since 1980. Mr. Loucks was first elected an officer of Baxter in 1971. LESTER B. KNIGHT, age 35, has been an executive vice president of Baxter since 1992, and a vice president since 1990. Mr. Knight previously was president of a division of a subsidiary of Baxter, and prior to that was employed in various management capacities with the same subsidiary. Mr. Knight is the son of Charles F. Knight, a director of Baxter. TONY L. WHITE, age 47, has been an executive vice president of Baxter since 1992, and a vice president since 1986, when he was first elected an officer. HENRY R. AUTRY, age 45, has been senior vice president and chief administrative officer of Baxter since 1993. Mr. Autry previously was president of a division of a subsidiary of Baxter. Before joining the Company, Mr. Autry was vice president of international sales at Federal Express Corporation. HARRY M. JANSEN KRAEMER, JR., age 39, has been senior vice president and chief financial officer of Baxter since 1993. Mr. Kraemer previously was the vice president of finance and operations for a subsidiary of Baxter. Prior to that he was employed as controller, group controller, and president of various divisions of subsidiaries of Baxter. ARTHUR F. STAUBITZ, age 54, has been senior vice president, secretary and general counsel of Baxter since 1993. Mr. Saubitz previously was vice president/general manager of the ventures group of a subsidiary of Baxter. Prior to that he was senior vice president, secretary and general counsel of Amgen, Inc. Prior to that he was a vice president of a Baxter subsidiary, and prior to that he was a vice president and deputy general counsel of Baxter. BARBARA Y. MORRIS, age 48, has been a senior vice president of Baxter since 1992. Ms. Morris was first elected an officer of Baxter in 1986. HERBERT E. WALKER, age 59, has been senior vice president of Baxter since 1993. Mr. Walker previously was vice president of human resources of a division of a subsidiary of Baxter. DALE A. SMITH, age 62, has been a group vice president of Baxter since 1979, when he was first elected an officer. RONALD H. ABRAHAMS, age 51, has been a vice president of Baxter since 1990. Mr. Abrahams previously was vice president -- quality assurance and regulatory affairs of a subsidiary of Baxter. 15 DAVID J. AHO, age 44, has been a vice president of Baxter since 1989. Mr. Aho previously was vice president of government affairs of a subsidiary of Baxter. JAMES H. TAYLOR, JR., age 55, has been a vice president of Baxter since 1992. Mr. Taylor previously was the general manager of operations of a division of a subsidiary of Baxter, and prior to that was vice president of manufacturing of that division. BRIAN P. ANDERSON, age 43, has been the controller of Baxter since 1993. Mr. Anderson previously was the vice president of corporate audit of a subsidiary of Baxter, and prior to that was a partner in the international accounting firm of Deloitte & Touche. LAWRENCE D. DAMRON, age 47, has been treasurer of Baxter since 1992. Mr. Damron previously was a vice president and controller of a division of a subsidiary of Baxter, and prior to that was the corporate auditor of another subsidiary. Prior to that, he was vice president and controller of a division of that subsidiary. c) COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934. Incorporated by reference from Proxy Statement, page 17, section entitled "Section 16 Reporting." 16 - -------------------------------------------------------------------------------- PART IV - -------------------------------------------------------------------------------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following documents are filed as a part of this report:
(a) Financial Statements Location FINANCIAL STATEMENTS REQUIRED BY ITEM 8 OF THIS FORM Consolidated Balance Sheets Annual Report, page 49 Consolidated Statements of Income Annual Report, page 50 Consolidated Statements of Cash Flows Annual Report, page 51 Consolidated Statements of Stockholders' Equity Annual Report, page 52 Notes to Consolidated Financial Statements Annual Report, page 53-66 Report of Independent Accountants Annual Report, page 48 SCHEDULES REQUIRED BY ARTICLE 12 OF REGULATION S-X Report of Independent Accountants on Financial Statement page 18 Schedules II Amounts Receivable from Related Parties and Underwriters, page 19 Pro- moters, and Employees other than Related Parties V Property, Plant and Equipment page 20 VI Accumulated Depreciation and Amortization of Property, page 21 Plant and Equipment VIII Valuation and Qualifying Accounts page 22 IX Short-Term Borrowings page 23 X Supplementary Income Statement Information page 24 All other schedules have been omitted because they are not applicable or not required. (b) Reports on Form 8-K A report on Form 8-K, dated October 27, 1993, was filed with the Securities and Exchange Commission ("SEC") under Item 5, Other Events, to file a press release which announced the signing of a five-year agreement. A report on Form 8-K, dated November 16, 1993, was filed with the SEC under Item 5, Other Events, to file a press release which announced adoption of a plan of strategic actions to improve stockholder value, among other matters. A report on Form 8-K, dated December 22, 1993, was filed with the SEC under Item 5, Other Events, to file a press release which announced the lifting of a governmental suspension. A report on Form 8-K, dated December 27, 1993, was filed with the SEC under Item 5, Other Events, to file a press release which announced the resignations of an officer and director, as well as another director. (c) Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated herein by reference.
17 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES - -------------------------------------------------------------------------------- Board of Directors BAXTER INTERNATIONAL INC. Our audits of the consolidated financial statements referred to in our report dated February 10, 1994 appearing on page 48 of the 1993 Annual Report to Stockholders of Baxter International Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedules listed in Item 14(a) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE Chicago, Illinois February 10, 1994 18 SCHEDULE II - -------------------------------------------------------------------------------- AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES (In thousands of dollars) - --------------------------------------------------------------------------------
DEDUCTIONS BALANCE AT BALANCE AT ------------------------ CLOSE OF PERIOD BEGINNING AMOUNTS AMOUNTS ------------------------ NAME OF DEBTOR OF PERIOD ADDITIONS COLLECTED WRITTEN OFF CURRENT LONG-TERM - ------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1993: Robert Kleinert (B) $ 9 $ -- $ 9 $ -- $ -- $ -- Douglas Berg (C) -- 127 -- -- 127 -- - ------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1992: V. Gordon Clemens, Jr. (A) $ 385 $ -- $ 385 $ -- $ -- $ -- Danny Ray Haynes (A) 460 -- 460 -- -- -- Robert Kleinert (B) 225 -- 216 -- 9 -- - ------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1991: V. Gordon Clemens, Jr. (A) $ 385 $ -- $ -- $ -- $ -- $ 385 Danny Ray Haynes (A) 460 -- -- -- -- 460 Robert Kleinert (B) -- 225 -- -- 225 -- - ------------------------------------------------------------------------------------------- (A) Amounts represent mortgages to former employees of Caremark Inc. As part of the spin-off from Baxter on November 30, 1992, these loans were allocated to Caremark International Inc. (B) Amount represents mortgage to an employee of a division of the Company. The loan was at the prime interest rate. (C) Amount represents a relocation loan to an employee of a division of the Company. No interest is charged on this loan. This loan will be repaid during 1994, when a prior residence is sold.
19 SCHEDULE V - -------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT (In millions of dollars) - --------------------------------------------------------------------------------
BALANCE AT OTHER BALANCE AT BEGINNING ADDITIONS CHANGES-ADD END OF CLASSIFICATION OF PERIOD AT COST RETIREMENTS (DEDUCT)(A) PERIOD - ------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1993: Land $ 195 $ 6 $ -- $ 2 $ 203 Buildings and leasehold improvements 976 10 (12) 77 1,051 Machinery and other equipment 2,298 138 (122) 194 2,508 Equipment leased or rented to customers 343 89 (33) (9) 390 Construction in progress 397 362 (5) (415) 339 - ------------------------------------------------------------------------------------------- Total $ 4,209 $ 605 $ (172) $ (151) $ 4,491 ----------- ----- ----- ----- ----------- ----------- ----- ----- ----- ----------- - ------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1992: Land $ 196 $ 2 $ (3) $ -- $ 195 Buildings and leasehold improvements 947 17 (23) 35 976 Machinery and other equipment 2,102 130 (151) 217 2,298 Equipment leased or rented to customers 274 103 (27) (7) 343 Construction in progress 319 388 (1) (309) 397 - ------------------------------------------------------------------------------------------- Total $ 3,838 $ 640 $ (205) $ (64) $ 4,209 ----------- ----- ----- ----- ----------- ----------- ----- ----- ----- ----------- - ------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1991: Land $ 184 $ 1 $ -- $ 11 $ 196 Buildings and leasehold improvements 915 13 (10) 29 947 Machinery and other equipment 1,915 134 (80) 133 2,102 Equipment leased or rented to customers 207 89 (20) (2) 274 Construction in progress 208 355 (2) (242) 319 - ------------------------------------------------------------------------------------------- Total $ 3,429 $ 592 $ (112) $ (71) $ 3,838 ----------- ----- ----- ----- ----------- ----------- ----- ----- ----- ----------- - ------------------------------------------------------------------------------------------- (A) Property, plant and equipment of acquired or divested companies, foreign currency translation adjustments and reclassification of assets.
20 SCHEDULE VI - -------------------------------------------------------------------------------- ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (In millions of dollars) - --------------------------------------------------------------------------------
BALANCE AT CHARGED TO OTHER BALANCE AT BEGINNING COSTS AND CHANGES-ADD END OF CLASSIFICATION OF PERIOD EXPENSES RETIREMENTS (DEDUCT)(A) PERIOD - ------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1993: Buildings and leasehold improvements $ 235 $ 47(B) $ (6) $ (13) $ 263 Machinery and other equipment 1,155 344(B) (102) (42) 1,355 Equipment leased or rented to customers 172 73 (24) (3) 218 - ------------------------------------------------------------------------------------------- Total $ 1,562 $ 464 $ (132) $ (58) $ 1,836 ----------- ----- ----- --- ----------- ----------- ----- ----- --- ----------- - ------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1992: Buildings and leasehold improvements $ 220 $ 32 $ (14) $ (3) $ 235 Machinery and other equipment 1,097 231 (156) (17) 1,155 Equipment leased or rented to customers 134 60 (19) (3) 172 - ------------------------------------------------------------------------------------------- Total $ 1,451 $ 323 $ (189) $ (23) $ 1,562 ----------- ----- ----- --- ----------- ----------- ----- ----- --- ----------- - ------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1991: Buildings and leasehold improvements $ 199 $ 33 $ (5) $ (7) $ 220 Machinery and other equipment 1,007 207 (91) (26) 1,097 Equipment leased or rented to customers 101 45 (13) 1 134 - ------------------------------------------------------------------------------------------- Total $ 1,307 $ 285 $ (109) $ (32) $ 1,451 ----------- ----- ----- --- ----------- ----------- ----- ----- --- ----------- - ------------------------------------------------------------------------------------------- (A) Accumulated depreciation of divested companies, foreign currency translation adjustments and reclassification of assets. (B) Includes amounts provided for by the restructuring charge.
The estimated lives used in determining depreciation and amortization are as follows: 20 to 44 Buildings and leasehold improvements years Machinery and other equipment 3 to 20 years Equipment leased to customers 1 to 5 years
21 SCHEDULE VIII - -------------------------------------------------------------------------------- VALUATION AND QUALIFYING ACCOUNTS (In millions of dollars) - --------------------------------------------------------------------------------
ADDITIONS ------------------------------ BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER DEDUCTIONS END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS(A) FROM RESERVES PERIOD - ------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1993: Accounts receivable $ 29 $ 8 $ -- $ (5) $ 32 -- -- --- --- --- --- --- --- --- --- - ------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1992: Accounts receivable $ 27 $ 6 $ 1 $ (5) $ 29 -- -- --- --- --- --- --- --- --- --- - ------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1991: Accounts receivable $ 27 $ 12 $ (1) $ (11) $ 27 -- -- --- --- --- --- --- --- --- --- - ------------------------------------------------------------------------------------------- (A) Valuation accounts of acquired or divested companies and foreign currency translation adjustments. Reserves are deducted from assets to which they apply.
22 SCHEDULE IX - -------------------------------------------------------------------------------- SHORT-TERM BORROWINGS (In millions of dollars) - --------------------------------------------------------------------------------
MAXIMUM AVERAGE WEIGHTED WEIGHTED AMOUNT AMOUNT AVERAGE BALANCE AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE CATEGORY OF AGGREGATE AT END OF INTEREST DURING THE DURING THE DURING THE SHORT-TERM BORROWINGS PERIOD RATE(C) PERIOD(D) PERIOD(E) PERIOD(F) - ------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1993: Notes payable to banks $ 271 4.2% $ 574 $ 448 5.1% -- -- --------- ----- ----- --- --------- ----- ----- --- Commercial paper $ 833 3.5% $ 931 $ 589 4.8% Short-term notes $ 467 3.5% $ 722 $ 587 4.8% Reclassified to long-term debt(A) $ (1,000) --------- Balance classified as short-term(B) $ 300 --------- --------- - ------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1992: Notes payable to banks $ 351 5.0% $ 461 $ 325 6.6% -- -- --------- ----- ----- --- --------- ----- ----- --- Commercial paper $ 475 3.9% $ 664 $ 612 5.2% Short-term notes $ 465 4.0% $ 720 $ 613 5.2% Reclassified to long-term debt(A) $ (830) --------- Balance classified as short-term(B) $ 110 --------- --------- - ------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1991: Notes payable to banks $ 263 7.6% $ 286 $ 259 10.7% -- -- --------- ----- ----- --- --------- ----- ----- --- Commercial paper $ 676 5.4% $ 676 $ 527 6.7% Short-term notes $ 445 5.5% $ 549 $ 508 6.7% Reclassified to long-term debt(A) $ (1,121) --------- Balance classified as short-term(B) $ 0 --------- --------- - ------------------------------------------------------------------------------------------- Refer to "Notes to consolidated Financial Statement -- Credit Facilities" of the 1993 annual report to Stockholders. (A) At December 31, 1993, 1992 and 1991, this amount of commercial paper and short-term notes has been classified with long-term debt as it is supported by long-term credit facilities and will continue to be refinanced. (B) Amounts included in current maturities of long-term debt and lease obligations at December 31, 1993, 1992 and 1991. (C) Calculated as the average interest rate of outstanding debt obligations as of the end of the period. (D) Maximum amount outstanding calculated for each category using month-end balances during the period. Maximum combined short-term borrowings were $1,932, $1,660 and $1,417 million for 1993, 1992 and 1991, respectively. (E) Calculated using month-end balances during the period for notes payable to banks and the daily balances for commercial paper and short-term notes. (F) Calculated by dividing the interest expense for the year for such borrowings by the average amounts outstanding during the period.
23 SCHEDULE X - -------------------------------------------------------------------------------- SUPPLEMENTARY INCOME STATEMENT INFORMATION (In millions of dollars) - --------------------------------------------------------------------------------
Year ended December 31, - ------------------------------------------------------------------------------------------- Item 1993 1992 1991 - ------------------------------------------------------------------------------------------- Charged to costs and expenses: Maintenance and repairs $ 111 $ 115 $ 108 --------- --------- --------- --------- --------- --------- Depreciation and amortization of intangible assets, preoperating costs, and similar deferrals $ 132 $ 124 $ 126 --------- --------- --------- --------- --------- --------- - -------------------------------------------------------------------------------------------
Amounts charged to (1) taxes other than payroll and income taxes, (2) royalties, and (3) advertising costs, have been omitted since each is less than 1% of net sales. 24 SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BAXTER INTERNATIONAL INC. By: /S/ VERNON R. LOUCKS JR. -------------------------------------- Vernon R. Loucks Jr. CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Date: March 21, 1994 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. (i) Principal Executive Officer: /S/ VERNON R. LOUCKS JR. ------------------------------------- Vernon R. Loucks Jr. DIRECTOR, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER (ii) Principal Financial Officer: /S/ HARRY M. JANSEN KRAEMER, JR. ------------------------------------- Harry M. Jansen Kraemer, Jr. SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (iii) Controller: /S/ BRIAN P. ANDERSON ------------------------------------- Brian P. Anderson CONTROLLER (iv) A Majority of the Board of Directors: SILAS S. CATHCART DAVID C.K. CHIN, M.D. JOHN W. COLLOTON SUSAN CROWN JAMES D. EBERT MARY JOHNSTON EVANS FRANK R. FRAME DAVID W. GRAINGER MARTHA R. INGRAM GEORGES C. ST. LAURENT, JR. FRED L. TURNER By: /S/ VERNON R. LOUCKS JR. ------------------------------------- Vernon R. Loucks Jr. DIRECTOR AND ATTORNEY-IN-FACT
25 - -------------------------------------------------------------------------------- APPENDICES
DESCRIPTION PAGE - ----------------------------------------------------------------------------------------------------------- ----- Computation of Primary Earnings per Common Share (Exhibit 11.1) 30 Computation of Fully Diluted Earnings per Common Share (Exhibit 11.2) 31 Computation of Ratio of Earnings to Fixed Charges (Exhibit 12) 32 Subsidiaries of the Company (Exhibit 21) 33
- -------------------------------------------------------------------------------- EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
NUMBER AND DESCRIPTION OF EXHIBIT - ------------------------------------------------------------------------------------------------------------------- 3. Certificate of Incorporation and Bylaws 3.1* Restated Certificate of Incorporation, filed as exhibit 3.1 to the Company's annual report on Form 10-K for the year ended December 31, 1990, file number 1-4448 (the "1990 Form 10-K"). 3.2* Certificate of Designation of Series A Junior Participating Preferred Stock, filed under the Securities Act of 1933 as exhibit 4.3 to the Company's registration statement on Form S-8 (No. 33-28428). 3.3* Bylaws (as amended), filed as exhibit 3.3 to the Form 10-Q for the quarter ended September 30, 1993, file number 1-4448. 4. Instruments defining the rights of security holders, including indentures 4.1* Indenture for 4 3/4% Convertible Subordinated Debentures due January 1, 2001, filed under the Securities Act of 1933 as exhibit 2(d) to the Company's registration statement on Form S-7 (No. 2-55622). 4.2* Indenture dated November 15, 1985 between the Company and Bankers Trust Company, filed as exhibit 4.8 to the Company's current report on Form 8-K dated December 16, 1985, file no. 1-4448. 4.3* Amended and Restated Indenture dated November 15, 1985, between the Company and Continental Illinois National Bank and Trust Company of Chicago, filed under the Securities Act of 1933 as exhibit 4.1 to the Company's registration statement on Form S-3 (No. 33-1665). 4.4* First Supplemental Indenture to Amended and Restated Indenture dated November 15, 1985, between the Company and Continental Illinois National Bank and Trust Company of Chicago, filed under the Securities Act of 1933 as exhibit 4.1(A) to the Company's registration statement on Form S-3 (No. 33-6746). 4.5* Indenture dated as of August 15, 1977, between the Company and Midlantic National Bank, as supplemented, filed as exhibit 4.7 to the Company's annual report on Form 10-K for the year ended December 31, 1985, file no. 1-4448 (the "1985 Form 10-K"). 4.6* Fiscal and Paying Agency Agreement dated as of April 26, 1984, among American Hospital Supply International Finance N.V., the Company and The Toronto-Dominion Bank, as amended, filed as exhibit 4.9 to the 1985 Form 10-K. 4.7* Fiscal and Paying Agency Agreement dated as of November 15, 1984, between the Company and Citibank, N.A., as amended, filed as exhibit 4.16 to the Company's annual report on Form 10-K for the year ended December 31, 1987, file no. 1-4448 (the "1987 Form 10-K"). 4.8* Specimen Medium-Term Note, filed as exhibit 4.10 to the 1985 Form 10-K. 4.9* Specimen Extendible Note, filed as exhibit 4.11 to the 1985 Form 10-K.
26
NUMBER AND DESCRIPTION OF EXHIBIT - ------------------------------------------------------------------------------------------------------------------- 4.10* Specimen 13 1/8% Note, filed as exhibit 4.12 to the 1985 Form 10-K. 4.11* Specimen 9 5/8% Note, filed as exhibit 4.13 to the 1987 Form 10-K. 4.12* Specimen 8 7/8% Debenture, filed as exhibit 4.2(a) to the Company's current report on Form 8-K dated June 15, 1988, file no. 1-4448. 4.13* Specimen 9 1/2% Note, filed as exhibit 4.3(a) to the Company's current report on Form 8-K dated June 23, 1988, file no. 1-4448. 4.14* Specimen 9.85% Senior Note due 1993, filed as Annex A to exhibit 1.3 to the Company's current report on Form 8-K dated May 23, 1986, file no. 1-4448. 4.15* Specimen 9 1/4% Note, filed as exhibit 4.3(a) to the Company's current report on Form 8-K dated September 13, 1989, file number 1-4448. 4.16* Specimen 9 1/4% Note, filed as exhibit 4.3(a) to the Company's current report on Form 8-K dated December 7, 1989, file number 1-4448. 10. Material Contracts 10.1* Employment Agreement between William B. Graham and the Company, filed as exhibit 10.1 to the 1985 Form 10-K. 10.2* Form of Employment Agreement signed by listed executives, field as exhibit 19.4 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1985, file no. 1-4448. 10.3 Amended list of executives listed in exhibit 10.2 filed as exhibit 10.3 to the Company's annual report on Form 10-K for the year ended December 31, 1991, file no. 1-4448 (the "1991 Form 10-K"). 10.4* Supplemental retirement agreement and supplemental retirement benefit agreement between Robert J. Lambrix and the Company, filed as exhibit 10.16 to the Company's annual report on Form 10-K for the year ended December 31, 1986, file no. 1-4448 (the "1986 Form 10-K"). 10.5* Form of Indemnification Agreement entered into with directors and officers, filed as exhibit 19.4 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1986, file no. 1-4448. 10.6* Stock Option Plan of 1977 (as amended and restated), filed as exhibit 19.3 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1984, file no. 1-4448. 10.7* 1988 Long-Term Incentive Plan, filed as exhibit 10.12 to the 1987 Form 10-K. 10.8* 1987-1989 Long-Term Performance Incentive Plan, filed as exhibit 10.15 to the 1986 Form 10-K. 10.9* 1989 Long-Term Incentive Plan, filed as exhibit 10.12 to the Company's annual report on Form 10-K for the year ended December 31, 1988, file no. 1-4448 (the "1988 Form 10-K"). 10.10* Stock Option Plan Adopted July 25, 1988, filed as exhibit 10.13 to the 1988 Form 10-K. 10.11* 1991 Officer Incentive Compensation Plan, filed as exhibit 10.11 to the 1990 Form 10-K. 10.12* Restricted Stock Plan for Non-Employee Directors, filed as exhibit 10.16 to the 1988 Form 10-K. 10.13* Baxter International Inc. and Subsidiaries Incentive Investment Excess Plan, filed as exhibit 10.17 to the 1988 Form 10-K. 10.14* Baxter International Inc. and Subsidiaries Supplemental Pension Plan, filed as exhibit 10.18 to the 1988 Form 10-K.
27
NUMBER AND DESCRIPTION OF EXHIBIT - ------------------------------------------------------------------------------------------------------------------- 10.15* Amendment to Stock Option Plan of 1977, filed as exhibit 19.2 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1989, file no. 1-4448 (the "September, 1989 Form 10-Q"). 10.16* Amendment to Restricted Stock Plan for Non-Employee Directors, filed as exhibit 19.3 to the September, 1989 Form 10-Q. 10.17* Limited Rights Plan, filed as exhibit 19.6 to the September, 1989 Form 10-Q. 10.18* Amended and Restated Restricted Stock Plan for Non-Employee Directors (1989), filed as exhibit 19.8 to the September, 1989 Form 10-Q. 10.19* Amendments to various stock option plans, including those listed as exhibits 10.7, 10.8, 10.9 and 10.10 above, regarding disability, filed as exhibit 19.9 to the September, 1989 Form 10-Q. 10.20* Amendments to 1987-1989 Long-Term Performance Incentive Plan and 1988 Long-Term Incentive Plan, filed as exhibit 19.10 to the September, 1989 Form 10-Q. 10.21* 1987 Incentive Compensation Program, filed as exhibit C to the Company's proxy statement for use in connection with its May 13, 1987, annual meeting of stockholders, file no. 1-4448. 10.22* Rights Agreement between the Company and The First National Bank of Chicago, filed as exhibit 1 to a registration statement on Form 8-A dated March 21, 1989, file no. 1-4448. 10.23* Amendment to 1987 Incentive Compensation Program, filed as exhibit 19.1 to September, 1989 Form 10-Q. 10.24* Deferred Compensation Plan (1990), filed as exhibit 10.24 to the 1990 Form 10-K. 10.25* Restricted Stock Grant Terms and Conditions, filed as exhibit 10.25 to the 1991 Form 10-K. 10.26* Vernon R. Loucks Restricted Stock Grant Terms and Conditions, filed as exhibit 10.26 to the 1991 Form 10-K. 10.27* Deferred Compensation Plan (1990), as amended in 1992, filed as exhibit 10.27 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, file no. 1-4448 (the "1992 Form 10-K"). 10.28* Restricted Stock Plan for Non-Employee Directors (as amended and restated in 1992), filed as exhibit 10.28 to the 1992 Form 10-K. 10.29* 1992 Officer Incentive Compensation Plan, filed as exhibit 10.29 to the 1992 Form 10-K. 10.30* 1993 Officer Incentive Compensation Plan, filed as exhibit 10.30 to the 1992 Form 10-K. 10.31 1994 Officer Incentive Compensation Plan. 10.32 Separation Agreement: James R. Tobin. 10.34* Corporate Aviation Policy, filed as exhibit 10.33 to the 1992 Form 10-K. 10.35* Plan and Agreement of Reorganization Between Baxter and Caremark International Inc., filed as exhibit 10.34 to the 1992 Form 10-K. 11. Statement re: computation of per share earnings. 11.1 Computation of primary earnings per common share. 11.2 Computation of fully diluted earnings per common share. 12. Statements re: computation of ratios. 13. 1993 Annual Report to Stockholders (such report, except to the extent incorporated herein by reference, is being furnished for the information of the Securities and Exchange Commission only and is not deemed to be filed as part of this annual report on Form 10-K). 21. Subsidiaries of the Company.
28
NUMBER AND DESCRIPTION OF EXHIBIT - ------------------------------------------------------------------------------------------------------------------- 23. Consent of Price Waterhouse. 24. Powers of Attorney. 28.* Pro Forma Summary of Operations for the year ended December 31, 1985, filed as exhibit 28 to the 1990 Form 10-K. - ------------------------ * Incorporated herein by reference.
(All other exhibits are inapplicable.) Copies of the above exhibits are available at a charge of 35 cents per page upon written request to the Stockholder Services Department, Baxter International Inc., One Baxter Parkway, Deerfield, Illinois, 60015. Copies are also available at a charge of at least 25 cents per page from the Public Reference Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 29 [LOGO] Baxter International Inc., One Baxter Parkway, Deerfield, Illinois 60015 EX-10.3 2 EXHIBIT 10.3 Exhibit 10.3 BAXTER INTERNATIONAL INC. AMENDED LIST OF EXECUTIVES William B Graham Vernon R. Loucks Jr. Lester B. Knight Tony L.White Henry R. Autry Harry M. Kraemer, Jr. Arthur F. Staubitz Barbara Young Morris Herbert E. Walker Dale A. Smith Ronald H. Abrahams David J. Aho James H. Taylor, Jr. Brian P. Anderson Lawrence D. Damron EX-10.31 3 EXHIBIT 10.31 BAXTER INTERNATIONAL INC. 1994 OFFICER INCENTIVE COMPENSATION PLAN This 1994 Officer Incentive Compensation Plan ("Plan") of Baxter International Inc. ("Baxter") and its subsidiaries (collectively, the "Company" is adopted pursuant to the Baxter International Inc. 1987 Incentive Compensation Program (the "Program") for the purposes stated in the Program. The Plan is intended to comply with the requirements of Section 162(m)(4)(C) of the Internal Revenue Code of 1986, as amended, and the related income tax regulations issued thereunder. 1. ELIGIBILITY Officers of Baxter are eligible to participate in the Plan during the 1994 ("Plan Year") if the officer's participation is approved by the compensation committee of the board of directors of Baxter (the "Committee"). Officers so approved by the Committee shall be referred to herein as "Participants". 2. BONUS AWARD 2.1 Each Participant shall be eligible to receive a "Bonus Award" in accordance with the terms provided herein and any other terms established by the Committee. To determine a Participant's Bonus Award, the Committee shall establish (a) company performance goals for the Plan Year ("Company Performance Criteria"), (b) a "Bonus Range" for each Participant, and (c) the amount withina Participant's Bonus Range that will be payable to a Participant based upon the achievement of the Company Performance Criteria. The terms described in the preceding sentence must be established by April 1, 1994, and such terms shall not thereafter be changed, except as permitted by paragraph 2.2. 2.2 By March 31, 1995, the Committee shall assess the extent to which the Company has achieved the Company Performance Criteria based on the Company's publicly reported results for the Plan Year. The Committee shall exclude the effect of acquisitions and divestitures recorded in 1994 when assessing the extent to which the Company has achieved the Company Performance Criteria, but only if such exclusion would enhance the Company's performance relative to the Company Performance Criteria. The exclusion authorized by the preceding sentence shall only apply to the extent it is consistent with Section 162(m)(4)(C) and the related regulations described above. The Committee shall then determine each Participant's Bonus Award based upon the terms described in paragraph 2.1 above. The Committee however, has the discretion to reduce the amount of a Participant's Bonus Award determined under the preceding sentence. The Committee's determination shall be consistent with Section 162(m)(4)(C) and the related regulations described above. 2.3 If an officer becomes a Participant in the Plan during 1994, but after February 14, 1994, the Committee shall establish a prorated Bonus Range for such Participant based on the number of full months remaining in 1994 after he or she becomes a participant. To the extent applicable, the determination of a prorated Bonus Range shall be consistent with Section 162(m)(4)(C) and the related regulations described above. 3. PAYMENT 3.1 Except as otherwise determined by the Committee and except with respect to Participants who have filed deferral elections pursuant to paragraph 4, all bonuses will be paid in cash as soon as is practicable following determination of Bonus Awards by the Committee. 3.2 No participant will be eligible to receive a Bonus Award unless he or she continues to be employed by the Company through February 1, 1995, except (a) if a participant dies or is terminated by reason of disability prior to February 1,1995, then the participant or the participant's estate will receive 1/12 of the midpoint of the participant's Bonus Range for each full month of participation during 1994, and (b) if, prior to February 1, 1995, a participant (i) retires, (ii) resigns or (iii) his or her employment is terminated with the result that he or she is entitled to benefits under the Company's Severance Benefits Policy, the participant's Bonus Award may, if approved by the Committee, be determined in the same manner as provided in paragraphs 2.1 and 2.2 above. 4. DEFERRAL OF PAYMENT Participants may elect to defer payment in accordance with the Baxter International Inc. and Subsidiaries Deferred Compensation Plan. EX-10.32 4 EXHIBIT 10.32 Exhibit 10.32 Compensation Committee February 14, 1994 January 21, 1994 Mr. James R.Tobin 12 Briarwood Lane Lincolnshire, IL 60069 Dear Jim: This letter confirms our agreement concerning your termination of employment with Baxter International Inc. and its affiliates ("Company"). You and the Company acknowledge that your employment termination is by mutual agreement, and that it is completely independent of the reduction in force the Company announced in the fourth quarter of 1993. You ceased to be a director, officer and employee of the Company effective January 4, 1994 ("Termination Date"). Between your termination Date and December 31, 1994, you will receive severance pay in installments at regular payroll intervals. Your severance pay will equal a total of $396,800, your annual salary as in effect immediately prior to your Termination Date. If the senior officers of the Company, whose salaries were reduced in September 1993 along with yours, have their salaries restored to their pre-September 1993 levels before December 31, 1994, your severance pay will be increased as follows. Your severance pay will increase to the rate of your annual salary, as in effect immediately before the September 1993 reductions, effective the date on which the salary restorations are effective for the senior officers and continuing until December 31, 1994. You will continue to receive your monthly car allowance, flexible spending allowance and home security system reimbursement until June 30, 1994. If you die before receiving the severance pay, allowances and reimbursements due to you under this Agreement, the balance of such amounts will be paid to your surviving spouse, or to your estate if your spouse does not survive you. The balance of the payments will continue at the same intervals. You will not receive any bonus under the 1993 Officer Incentive Compensation Plan. You are not eligible to participate in any Company bonus plans which are adopted after the date of this Agreement. During the first quarter of 1994, you will receive a total of $38,154, in a single sum, for all of your accrued but unused vacation time, in accordance with the Company's policy. You will not accrue any vacation time after December 31, 1993. You are eligible to receive medical coverage through the Company's retiree medical plan, in accordance with the plan's provisions. You may postpone retiree medical coverage and elect, in accordance with a federal statute (COBRA), to continue your medical and dental benefits under the Company's Flexible Benefits Program for up to 18 months after your Termination Date. You may not obtain medical coverage through the retiree medical plan and COBRA simultaneously. You are eligible to continue your active participation in the Company's Incentive Investment Plan until June 30, 1994, consistent with the Plan's provisions. Your vested accrued benefits in the Incentive Investment Plan will be distributed in accordance with its provisions. Your active participation in the Baxter International Inc. and Subsidiaries Pension Plan ("Pension Plan") will continue until June 30, 1994, consistent with the Plan's provisions. Your vested accrued benefit in the Pension Plan will be distributed in accordance with its provisions. You may elect to begin receiving your Pension Plan benefit effective July 1, 1994. In addition, the Company will provide you with a non-qualified and unfunded supplemental pension benefit ("Pension Supplement") equal to the difference between a) your accrued benefit calculated under the provisions of the Pension Plan and b) the accrued benefit which you would have under the Pension Plan if you had ten additional years of participation in the Pension Plan. Your Pension Supplement is payable at the same time and in the same form as your benefit under the Pension Plan. The ten additional years of Pension Plan participation provided in this paragraph will not be counted when determining the amount you must pay for coverage through the Company's retiree medical plan. Your participation, if any, in the Company's Employee Stock Purchase Plan ceased on your Termination Date. You will receive a cash refund of the balance, if any, in your subscription account, consistent with the Plan's provisions. Your participation in the Company's split-dollar life insurance plan ceased on your Termination Date. Your split-dollar life insurance coverage has been terminated, and your right to have the Company maintain that coverage for you has been forfeited. -2- Your options and restricted shares will be vested or forfeited as listed below: OPTIONS
# of Date Options Option Expiration Granted Type Granted Price Date (2) Vesting - ------------------------------------------------------------------------ 11/21/88 NQ 21,149 (1) $15.89 (1) 4/1/94 all are vested; may exercise before expiration date 11/19/89 NQ 22,196 (1) $22.21 (1) 4/1/94 all are vested; may exercise before expiration date 7/30/90 NQ 31,410 (1) $24.36 (1) 4/4/94 all are vested; may exercise before expiration date 8/9/91 NQ 31,410 (1) $34.15 (1) 4/4/94 20,940 are vested; may exercise before expiration date; remainder will be forfeited 2/15/94 12/7/92 NQ 13,400 $33.88 4/4/94 4,466 are vested; may exercise before expiration date; remainder will be forfeited 2/15/94 8/2/93 NQ 63,800 $26.00 4/4/94 None are vested; all will be forfeited on 2/15/94 1. As equitably adjusted in connection with the Caremark spin-off 2. Option expiration dates consistent with option grant terms and conditions relating to employment termination
If the highest composite closing price of the Company's common stock between April 5, 1994 and September 30, 1994 ("Post-expiration price") exceeds the highest composite closing price between January 4, 1994 and April 4, 1994 ("Pre-expiration price"), the Company will make a cash payment to you. The payment will equal the amount by which the Post-expiration price exceeds the Pre-expiration price, multiplied by the number of shares for which you could have exercised the options identified above if the expiration date and vesting extended to September 30, 1994. The cash payment calculation will not include any options with an option price above the Post-expiration price. -3- RESTRICTED SHARES
# of Date Shares Granted Granted Vesting Date Disposition - ----------------------------------------------- 12/1/87 34,000 12/31/92 and 24,140 shares vested on 12/31/92; 12/31/94 remaining 9,860 shares will be forfeited 2/15/94 11/21/88 50,500 1 year after 48,813 shares have been earned earned and vested; remaining 1,687 shares will be forfeited 2/15/94 8/7/90 20,200 1 year after None have been earned or vested; earned all will be forfeited 2/15/94 2/17/92 25,000 12/31/92 and 8,325 shares vested on 12/31/92 12/31/94 with continuing sale/transfer restrictions until 12/31/94; remaining 16,675 shares will be forfeited 2/15/94 12/7/92 32,000 1 year after none have been earned or vested; earned all will be forfeited 2/15/94
You will not receive any additional grants of options or restricted shares. To preserve your rights to make various elections under the Company's Flexible Benefits Program, Pension Plan and Incentive Investment Plan, you must contact the Human Resources Department. You will be given the personal computer and the two cellular phones which the Company provided to you. You acknowledge that the compensation and benefits provided in this Agreement exceed the compensation and benefits which you would normally receive in connection with your employment termination. In exchange for the compensation and benefits under this Agreement, you waive your right to file or participate as a class member in any claims or lawsuits (whether or not you now know of the basis for the claims or lawsuits) with federal or state agencies or courts against the Company and its employee benefit plans, including their present and former directors, officers, employees, agents and fiduciaries. This general waiver release includes but is not limited to, all claims of unlawful discrimination in regard to age, race, sex, color, religion, national origin and handicap under Title VII of the Civil Rights Act, the Age Discrimination in Employment Act or any other federal or state statutes, all claims for wrongful employment termination or breach of contract and any other claims relating to your employment or termination of employment with the -4- Company. This waiver and release also apply to your heirs, assigns, executors and administrators. This waiver and release do not waive rights or claims which may arise after the date of this Agreement is signed except as stated in the next sentence. To be eligible to receive the Pension Supplement described above, you agree that this waiver and general release will be deemed to be signed by you again when your Pension Supplement begins to be paid. You agree: (a) not to intentionally disparage the Company, its employees or products; (b) not to intentionally engage in actions contrary to the interests of the Company; provided, however that this subsection (b) shall not apply to conduct otherwise permissible under your employment agreement with the Company; (c) not to disclose or allow disclosure of any provisions of this Agreement, except to your attorney or pursuant to subpoena or court order (although the Company may be required to disclose this Agreement in its 1994 proxy statement and as an exhibit to its Form 10-K for 1993); (d) to conduct the transition period in a constructive and positive manner; (e) to remain bound by the non- compete and confidentiality provisions of your employment agreement with the Company (the Company acknowledges that your employment with Biogen Inc. does not violate the non-compete provisions of your employment agreement); and (f) to return to the Company, by January 21, 1994, all Company property, including proprietary information. All amounts payable to you or on your behalf under this Agreement will be reported to appropriate governmental agencies as taxable income to the extent required, and appropriate withholding information will be made where necessary. In addition, all amounts payable to you under this Agreement are expressed as amounts prior to payment or withholding of any taxes, and the Company will not gross-up the amounts or otherwise reimburse you for the taxes you pay relating to such amounts. The amounts payable to you under this Agreement are in lieu of all severance compensation and other severance benefits from the Company to which you might otherwise be entitled. The Company may terminate the severance payments and the amounts payable under the Pension Supplement if you fail to comply with any of your obligations under this Agreement. You acknowledge that the Company has made no promises to you which are not included in this Agreement, and that this Agreement contains the entire understanding between you and the Company relating to your employment termination. You acknowledge that the terms of this Agreement are contractually binding. If any portion of this Agreement is declared invalid or unenforceable, the remaining portions of this Agreement will continue in force. -5- You acknowledge that you carefully read the terms of this Agreement, you know and understand its content and meaning, you were given a 21-day period to review it, you consulted with an attorney through whom you negotiated changes before accepting it, and you accept it voluntarily. If this letter accurately reflects our agreement, please sign two copies, and return one of them to me by February 3, 1994. The terms of this Agreement are subject to the approval of the Compensation Committee of the Company's Board of Directors as well as the Board of Directors. Sincerely, /s/ VERNON R. LOUCKS, JR. - ------------------------- Vernon R. Loucks, Jr. ACCEPTED AND AGREED: /S/ JAMES R. TOBIN - -------------------- (Signature) 2/1/94 - -------------------- (Date) -6- EX-11.1 5 EXHIBIT 11.1 EXHIBIT 11.1 - -------------------------------------------------------------------------------- COMPUTATION OF PRIMARY EARNINGS PER COMMON SHARE (In millions, except per share data) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------- 1993 1992 1991 - ------------------------------------------------------------------------------------------- EARNINGS Income (loss) from continuing operations before cumulative effect of accounting changes $ (268) $ 561 $ 507 Preferred stock dividends -- (5) (23) - ------------------------------------------------------------------------------------------- Income (loss) from continuing operations before cumulative effect of accounting changes applicable to common stock (268) 556 484 Discontinued operations Income from discontinued operations -- 63 84 Costs associated with effecting the business discontinuance -- (18) -- - ------------------------------------------------------------------------------------------- Total discontinued operations -- 45 84 - ------------------------------------------------------------------------------------------- Cumulative effect of accounting changes 70 (165) -- - ------------------------------------------------------------------------------------------- Net income (loss) available for common stock $ (198) $ 436 $ 568 --------- --------- --------- --------- --------- --------- - ------------------------------------------------------------------------------------------- SHARES Average common shares outstanding 277 279 280 --------- --------- --------- --------- --------- --------- - ------------------------------------------------------------------------------------------- PRIMARY EARNINGS (LOSS) PER COMMON SHARE INCOME FROM CONTINUING OPERATIONS $ (0.97) $ 1.99 $ 1.73 DISCONTINUED OPERATIONS INCOME FROM DISCONTINUED OPERATIONS -- 0.22 0.30 COSTS ASSOCIATED WITH EFFECTING THE BUSINESS DISCONTINUANCE -- (0.06) -- - ------------------------------------------------------------------------------------------- TOTAL DISCONTINUED OPERATIONS -- 0.16 0.30 - ------------------------------------------------------------------------------------------- CUMULATIVE EFFECT OF ACCOUNTING CHANGES 0.25 (0.59) -- - ------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ (0.72) $ 1.56 $ 2.03 --------- --------- --------- --------- --------- --------- - -------------------------------------------------------------------------------------------
30 EX-11.2 6 EXHIBIT 11.2 EXHIBIT 11.2 - -------------------------------------------------------------------------------- COMPUTATION OF FULLY DILUTED EARNINGS PER COMMON SHARE (In millions, except per share data) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, - -------------------------------------------------------------------------------- 1993(A) 1993(A) 1992 1991 - -------------------------------------------------------------------------------- EARNINGS Income (loss) from continuing operations before cumulative effect of accounting changes $ (268) $ (268) $ 561 $ 507 Preferred stock dividends -- -- (5) (23) Pro forma income (loss) from continuing operations before cumulative effect of accounting changes applicable to common stock (268) (268) 556 484 Discontinued operations Income from discontinued operations -- -- 63 84 Costs associated with effecting the business discontinuance -- -- (18) -- - -------------------------------------------------------------------------------- Total discontinued operations -- -- 45 84 - -------------------------------------------------------------------------------- Cumulative effect of accounting changes 70 70 (165) -- - -------------------------------------------------------------------------------- Pro forma net income (loss) available for common stock $ (198) $ (198) $ 436 $ 568 ------ ------ ------ ----- ------ ------ ------ ----- - -------------------------------------------------------------------------------- SHARES Weighted average number of common shares outstanding 277 277 279 280 Additional shares assuming conversion of cumulative convertible exchangeable preferred stock, exercise of stock options, performance share awards and stock purchase plan subscriptions -- 1 3 5 - -------------------------------------------------------------------------------- Average common shares and equivalents outstanding 277 278 282 285 ------ ------ ------ ----- ------ ------ ------ ----- - -------------------------------------------------------------------------------- FULLY DILUTED EARNINGS (LOSS) PER COMMON SHARE INCOME (LOSS) FROM CONTINUING OPERATIONS $(0.97) $(0.96) $ 1.97 $1.70 DISCONTINUED OPERATIONS INCOME FROM DISCONTINUED OPERATIONS -- -- 0.22 0.30 COSTS ASSOCIATED WITH EFFECTING THE BUSINESS DISCONTINUANCE -- -- (0.06) -- - -------------------------------------------------------------------------------- TOTAL DISCONTINUED OPERATIONS -- -- 0.16 0.30 - -------------------------------------------------------------------------------- CUMULATIVE EFFECT OF ACCOUNTING CHANGES 0.25 0.25 (0.59) -- - -------------------------------------------------------------------------------- NET INCOME (LOSS) $(0.72) $(0.71) $ 1.54 $2.00 ------ ------ ------ ----- ------ ------ ------ ----- - -------------------------------------------------------------------------------- (a) For the year ended December 31, 1993, fully diluted earnings (loss) per common share has been computed with and without anti-dilutive common stock equivalents.
31 EX-12 7 EXHIBIT 12 EXHIBIT 12 - -------------------------------------------------------------------------------- COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (In millions, except ratios) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------- 1993 1992 1991 1990 1989 - ------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income tax expense (benefit) $ (330) $ 753 $ 688 $ 16 $ 578 Add: Interest costs 232 221 231 264 291 Estimated interest included in rentals (1) 44 43 36 35 30 - ------------------------------------------------------------------------------------------- Fixed charges as defined 276 264 267 299 321 Interest costs capitalized (10) (10) (9) (5) (7) Losses of less than majority owned affiliates, net of dividends 27 34 32 22 15 - ------------------------------------------------------------------------------------------- Income (loss) as adjusted $ (37) $ 1,041 $ 978 $ 332 $ 907 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- - ------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges (0.13) 3.94 3.66 1.11 2.83 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- - ------------------------------------------------------------------------------------------- (1) Represents the estimated interest portion of rents. (2) Earnings were inadequate to cover fixed charges for the year-ended December 31, 1993, due to the provision for the restructuring program costs. The amount of the coverage deficiency is $313 million.
32 EX-13 8 EXHIBIT 13 EXHIBIT 13 FINANCIAL REVIEW This discussion and analysis presents the factors that had a material effect on Baxter International Inc.'s ("Baxter" or the "company") results of operations during the three years ended December 31, 1993, and the company's financial position at that date. Trends of a material nature are discussed to the extent known and considered relevant. In November 1993, Baxter announced that its board of directors approved a series of strategic actions to improve shareholder value, to extend positions of leadership in health-care markets and to reduce costs. These actions are designed to make the company's domestic medical/laboratory products and distribution segment more efficient and more responsive in addressing the sweeping changes occurring in the U.S. health-care system and accelerate growth of its medical specialties businesses worldwide. The company recorded a $700 million pre-tax provision to cover costs associated with these restructuring initiatives. The actions include: - - Realigning the company's U.S. sales organization; - - Restructuring the distribution organization and investing in new systems to improve manufacturing and distribution efficiencies worldwide; - - Seeking to divest diagnostics-products manufacturing businesses and exiting selected non-strategic product lines in other businesses; and - - Reducing corporate staff and layers of management to give business units more autonomy. These actions are expected to result in a reduction of the company's work force by approximately 7 percent, or 4,500 positions, most of which will occur over the next two to three years. The pre-tax restructuring charge of $700 million includes approximately $300 million for non-cash valuation adjustments as a result of the company's decision to close facilities or exit non-strategic businesses and investments. The company expects to spend approximately $400 million in cash related to the restructuring programs described above, with most of that expended over the next two to three years. In return, the company expects to generate annual pre-tax savings of approximately $100 million in 1994, $200 million in 1995, $275 million in 1996, $325 million in 1997 and exceeding $350 million in 1998. Management anticipates that these savings will be partially invested in increased research and development spending and the company's expansion into growing international markets. RESULTS OF CONTINUING OPERATIONS Sales from continuing operations of $8.9 billion in 1993 were 5% higher than in 1992. The $8.5 billion sales level in 1992 represented a 9% increase over the $7.8 billion level achieved in 1991. Domestic sales of $6.5 billion in 1993 were 6% higher than 1992. Domestic sales were $6.1 billion in 1992 and $5.7 billion in 1991. Sales in international markets rose approximately 2% to $2,428 million in 1993. International sales were $2,391 million in 1992 and $2,131 million in 1991. International sales growth in local currency was approximately 7% in 1993 and 9% in both 1992 and 1991. Despite the impact of health-care reform proposals in the U.S. which are driving significant cost containment measures and consolidations throughout the health-care industry, and with decreased surgical procedures and increased participation in managed care networks, demand for the company's products worldwide remains relatively strong. The company received some adverse publicity during 1993 arising from a notice of suspension by the Department of Veteran's Affairs ("DVA"). This suspension stemmed from a dispute between the DVA and Baxter Healthcare Corporation, a subsidiary of Baxter International Inc., over alleged misrepresentations concerning the status of products on its Federal Supply Schedule contracts and from the company's earlier guilty plea to an information charging it with one count of violating the anti-boycott statute of the U.S. Export Administration Act. This suspension was lifted in December, NET SALES [Graphic Omitted] SALES PER EMPLOYEE [Graphic Omitted] 35 1993. As a result of the publicity on the original consent decree, certain customers have decreased their business with the company or publicly expressed their intent to reduce future purchases of the company's products and services. Based on information available to management, such customer actions did not have a material effect on the company's sales and earnings for the year ended December 31, 1993, and are not expected to have a material impact on future sales and earnings. Operating income declined from $1,045 million in 1992 to $239 million (2.7% of sales) in 1993 largely as a result of the $700 million restructuring charge mentioned previously. Operating income in 1993, excluding the restructuring charge, decreased 10% to $939 million, compared with $1,045 million in 1992 and $960 million in 1991. Operating income, excluding restructuring charges, as a percent of sales was 10.6% in 1993, 12.3% in 1992 and 12.3% in 1991. The decrease in 1993 operating income, excluding the restructuring charge, is primarily due to lower gross profit margins, negative swings in foreign-exchange rates and costs associated with other downsizing programs. The other downsizing programs cost $53 million and were primarily incurred to combine sales staffs and streamline administrative functions in the company's hospital and diagnostics businesses. Operating income as a percent of sales remained flat in 1992 as compared to 1991 as an improved gross profit rate, which was primarily driven by the benefits from the 1990 restructuring program (which concentrated on the elimination of excess manufacturing capacity), was offset by the first-time recognition of the additional costs associated with the new accounting rule covering retiree health benefits. Excluding the effects of this accounting change on continuing operations, operating income for 1992 would have increased 11% over 1991. The gross margin rate was 36.3% in 1993, 38.1% in 1992 and 38.0% in 1991. The decline in this rate in 1993 in the U.S. reflects lower prices on certain product lines, a heavier mix of lower-margin distributed and manufactured products and unfavorable manufacturing variances related to the rebalancing of inventories which caused some manufacturing plants to operate at reduced capacity levels. The mix shift towards distributed products is consistent with the company's strategy of being a broad-based distributor of health-care supplies and services in the U.S. The adverse impact of foreign currency exchange rates also reduced the total company gross margin rate by approximately .7% in 1993. The company's marketing and administrative expenses were $1,879 million in 1993, $1,798 million in 1992 and $1,648 million in 1991. As a percent of sales, these expenses were 21.2% in both 1993 and 1992 and 21.1% in 1991. Excluding the $53 million in downsizing costs discussed previously, the 1993 percent of marketing and administrative expenses to sales would have been approximately 20.6%. Research and development ("R&D") expenses increased 6% to $337 million in 1993. R&D spending rose 10% in 1992. As a percent of self-manufactured product sales R&D expenses were approximately 5.6% in 1993 compared to 5.4% in both 1992 and 1991. The company concentrates its R&D expenditures in potentially high-growth, high-return areas which include biotechnology products and treatments for kidney failure, blood disorders and cardiovascular disease. Baxter's R&D programs are directed at developing new and improved products for both new and emerging markets as well as technological improvements in the company's manufacturing processes. New self-manufactured products introduced to worldwide markets in the last five years comprised approximately 35% of the company's total 1993 self-manufactured sales compared to 34% for 1992. Interest expense was $222 million in 1993, $211 million in 1992 and $222 million in 1991. The increase in 1993 was primarily due to higher debt levels offset by lower interest rates. The decrease in 1992 was primarily due to declining interest rates. OPERATING INCOME [Graphic Omitted] MARKETING AND ADMINISTRATIVE EXPENSES [Graphic Omitted] 36 During 1993, the company incurred significant charges for major litigation settlements and minimum liability exposures, and recorded significant estimated insurance recoveries with respect to those liabilities. The net results of the charges and recoveries are as follows (in millions):
Gross Estimated Net litigation insurance litigation charge recoveries charge - ---------------------------------------------------------------------------- Mammary implant product liabilities $556 $426 $130 HIV/hemophilia product liabilities 131 83 48 Patent infringement settlement 105 - 105 Legal fees and other 47 - 47 - ---------------------------------------------------------------------------- Total $839 $509 $330 - ----------------------------------------------------------------------------
The provision for mammary implant product liabilities pertains to the company's share of a proposed global settlement of class action litigation. The provision for HIV/hemophilia product liabilities pertains to worldwide litigation and settlement expenses involving anti-hemophilic Factor Concentrate cases for HIV-positive hemophiliacs. The patent infringement settlement pertains to patent litigation with Scripps Research Institute and Rhone-Poulenc Rorer, Inc. relating to certain anti-hemophilic Factor VIII products manufactured and sold prior to January 1, 1993. The provision for legal fees pertains primarily to the product liability litigation. See the accompanying Notes to Consolidated Financial Statements titled "Legal Proceedings" for a more detailed description of these litigation issues. Other non-operating expenses were $47 million in 1993, $105 million in 1992 and $80 million in 1991. Other non-operating expenses include approximately $44 million in net gains associated with the disposal of several minor, non-strategic business units and assets as compared to losses of $21 million in 1992 and $6 million in 1991. Also included in other non-operating expenses in 1993 was a provision for $8 million in costs related to Baxter's settlement of anti-boycott investigations under the U.S. Export Administration Act. Income (loss) from continuing operations before income taxes was a loss of $330 million in 1993 compared to income of $753 million in 1992 and income of $688 million in 1991. The loss in 1993 primarily results from the $700 million restructuring charge, the $330 million litigation charges and the decline in the gross margin, discussed previously. The company recorded an income tax benefit of $62 million in 1993 compared to expense of $192 million in 1992 and $181 million in 1991. The effective tax rate in 1993 was 19% compared to 25% in 1992 and 26% in 1991. The change in the 1993 effective tax rate was primarily due to the tax benefits associated with the restructuring and litigation charges discussed previously, offset by a provision for U.S. taxes on previously unremitted foreign earnings which the company intends to utilize for the cash requirements of its restructuring program. Without these charges, the 1993 effective tax rate would have been approximately 23%. This decrease, as compared to the prior year, is primarily due to the mix of earnings generated in jurisdictions with a lower tax rate and the utilization of tax credits. Net earnings (loss) from continuing operations was a net loss of $268 million in 1993 compared to net earnings of $561 million in 1992 and net earnings of $507 million in 1991. Earnings (loss) per common share from continuing operations was a loss of 97 cents in 1993 compared to earnings of $1.99 in 1992 and $1.73 in 1991. The loss in 1993 primarily reflects the provisions for restructuring and litigation charges. The company estimates that earnings per share in 1993, excluding these charges, would have been approximately $1.95. The decline in 1993 earnings per share is primarily due to the factors discussed previously. DISCONTINUED OPERATIONS Net earnings from discontinued operations were $45 million in 1992 and $84 million in 1991. Earnings per common share attributable to discontinued operations totaled 16 cents R&D EXPENSES [Graphic Omitted] EARNINGS (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS [Graphic Omitted] 37 in 1992 and 30 cents in 1991. The lower level of earnings from discontinued operations in 1992 reflects the distribution of Caremark International Inc. to Baxter stockholders as of November 30, 1992, and provisions for costs associated with this distribution. The company's portion of costs incurred to effect the distribution were $18 million (net of $6 million in related income tax benefits). ADOPTION OF NEW ACCOUNTING STANDARDS The 1993 benefit for the cumulative effect of adopting FASB Statement No. 109, "Accounting for Income Taxes" was $81 million, or 29 cents per common share. The 1993 charge for the cumulative effect of adopting FASB Statement No. 112, "Accounting for Postemployment Benefits" which requires accrual accounting for postemployment benefits such as disability-related and workers compensation payments was $11 million (net of $7 million in income tax benefits), or 4 cents per common share. The 1992 charge for the cumulative effect of adopting FASB Statement No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions" covering the accounting for retiree benefits other than pensions was $165 million (net of $50 million in income tax benefits), or 59 cents per common share. IMPACT OF INFLATION In recent years, the company has experienced increases in its labor and material cost base which are influenced, in part, by general inflationary trends. While not directly related to inflationary trends, the company's revenue base, on average, over recent years has been adversely affected by lower average selling prices on certain products as a result of changes in Medicare reimbursement regulations and economic pressures in the hospital marketplace. There is little correlation between general inflation rates directly affecting costs and expenses and the company's pricing levels for products sold to health-care customers. Management expects that these trends will continue. FINANCIAL CONDITION Management assesses the company's liquidity in terms of its overall ability to mobilize cash to support ongoing business levels and to fund its growth. Cash flow provided by continuing operations (which include working capital components) increased to $765 million in 1993 from a level of $742 million in 1992 and $697 million in 1991. The increase in 1993 compared to 1992 is due to a variety of items including an improvement in the collection of accounts receivable balances. The increase in 1992 compared to 1991 is primarily due to higher earnings. Management believes that the company will generate cash flow sufficient to support normal ongoing business requirements. Investment transactions for the three years ended December 31, 1993 are as follows:
(in millions) 1993 1992 1991 - ---------------------------------------------------------------------------- Capital expenditures and additions $605 $640 $592 to the pool of equipment leased or rented to customers Acquisitions 120 125 115 Proceeds from asset dispositions (70) (39) (36) - ---------------------------------------------------------------------------- Total investment transactions, net $655 $726 $671 - ----------------------------------------------------------------------------
Major capital projects funded in 1993 include the expansion of manufacturing capacity for renal products in Puerto Rico and Singapore, a Recombinant Factor VIII manufacturing facility in Thousand Oaks, California for the Biotech group and expenditures for a distribution center in Orange County, New York. The higher level of capital expenditures in 1992 were to fund programs for expansion of distribution centers and manufacturing capacity for blood products. The company expects to spend approximately $600 million in total capital expenditures in 1994. The acquisitions summarized in the above table involved no significant change to the company's strategic direction, and were made for the purpose of acquiring technologies, CASH FLOW PROVIDED BY CONTINUING OPERATIONS [Graphic Omitted] CAPITAL EXPENDITURES [Graphic Omitted] 38 broadening product lines or expanding market coverage. The proceeds received from asset dispositions were from the sale or discontinuance of several minor non-strategic or unprofitable business units and investments. The majority of these transactions resulted in the disposition of the company's entire interest in such businesses. The company's current assets exceeded current liabilities by $1.5 billion at December 31, 1993 compared to an excess of $1.2 billion at December 31, 1992. This increase reflects increases in cash and equivalents, inventories and short-term deferred income tax assets offset by increases in current liabilities related to the restructuring and litigation costs. Current assets included receivables of $1.7 billion and inventories of $1.8 billion. These assets are convertible into cash over a relatively short period of time and are a source to help the company satisfy normal operating cash requirements. Inventory levels increased from $1,632 million at December 31, 1992 to $1,772 million at December 31, 1993 primarily reflecting the increase in inventories needed to support ValueLink and national brand distribution agreements. Short-term and long-term deferred income tax assets and liabilities increased due to the adoption of FASB Statement No. 109 which also required certain reclassifications, and to temporary differences associated with the restructuring and litigation charges accrued during 1993. The company has assessed the need for establishing valuation allowances pertaining to its deferred tax assets with respect to its anticipated future taxable income levels and tax planning strategies. Based on that assessment, the company has provided a valuation allowance for certain state and foreign jurisdictions where there is uncertainty regarding the realization of a portion of the deferred tax assets. Other intangible assets increased in 1993 due to the tax-benefit "gross-up" related to past acquisitions as required by FASB Statement No. 109 and a $20 million increase related to the change in the minimum pension liability. The insurance receivable included in other assets in the December 31, 1993 balance sheet is related to amounts expected to be recoverable by the company in connection with the accrual of estimated payments to be made related to the mammary implant and HIV/hemophilia litigation matters. See accompanying Notes to Consolidated Financial Statements titled "Legal Proceedings" for more details. To meet its net financing requirements during the two years ended December 31, 1993, the company utilized short-term borrowings as required. For purposes of covenant compliance and rating agency reviews the company's credit arrangements permit it to reduce its debt to capital ratio by a percentage of cash and equivalents. (Also see the accompanying Notes to Consolidated Financial Statements titled "Credit Facilities"). Long-term debt was issued or re-financed when conditions were considered favorable. The results of these activities on the company's capital structure are shown below (in millions):
December 31, 1993 1992 - ---------------------------------------------------------------------------- Long-term obligations $2,800 $2,433 Stockholder's equity 3,185 3,795 - ---------------------------------------------------------------------------- Long-term debt as a percent of total capital 46.8% 39.1% - ----------------------------------------------------------------------------
At December 31, 1993, approximately 70% of the company's net debt was effectively at fixed rates. Net debt (after consideration of cash and equivalents) rose approximately $242 million since the start of 1993. A patent litigation settlement of $105 million and $124 million in purchases of the company's common stock to fund benefit plans contributed to this increase. At December 31, 1993, the company's net debt to net capital ratio was approximately 50% compared to 43% at December 31, 1992. This increase was also due to the adverse effect on capital due to the restructuring and litigation provisions discussed previously. The company expects to fund its restructuring and litigation cash needs through cash flow from operations and by repatriation of previously unremitted foreign earnings. In 1994 and beyond, the company will have an increased TOTAL CAPITAL [Graphic Omitted] 39 focus on improving its cash flows from operations. Management expects that net debt at the end of 1994 will be the same as the 1993 year-end level, before the consideration of net proceeds from divestitures. The company also intends to utilize the net proceeds from the planned divestiture of the diagnostics-products manufacturing and other non-strategic businesses to reduce net debt, and thus, anticipates that its net debt to net capital will decline during 1994, with the goal of reaching the 40% range in the years ahead. The company's debt ratings of A3 on senior debt by Moody's, A- by Standard & Poor's and A by Duff & Phelps were reaffirmed by each rating agency after the 1993 restructuring announcement. Standard & Poor's and Duff & Phelps have indicated that continuation of these ratings in the future is dependent on Baxter's successful implementation of the restructuring program announced in November 1993 (discussed previously) and the reduction of its financial leverage which is expected to result from the planned divestiture of its diagnostics-products manufacturing businesses. At December 31, 1993, the company could issue up to $300 million in aggregate principal amount of additional senior unsecured debt securities under an effective registration statement filed with the Securities and Exchange Commission. The company intends to fund its long-term obligations as they mature by issuing additional debt or through cash flow from operations. The company believes it has lines of credit adequate to support ongoing operational and restructuring requirements. Beyond that, the company believes it has sufficient financial flexibility to attract long-term capital on acceptable terms as may be needed to support its growth objectives. The company's board of directors authorized the purchase of common stock to fund various employee-benefit plans and for other corporate purposes. The company purchased 4.5 million shares of common stock for $124 million in 1993, and may purchase up to an additional 11 million shares under this authority. Common stock in treasury increased due to the purchases mentioned above, partially offset by shares issued in connection with employee benefit programs. In February 1994, the board of directors declared the dividend on the company's common stock at an annualized rate of $1.00 per share. The company plans to increase future dividends in line with improvements in earnings and cash flow performance. LITIGATION See the accompanying Notes to Consolidated Financial Statements titled "Legal Proceedings" for a detailed description of the company's litigation. The company has been named as a potentially responsible party for unsettled claims for cleanup costs at 18 hazardous waste sites. The company was a significant contributor to waste disposed on only one of these sites, the Thermo-Chem site in Muskegon, Michigan. The company expects that the total cleanup costs for this site will be between $37 million and $82 million, of which the company's share will be approximately $5 million. This amount has been reserved and reflected in the company's financial statements. In all of the other sites, the company was a minor contributor and therefore, does not have information on the total cleanup cost. The company has, however, in most of these cases, been advised by the potentially responsible party of its roughly estimated exposure at these sites, which, in the aggregate, totals approximately $5 million. The company is a defendant in a number of other claims, investigations and lawsuits. Based on the advice of counsel, management does not believe that these actions, individually or in the aggregate, will have a material adverse effect on the company's operations or its consolidated financial condition. DIVIDENDS PER COMMON SHARE [Graphic Omitted] 40 REVIEW OF BUSINESS SEGMENTS In November 1993, the company announced a significant restructuring, and as a result, it redefined the industry segments for which it reports financial results. The new definitions are consistent with the company's strategic direction. The company now reports its operations in two industry segments: Medical Specialties and Medical/Laboratory Products and Distribution. MEDICAL SPECIALTIES The company develops, manufactures and markets on a global basis highly specialized medical products for treating kidney and heart disease and blood disorders and for collecting and processing blood. These products include dialysis equipment and supplies; prosthetic heart valves and cardiac catheters; blood-clotting therapies; and machines and supplies for collecting, separating and storing blood. These products require extensive research and development, and investment in worldwide distribution, marketing, and administrative infrastructure. The company's International Hospital unit, which manufactures and distributes intravenous solutions and other medical products outside the United States, is also included in this segment because it shares facilities, resources and customers with the other medical specialty businesses in several locations worldwide. This segment represents approximately one-third of the company's sales and approximately two-thirds of the company's operating income excluding the restructuring charge. International sales comprise two-thirds of the sales in this segment. NET SALES Sales of the company's medical specialties products increased 5% to $3,250 million in 1993. The $3,096 million sales level in 1992 was approximately 11% higher than the $2,785 million level achieved in 1991. U.S. sales were $1,108 million in 1993, $1,020 million in 1992 and $932 million in 1991. International sales were $2,142 million in 1993, $2,076 million in 1992 and $1,853 million in 1991. Sales growth in all periods is generally attributable to normal market growth, new product introductions and increased market penetration in selected areas. Foreign exchange fluctuations negatively affected sales growth in 1993 and positively contributed to sales increases in 1991 and 1992. International sales of this segment's products, excluding the effects of foreign currency values, increased 8% in 1993 and 10% in 1992. Sales trends for the medical specialty segment are outlined below (in millions):
Unit 1993 1992 1991 - ------------------------------------------------------------------------ Renal $1,061 $ 978 $ 857 Biotech 849 805 719 Cardiovascular 562 540 504 International Hospital 778 773 705 - ------------------------------------------------------------------------ Total $3,250 $3,096 $2,785 - ------------------------------------------------------------------------
Worldwide sales of renal products and services were strong over the past three years, reflecting a growing patient base and increased acceptance of peritoneal dialysis ("PD") therapy. Sales penetration of PD products was especially strong in international markets, where many national governments recognize the therapy's low start-up and operating costs relative to traditional hemodialysis. Sales of the company's UltraBag-TM- system, designed to reduce the incidence of infection and improve convenience for the patient, contributed to increased sales in Europe in 1992 and 1993 and in the U.S. and Japan in 1993. The company will launch its HomeChoice-TM- Automated PD System in North America, Japan and Europe in early 1994. The system simplifies the PD process and may yield 20% to 30% more dialysis in a given amount of time. The company experienced strong demand domestically for its therapeutic blood products, especially in the U.S. MEDICAL SPECIALTIES NET SALES [Graphic Omitted] 41 Recombinante-TM- Anti-hemophilic Factor (Recombinant) was launched in the U.S. early in 1993. The product was recommended by the European Community's Committee for Proprietary Medicinal Products for approval for market and sales in the European Community in May, 1993 and has received technical and reimbursement approval in several countries. The product is a genetically engineered blood-clotting factor for people with hemophilia, an inherited blood disorder. The market for the company's blood-collection products slowed in 1993, as the number of whole-blood-collections declined in the U.S. and in Europe. Sales of manual collection products were flat. The demand for automated blood collections was strong in 1993, 1992 and 1991, as the company's automated CS-3000-R-, blood cell separator machines and its Autopheresis-C-R-, plateletpheresis system grew at double-digit levels. Sales growth of the company's cardiovascular products moderated in 1993, primarily due to the reduced level of hospital activity in the United States. Sales growth outside the United States remained strong. The company continued to experience particularly strong demand for its Carpentier-Edwards-R- Pericardial tissue valves. The company also received U.S. Food and Drug Administration approval for its Vigilance-R- Continuous Cardiac Output/SvO2 monitor in late 1993. This represents the first technology ever to provide continuously, rather than intermittently, the very desirable combination of data about cardiac output and venous oxygen-saturation and is expected to strengthen the company's position in the specialty cardiac-monitoring market. The company is expanding its growing position in Latin America with the 1994 acquisition of Macchi Engenharia Biomedica Ltda. Macchi is a Brazilian-based manufacturer and marketer of oxygenators and other cardiovascular products used in open-heart surgery. Sales of the company's hospital products in international markets increased modestly in 1993 due to weakening of foreign currencies. Additionally, the company's sales in Canada slowed as hospital cost containment in that country put downward pressure on the consumption of health-care products and services. Sales of specialty IV products, including infusion pumps, were strong as the company broadened its base product offering to international markets. Unit demand for the company's products continued to increase. OPERATING INCOME Operating income was $543 million (16.7% of sales) in 1993, $606 million in 1992 and $535 million in 1991. Operating income in 1993 includes a restructuring charge of $100 million (approximately $42 non-cash) to rationalize manufacturing capacity in the U.S. and Canada, consolidate distribution facilities in Europe and streamline administrative efficiency in several countries. As a percent of sales, operating income was 19.8% in 1993 (excluding restructuring program charges), 19.6% in 1992 and 19.2% in 1991. Excluding the restructuring program charges, operating income increased as a result of lower manufacturing costs, improved expense control and improved pricing in selected product lines offset by the adverse impact of foreign currency rates. Operating income in 1992 increased as the company benefited from plant rationalization, reductions in administrative staff, sales-force realignments and a shift in product sourcing to lower-cost manufacturing sites. The company's European operations were especially strong across all product areas, reflecting the benefits of the company's realignment of its sales and marketing organization for each business on a Pan-European basis. In 1992, the increase in operating income was partially offset by the first-time recognition of the additional cost associated with a new accounting rule covering retiree health-care benefits and expanded investments in marketing programs for cardiovascular products. Significant R&D investments were made in 1993 for prod- MEDICAL SPECIALTIES OPERATING INCOME [Graphic Omitted] 42 ucts to treat kidney and heart disease and blood disorders and to collect and process blood. The company implanted its Novacor-R-, wearable left-ventricular assist system ("LVAS") in 33 recipients in the U.S. and Europe during 1993. The electrically powered LVAS acts as a "bridge" to a heart transplant while patients await suitable donors. Baxter began clinical trials of its hemoglobin-based blood substitute on victims of hemorrhagic shock in the U.S. and in Europe in 1993. The blood substitute is designed to carry oxygen throughout the body of a patient who has lost a large amount of blood because of an accident or some other cause. In 1993, the company successfully completed a multi-center phase I/II clinical trial for anti-CD45, a drug that is being studied as a preventative for acute organ rejection following organ transplantation. The study involved patients in the United Kingdom who were undergoing kidney transplants. The company is collaborating with Cantab Pharmaceuticals, plc. to develop and market the drug. R&D expenses increased 11% in 1993 as compared with 15% in 1992. The company spent 8.3% of this segment's self-manufactured product sales on R&D for this segment in 1993, 7.9% in 1992 and 7.6% in 1991. CAPITAL EXPENDITURES Capital expenditures, including additions to the pool of equipment leased or rented to customers for the medical specialties segment were $266 million in 1993, $259 million in 1992 and $195 million in 1991. Major capital investments in 1993 were made for the expansion of manufacturing capacity for renal products in Puerto Rico and Singapore and a manufacturing facility in Thousand Oaks, California for recombinant blood-therapy products. In 1994, the company expects to spend approximately $350 million in capital expenditures for the medical specialties segment. The 32% expected increase is due to the completion of the renal plant expansion in Singapore and the completion of a plant to manufacture disposable products used in the automated collection of blood components in Puerto Rico. MEDICAL/LABORATORY PRODUCTS AND DISTRIBUTION Baxter manufactures medical and laboratory supplies and equipment, including intravenous fluids and pumps, diagnostic-testing equipment and reagents, surgical instruments and procedure kits, and a range of disposable and reusable medical products. These self-manufactured products, as well as a significant volume of third party manufactured medical and laboratory products, are primarily distributed throughout the company's extensive distribution system to U.S. hospitals, alternate-site care facilities, medical laboratories, and industrial and educational facilities. NET SALES Sales of the company's medical/laboratory products and distribution segment increased 5% to $5,629 million in 1993. The $5,375 million sales level in 1992 was 7% higher than the $5,014 million level achieved in 1991. Sales growth in all periods reflects market growth and increased market penetration. Additionally, in 1991 and 1992, sales growth was aided by more favorable product pricing in selected areas. U.S. sales were $5,343 million in 1993, $5,060 million in 1992 and $4,736 million in 1991. Sales in international markets were $286 million in 1993, $315 million in 1992 and $278 million in 1991. Demand for many of the company's medical/laboratory products and distribution services depends on hospital utilization, as measured by surgical procedures and adjusted patient days (a measure of both hospital inpatient days and outpatient visits). The rate of growth of surgical procedures overall, including hospital-based inpatient and outpatient activity, has slowed. In addition, adjusted patient days have declined. The growth in outpatient surgical activity continues to outpace the growth in inpatient procedures. Demand for the company's products sold to industrial and educational facilities is in part influenced by the strength of the U.S. economy. There is fundamental change occurring in the U.S. health- MEDICAL SPECIALTIES R&D EXPENSES [Graphic Omitted] MEDICAL SPECIALTIES CAPITAL EXPENDITURES [Graphic Omitted] 43 care system and significant change occurring in the company's marketplace. Competition among all health-care providers is becoming much more intense as they attempt to gain patients on the basis of quality, service and price. Each is under pressure to decrease the total cost of health-care delivery, and therefore, are looking for ways to reduce materials handling costs, decrease supply utilization, increase product standardization per procedure, and control closely capital expenditures. There has been increased consolidation in the company's customer base and by its competitors and these trends are expected to continue. In recent years, the company's overall price increases have been below the Consumer Price Index, and these industry trends may inhibit the company's ability to increase its supply prices in the future. In response to the significant changes occurring in the company's marketplace, the company's board of directors approved a series of strategic actions designed to make the company's domestic hospital supply operations more efficient and responsive in addressing the sweeping changes occurring in the U.S. health-care system. These actions include realigning the company's U.S. sales organization, consolidating the hospital and laboratory distribution organizations, and divesting its diagnostics products manufacturing business. The company intends to continue the distribution of diagnostic products in the U.S. The company is focused on helping to drive down health-care costs while maintaining and improving quality of care. In addition to the company's Corporate Program, the unique services outlined below describe some of the company's efforts toward helping customers reduce overall health-care delivery costs. By providing cost-effective products and logistical support services, the company strives to help hospitals maintain a strategic edge in an increasingly competitive marketplace without sacrificing the quality of patient care. The company's Corporate Program provides over 2,000 hospitals and multihospital systems with a single point of contact for all products, services and proprietary value-added programs. Such programs, include Baxter Corporate Consulting ("BCC") and the Access-TM- program. In 1993, sales to all customers under the Baxter Corporate Program grew to $2.7 billion. Sales to these customers increased 9% over 1992. Other programs of strategic value to customers in today's cost containment environment include ValueLink-R- services, the Quality Enhanced Distribution ("QED") services program and the Procedure-Based Delivery System-TM- ("PBDS"). All of these programs are discussed below. BCC provides a range of programs and services to assist hospitals in reducing costs while increasing the quality of care. In every case, continuous quality-improvement techniques are used and services are customized to satisfy individual customer needs. On average, BCC has identified $813,000 of financial savings per customer engagement. And, in 1993, the company's sales to customers who use its consulting service increased over 10%, more than three times the growth to non-Corporate Program customers. The Access program brings additional resources to Baxter's corporate customer to address specific health-care issues that lie outside Baxter's product and service offerings. As of December 31, 1993, over 1,000 corporate customers were taking advantage of these Access programs. Five years ago, Baxter developed the ValueLink services program, a hospital-logistics management service designed to improve supply-chain quality and create total inventory system economies. ValueLink services are designed to permit hospitals to dramatically reduce inventories and related warehousing costs for medical-surgical supplies, relying on Baxter for frequent, standardized deliveries and improved service levels. As of December 31, 1993, 53 hospitals across the United States, averaging 450 to 500 beds per hospital, were participating in Baxter's ValueLink program as compared to 30 hospitals in 1992 and 22 hospitals in 1991. The Quality Enhanced Distribution services program, started in late 1991, reduces the time it takes for a hospital to MEDICAL/LABORATORY PRODUCTS NET SALES [Graphic Omitted] 44 receive and store supplies and to process accounts payable. As a result, many of the company's hospital customers have been able to reduce, by as much as 90%, the amount of labor associated with the receipt and storage of medical and laboratory supplies. At the end of 1993, Baxter had 724 QED initiatives serving U.S. hospitals versus 536 in 1992 and 117 in 1991. While cost pressures on U.S. hospitals have increased interest in programs like ValueLink and QED, the revolutionary changes in the way hospitals are likely to be reimbursed in the new health-care environment led the company to pilot even bolder programs during 1993 to help its customers take costs out of their system. A natural next step from helping hospitals manage logistics costs is helping them manage supply utilization. While the goal of these "managed-cost" initiatives is to reduce customers' total supply costs, the company also benefits by earning a larger share of the business that remains. A primary building block of these programs is the Procedure-Based Delivery System-TM-, in which Baxter assembles both sterile and non-sterile supplies into individual kits for surgical and obstetrical procedures that are delivered "just-in-time" in ready-to-use fashion, saving the hospital inventory costs and labor-handling costs. In January, 1993 the company signed a distribution agreement with Johnson and Johnson Medical, Inc. ("JJMI") allowing Baxter to distribute all products manufactured by JJMI and the fracture-management product line of Johnson Orthopaedics, Inc. Additionally, in 1993, the company began to distribute a variety of products from 3M Health Care through its regular channels. Previously the company distributed 3M's products only through certain ValueLink accounts. The company also signed hospital-specific distribution agreements with U.S. Surgical for disposable products used in laparoscopic surgery. These arrangements are consistent with the company's goal of serving as a preferred distributor for products manufactured outside the company and contributed to the strong increase in the company's medical products purchased for resale. Sales of products purchased for resale, which represented 43% of the company's sales of its medical/laboratory products and distribution segment, increased 9% in 1993. In 1992, sales of these products represented 41% of the segment's sales; these sales increased 6% in 1992 over 1991. Sales of the company's self-manufactured products increased more than 1% in 1993 and increased 8% in 1992. These products were negatively affected by overall cost-containment pressures on the company from customers and by lower demand for some of the company's products. Baxter anticipates hospital, laboratory and alternate-site care supply markets will continue to grow. Baxter expects to grow its sales faster than these markets and therefore gain market share. The company expects to capitalize on its unique broad offering of products and value-added services including its ValueLink, QED, Access, BCC, Corporate Program and PBDS managed-cost initiatives described above. The primary focus of the company's services is to help its customers reduce the cost of delivering quality health care. By doing so, the company expects to further penetrate its corporate accounts and enroll more customers in its ValueLink and QED programs. OPERATING INCOME (LOSS) There was an operating loss in 1993 of $132 million compared to operating income of $551 million in 1992 and $539 million in 1991. The loss in 1993 reflects restructuring charges of $550 million ($231 non-cash) designed to make the company's domestic hospital-supply operations more efficient and more responsive in addressing the sweeping changes occurring in the U.S. health-care system. Operating income as a percent of sales was 7.4% in 1993 (excluding restructuring program charges), 10.3% in 1992 and 10.7% in 1991. Operating income in 1993 decreased, excluding restructuring program costs, as a result of a lower sales growth MEDICAL/LABORATORY PRODUCTS NET SALES [Graphic Omitted] 45 of the company's manufactured products and higher sales of the company's distributed products, the impact of an inventory reduction program that caused some manufacturing plants to operate at reduced capacity utilization levels and the company's inability to recover raw material and other cost increases through product pricing, and downsizing costs discussed previously. In 1992, operating income increased in most major product areas due to manufacturing efficiencies associated with the company's 1990 restructuring program and modestly higher pricing on selected products. Similar trends were experienced in 1991. The lower cost of manufacturing due to plant closures contributed to the company's increased operating income in 1992 and 1991. In addition, the company benefited from initiatives implemented during its 1990 restructuring program, including several administrative consolidations in its customer service, purchasing and field finance operations which created significant operating expense savings during that time. In 1992, operating income was adversely affected by the first-time recognition of the additional cost associated with a new accounting rule covering retiree health-care benefits. Additionally, expense levels increased slightly as the company broadened its logistical service offering to hospitals and invested in new programs to improve market penetration and operating efficiency. CAPITAL EXPENDITURES Capital expenditures, including additions to the pool of equipment leased or rented to customers, for the segment were $300 million in 1993, $365 million in 1992 and $363 million in 1991. Baxter expects to further automate existing distribution functions and consolidate less efficient manufacturing facilities. In 1993, the company opened a new highly automated facility in Waukegan, Illinois designed especially to meet customer requirements. It opened a similar facility in Ontario, California in 1991. Baxter plans to open one additional such facility in Orange County, New York in 1994. As a result of these new centers, smaller facilities in the region will be closed. The company plans to increase its investments in logistics and information technology to enhance its level of customer support. The company expects to spend approximately $250 million in capital expenditures in 1994. The decline in expenditures is due to the completion of the company's investments in very large, strategically located distribution centers. MEDICAL/LABORATORY PRODUCTS OPERATING INCOME [Graphic Omitted] MEDICAL/LABORATORY PRODUCTS CAPITAL EXPENDITURES [Graphic Omitted] 46 MANAGEMENT'S RESPONSIBILITIES FOR FINANCIAL REPORTING The consolidated balance sheets of Baxter International Inc. and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 1993, have been prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and include some amounts that are based upon management's best estimates and judgments. The financial information contained elsewhere in this annual report is consistent with that contained in the financial statements. Management is responsible for establishing and maintaining a system of internal control designed to provide reasonable assurance as to the integrity and reliability of financial reporting. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal control, and that the cost of such systems should not exceed the benefits to be derived therefrom. Management believes that the foundation of an appropriate system of internal control is a strong ethical company culture and climate. To this end the Corporate Responsibility office was created in 1993 to recommend to the Public Policy Committee of the Board of Directors, revisions to the company's existing ethics and compliance policies, and to direct the implementation of and compliance with the company's ethics and compliance policies and procedures. The Corporate Responsibility office monitors compliance through audit programs and the requirement for annual representations by senior managers. Additionally, a professional staff of corporate auditors reviews the related internal control system design, the accounting policies and procedures supporting this system and compliance therewith. The results of these reviews are reported annually to the Public Policy and Audit Committees. Independent certified public accountants perform audits, in accordance with generally accepted auditing standards, which include a review of the system of internal controls and result in assurance that the financial statements are, in all material respects, fairly presented. The board of directors, through its audit committee composed solely of non-employee directors, is responsible for overseeing the integrity and reliability of the company's accounting and financial reporting practices and the effectiveness of its system of internal controls. The independent certified public accountants and corporate auditors meet regularly with, and have access to, this committee, with and without management present, to discuss the results of the audit work. Management assessed the company's system of internal control as of December 31, 1993, in relation to criteria for effective internal control over financial reporting described in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, it is management's opinion that, as of December 31, 1993, the company maintained an effective system of internal controls over the preparation of its published interim and annual financial statements. /s/ Vernon R. Loucks Jr. - ------------------------ Vernon R. Loucks Jr. Chairman and Chief Executive Officer /s/ Harry M. Jansen Kramer, Jr. - ------------------------------- Harry M. Jansen Kramer, Jr. Senior Vice President and Chief Financial Officer /s/Brian P. Anderson - -------------------- Brian P. Anderson Controller 47 REPORT OF INDEPENDENT ACCOUNTANTS BOARD OF DIRECTORS AND STOCKHOLDERS BAXTER INTERNATIONAL INC. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, cash flows and stockholders' equity present fairly, in all material respects, the financial position of Baxter International Inc. (the company) and its subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Effective January 1, 1993, as discussed in the Income Taxes Note, the company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" and as discussed in the Retirement and Other Benefit Programs Note, the company also adopted Statement No. 112, "Employers Accounting for Postemployment Benefits." Additionally, as discussed in the Retirement and Other Benefit Programs Note, effective January 1, 1992, the company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." PRICE WATERHOUSE Chicago, Illinois February 10, 1994 48 CONSOLIDATED BALANCE SHEETS
December 31 (in millions, except shares) 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and equivalents $ 479 $ 32 Accounts receivable, net of allowance for doubtful accounts of $32 in 1993 and $29 in 1992 1,594 1,572 Notes and other current receivables 82 95 Inventories 1,772 1,632 Short-term deferred income taxes 341 132 Prepaid expenses 154 126 ------------------------------------------------------------------------------------------------------ TOTAL CURRENT ASSETS 4,422 3,589 - ------------------------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT, NET 2,655 2,647 - ------------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS Goodwill and other intangibles 2,490 2,488 Non-current receivables 180 158 Insurance receivables 509 -- Investment in affiliates 180 195 Other 109 78 ------------------------------------------------------------------------------------------------------ TOTAL OTHER ASSETS 3,468 2,919 ------------------------------------------------------------------------------------------------------ TOTAL ASSETS $10,545 $9,155 - ------------------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Notes payable to banks $271 $351 Current maturities of long-term debt and lease obligations 551 149 Accounts payable and accrued liabilities 1,783 1,479 Income taxes payable 328 389 ------------------------------------------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 2,933 2,368 - ------------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT AND LEASE OBLIGATIONS 2,800 2,433 - ------------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEFERRED INCOME TAXES 201 174 - ------------------------------------------------------------------------------------------------------------------------------- LONG-TERM LITIGATION LIABILITIES 674 -- - ------------------------------------------------------------------------------------------------------------------------------- OTHER NON-CURRENT LIABILITIES 752 385 - ------------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $1 par value, authorized 350,000,000 shares, issued 287,701,247 shares in 1993 and 1992 288 288 Additional contributed capital 1,883 1,889 Retained earnings 1,452 1,928 Common stock in treasury, at cost, 11,187,278 shares in 1993 and 8,367,792 shares in 1992 (350) (281) Cumulative foreign currency adjustment (88) (29) ------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY 3,185 3,795 ------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,545 $9,155 - ------------------------------------------------------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
49 CONSOLIDATED STATEMENT OF INCOME
Year ended December 31 (in millions, except per share data) 1993 1992 1991 - ----------------------------------------------------------------------------------------------------------------------------- OPERATIONS Net Sales $8,879 $8,471 $7,799 Operating costs and expenses Cost of goods sold 5,657 5,244 4,836 Marketing and administrative expenses 1,879 1,798 1,648 Research and development expenses 337 317 288 Goodwill amortization 67 67 67 Restructuring charge 700 -- -- ------------------------------------------------------------------------------------------------------ Total operating costs and expenses 8,640 7,426 6,839 ------------------------------------------------------------------------------------------------------ Operating income 239 1,045 960 Non-operating expenses (income) Interest expense 222 211 222 Interest income (30) (24) (30) Litigation 330 -- -- Other 47 105 80 ------------------------------------------------------------------------------------------------------ Total non-operating expenses 569 292 272 ------------------------------------------------------------------------------------------------------ Income (loss) from continuing operations before income taxes and cumulative effect of accounting changes (330) 753 688 Income tax expense (benefit) (62) 192 181 ------------------------------------------------------------------------------------------------------ Income (loss) from continuing operations before cumulative effect of accounting changes (268) 561 507 Discontinued operations Income from discontinued operations net of applicable income taxes of $31 and $32 for 1992 and 1991, respectively -- 63 84 Costs associated with effecting the business discontinuance net of income tax benefit of $6 for 1992 -- (18) -- ------------------------------------------------------------------------------------------------------ Total discontinued operations -- 45 84 ------------------------------------------------------------------------------------------------------ Income (loss) before cumulative effect of accounting changes (268) 606 591 Cumulative effect of change in accounting for: Income taxes 81 -- -- Other postemployment/postretirement benefits net of income tax benefits of $7 and $50 for 1993 and 1992, respectively (11) (165) -- ------------------------------------------------------------------------------------------------------ Net income (loss) ($198) $441 $591 - ------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Earnings (loss) per common share Continuing operations $(0.97) $1.99 $1.73 Discontinued operations Income from discontinued operations -- 0.22 0.30 Costs associated with effecting the business discontinuance -- (0.06) -- ------------------------------------------------------------------------------------------------------ Total discontinued operations -- 0.16 0.30 ------------------------------------------------------------------------------------------------------ Cumulative effect of change in accounting for: Income taxes 0.29 -- -- Other postemployment/postretirement benefits (0.04) (0.59) -- ------------------------------------------------------------------------------------------------------ Net income (loss) $(0.72) $1.56 $2.03 ------------------------------------------------------------------------------------------------------ Average number of common shares and equivalents outstanding 277 279 280 - ------------------------------------------------------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
50 CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31 (in millions) (Brackets denote cash outflows) 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOW PROVIDED Income (loss) from continuing operations $ (268) $ 561 $ 507 BY CONTINUING OPERATIONS Adjustments Depreciation and amortization 494 447 411 Deferred income taxes (172) 32 78 Asset dispositions, net (pre-tax) (44) 21 6 Provision for restructuring and litigation charges 925 -- -- Minority and equity interests, net of distributions 27 35 26 Other 24 13 6 Changes in balance sheet items Accounts receivable (42) (171) (168) Inventories (167) (139) (66) Accounts payable and accrued liabilities 61 63 111 Income taxes payable 4 (14) 9 Restructuring program payments (29) (63) (158) Other (48) (43) (65) ------------------------------------------------------------------------------------------------------ CASH FLOW PROVIDED BY CONTINUING OPERATIONS 765 742 697 - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOW PROVIDED BY DISCONTINUED OPERATIONS -- 21 13 - ------------------------------------------------------------------------------------------------------------------------------- INVESTMENT TRANSACTIONS Capital expenditures (516) (537) (503) Additions to the pool of equipment leased or rented to customers (89) (103) (89) Acquisitions (net of cash received) and investments in affiliates (120) (125) (115) Proceeds from asset dispositions 70 39 36 ------------------------------------------------------------------------------------------------------ INVESTMENT TRANSACTIONS, NET (655) (726) (671) - ------------------------------------------------------------------------------------------------------------------------------- FINANCING TRANSACTIONS Issuances of debt and lease obligations 2,437 3,203 1,374 Redemption of debt and lease obligations (2,021) (2,684) (1,122) Increase (decrease) in debt with maturities of three months or less 274 (215) 249 Redemption of preferred stock -- (337) -- Common stock cash dividends (278) (240) (208) Preferred stock cash dividend -- (5) (23) Stock issued under employee benefit plans 52 85 81 Purchase of treasury stock (124) (123) (109) ------------------------------------------------------------------------------------------------------ FINANCING TRANSACTIONS, NET 340 (316) 242 - ------------------------------------------------------------------------------------------------------------------------------- EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS (3) 12 1 - ------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS 447 (267) 282 CASH AND EQUIVALENTS AT BEGINNING OF YEAR 32 299 17 - ------------------------------------------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS AT END OF YEAR $479 $32 $299 - ------------------------------------------------------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
51 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31 (in millions) 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------------------------- ADJUSTABLE RATE Balance, beginning of year $-- $339 $339 PREFERRED STOCK Redemption of preferred stock -- (339) -- ------------------------------------------------------------------------------------------------------ Balance, end of year -- -- 339 - ------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK Balance, beginning of year 288 288 285 Stock issued under employee benefit plans -- -- 3 ------------------------------------------------------------------------------------------------------ Balance, end of year 288 288 288 - ------------------------------------------------------------------------------------------------------------------------------- ADDITIONAL Balance, beginning of year 1,889 1,859 1,799 CONTRIBUTED CAPITAL Stock issued under employee benefit plans (6) 30 60 ------------------------------------------------------------------------------------------------------ Balance, end of year 1,883 1,889 1,859 - ------------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance, beginning of year 1,928 2,083 1,723 Net income (loss) (198) 441 591 Common stock cash dividends (278) (240) (208) Preferred stock cash dividends -- (5) (23) Stock dividend of Caremark International Inc. -- (351) -- ------------------------------------------------------------------------------------------------------ Balance, end of year 1,452 1,928 2,083 - ------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK Balance, beginning of year (281) (234) (130) IN TREASURY Purchases (124) (123) (109) Stock issued under employee benefit plans 55 76 5 ------------------------------------------------------------------------------------------------------ Balance, end of year (350) (281) (234) - ------------------------------------------------------------------------------------------------------------------------------- CUMULATIVE FOREIGN Balance, beginning of year (29) 38 76 CURRENCY ADJUSTMENT Currency fluctuations (59) (67) (38) ------------------------------------------------------------------------------------------------------ Balance, end of year (88) (29) 38 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $3,185 $3,795 $4,373 - ------------------------------------------------------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies is presented to assist the reader in understanding and evaluating the consolidated financial statements. These policies are in conformity with generally accepted accounting principles and have been applied consistently in all material respects. BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of Baxter International Inc. and its majority-owned subsidiaries ("Baxter" or the "company"). Operations outside the United States and its territories are included in the consolidated financial statements on the basis of fiscal years ending November 30. CASH AND EQUIVALENTS Cash and equivalents include cash, cash investments and marketable securities with a maturity of three months or less. Cash payments for interest were $217 million in 1993, $193 million in 1992 and $201 million in 1991. Cash payments made by Baxter for income taxes related to continuing operations in 1993, 1992 and 1991 were $79, $157 and $67 million, respectively. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. Market for raw materials is based on replacement costs and for other inventory classifications on net realizable value. Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value. Inventories consisted of the following at December 31 (in millions):
1993 1992 - ------------------------------------------------- Raw materials $ 238 $ 240 Work in process 221 201 Finished products 1,313 1,191 - ------------------------------------------------- Total inventories $1,772 $1,632 - ------------------------------------------------- - -------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation and amortization are provided for financial reporting purposes principally on the straight-line method over the estimated useful lives of the assets or, for leasehold improvements, over the terms of the related facility leases, if shorter. Straight-line and accelerated methods of depreciation are used for income tax purposes. Property, plant and equipment consisted of the following at December 31 (in millions):
1993 1992 - ---------------------------------------------------------------- Land $ 203 $ 195 Buildings and leasehold improvements 1,051 976 Machinery and equipment 2,508 2,298 Equipment leased or rented to customers 390 343 Construction in progress 339 397 - ---------------------------------------------------------------- Total property, plant and equipment,at cost 4,491 4,209 Accumulated depreciation and amortization (1,836) (1,562) - ---------------------------------------------------------------- Net property, plant and equipment $2,655 $2,647 - ---------------------------------------------------------------- - ----------------------------------------------------------------
Interest costs capitalized to property, plant and equipment were $10 million in 1993, $10 million in 1992 and $9 million in 1991. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the excess of cost over the fair value of net assets acquired and is amortized on a straight-line basis over estimated useful lives not exceeding 40 years. Based upon management's assessment of the future cash flows of acquired businesses, the carrying value of goodwill at December 31, 1993 has not been impaired. As of December 31, 1993 and 1992, goodwill was $2,098 million and $2,167 million, respectively, net of accumulated amortization of $538 million and $471 million, respectively. Other intangible assets include purchased patents, trademarks, deferred charges and other identified rights which are amortized on a straight-line basis over their legal or estimated useful lives, whichever is shorter (generally not exceeding 17 years). As of December 31, 1993 and 1992, other intangibles were $392 million and $321 million, respectively, net of accumulated amortization of $226 million and $183 million, respectively. INCOME TAXES Effective January 1, 1993, the company adopted Financial Accounting Standards Board ("FASB") Statement No. 109, "Accounting for Income Taxes." Under this standard, deferred income taxes reflect the impact of temporary differences between the assets and liabilities recognized for financial reporting purposes and amounts recognized for tax purposes. Deferred income tax accounts are adjusted to reflect changes in tax rates made from time to time by taxing authorities in the jurisdiction in which the company operates. 53 EARNINGS PER SHARE Earnings per share of common stock are computed by dividing the net income available for common stock by the weighted average number of common shares outstanding during the period. RECLASSIFICATIONS Certain immaterial reclassifications have been made to conform the 1992 and 1991 financial statements to the 1993 presentation. RESTRUCTURING CHARGE In November 1993, the company announced that its board of directors approved a series of strategic actions to improve shareholder value, to extend positions of leadership in health-care markets and to reduce costs. These actions are designed to make the company's domestic medical/laboratory products and distribution segment more efficient and more responsive in addressing the sweeping economic changes occurring in the U.S. health-care system and accelerate growth of its medical specialties businesses worldwide. The company recorded a $700 million pre-tax provision to cover costs associated with these restructuring initiatives. ACQUISITIONS, INVESTMENTS IN AFFILIATES, DIVESTITURES AND DISCONTINUED OPERATIONS The company invested $52 million in 1993, $41 million in 1992 and $7 million in 1991 for acquisitions accounted for as purchase transactions. Had these acquisitions taken place on January 1, consolidated results in the year of acquisition would not have been materially different from reported results. These acquisitions involved no significant change to the company's strategic direction. They were made to acquire technologies, broaden product lines and expand market coverage. The company also invested $52 million in 1993, $72 million in 1992 and $77 million in 1991 in affiliated companies. Additionally, the company paid previously recorded acquisition-related liabilities associated with the 1985 acquisition of American Hospital Supply Corporation ("American") of $16 million in 1993, $12 million in 1992 and $31 million in 1991. The company disposed of or discontinued several minor non-strategic or unprofitable business units and investments which resulted in a net gain of $27 million (net of $17 million related tax expense) in 1993, as compared to net losses of $16 million and $2 million (net of related income tax benefits of $5 million and $4 million) in 1992 and 1991, respectively. The majority of these transactions resulted in the disposition of the company's entire interest in such businesses. The aggregate net sales proceeds for such dispositions were $70 million in 1993, $30 million in 1992 and $34 million in 1991. On October 28, 1992, the board of directors of Baxter declared a dividend to the company's common stockholders of all the common stock of Caremark International Inc. ("Caremark," formerly a wholly-owned subsidiary of Baxter). This dividend was distributed to holders of record on November 30, 1992. The primary purpose for the stock dividend was to eliminate a developing strategic competitive conflict between the customers of Baxter's hospital business and Caremark's alternate site health-care businesses. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consisted of the following at December 31 (in millions):
1993 1992 - ---------------------------------------------------------------- Accounts payable, principally trade $ 738 $ 650 Employee compensation and withholdings 339 229 Restructuring and merger consolidation 237 34 Pension and other deferred benefits 64 73 Property, payroll and other taxes 93 89 Other current obligations 312 404 - ---------------------------------------------------------------- Accounts payable and accrued liabilities $1,783 $1,479 - ---------------------------------------------------------------- - ----------------------------------------------------------------
CREDIT FACILITIES At December 31, 1993, Baxter's revolving credit facilities enabled the company to borrow funds on an unsecured basis at variable interest rates. The banks participating in these facilities are committed to maintain a $1 billion facility through August 1996 (with two one-year extensions) and a $500 million facility through August 1994. The amended agreements contain covenants which include a maximum debt-to-capital ratio (as defined) and a minimum interest coverage ratio. At December 31, 1993, there were no borrowings outstanding under this facility. Baxter also maintains short-term credit arrangements totaling approximately $1.4 billion in support of international operations. At December 31, 1993, approximately $311 million of borrowings were outstanding under these facilities, of which $122 million is classified as long-term debt. 54 BAXTER INTERNATIONAL LONG-TERM DEBT AND LEASE OBLIGATIONS Long-term debt and lease obligations consisted of the following at December 31 (in millions):
1993 Unamortized deferred financing Effective discounts/costs Interest (premiums/gains) Rate 1993 1992 - ------------------------------------------------------------------------------- Commercial paper $ 833 $ 475 - ------------------------------------------------------------------------------- Short-term notes 467 465 - ------------------------------------------------------------------------------- 5% notes due 1995 $ 3 6.3% 147 146 - ------------------------------------------------------------------------------- 7 1/2 % notes due 1997 (2) 7.3% 202 202 - ------------------------------------------------------------------------------- 8 1/8 % notes due 2001 1 8.3% 149 149 - ------------------------------------------------------------------------------- 9 1/4 % notes due 1996 2 9.7% 148 148 - ------------------------------------------------------------------------------- Swapped notes due 1997, 2002 and 2008 (13) 3.4% 418 221 - ------------------------------------------------------------------------------- 9 1/2 % notes due 2008 (redeemable by holders in 1998) 1 10.0% 99 98 - -------------------------------------------------------------------------------- Industrial development obligations, due 1994 through 2013 (1) 8.5% 74 74 - ------------------------------------------------------------------------------- Notes and capitalized lease obligations due 1994 through 2020 83 7.4% 814 604 - ------------------------------------------------------------------------------- Total long-term debt and lease obligations 3,351 2,582 Current portion (551) (149) - ------------------------------------------------------------------------------- Long-term portion $2,800 $2,433 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
At December 31, 1993 and 1992, commercial paper and certain short-term notes together totaling $1 billion and $830 million respectively, have been classified with long-term debt as they are supported by long-term credit facilities and will continue to be refinanced. The company leases certain facilities and equipment under capital and operating leases expiring at various dates. Most of the operating leases contain renewal options. Total expense for all operating leases was $132 million in 1993, $128 million in 1992, and $109 million in 1991. Future minimum lease payments (including interest) under capital and noncancelable operating leases and aggregate debt maturities at December 31, 1993, were as follows (in millions):
Aggregate debt maturities Operating and capital leases leases - -------------------------------------------------------------------- 1994 $ 99 $ 553 1995 61 436 1996 45 1,163 1997 28 228 1998 19 27 Thereafter 68 1,018 - -------------------------------------------------------------------- Total obligations and commitments $320 $3,425 - ------------------------------------------------ Amounts representing interest, discounts, premiums and deferred financing costs 74 - -------------------------------------------------------------------- Present value of long-term debt and lease obligations $3,351 - -------------------------------------------------------------------- - --------------------------------------------------------------------
FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying values of cash and cash equivalents, accounts receivable and payable, and accrued liabilities, approximate fair value due to the short-term maturities of these assets and liabilities. Investments in affiliates are accounted for by both the cost and equity methods and pertain to several minor equity investments in privately-held companies for which fair values are not readily available, but are believed to exceed carrying amounts. The assets and liabilities of the company also include the following categories of financial instruments as of December 31, 1993 (in millions):
Carrying Approximate Amounts Fair Values - ----------------------------------------------------------------------------- December 31, December 31, 1993 1992 1993 1992 - ----------------------------------------------------------------------------- Insurance receivables $ 509 -- $ 222 -- - ---------------------------------------------------------------------------- Total short-term debt 271 $ 351 271 $ 351 - ---------------------------------------------------------------------------- Total long-term debt and lease obligations 3,351 2,582 3,489 2,714 - ---------------------------------------------------------------------------- Long-term litigation liabilities 674 -- 384 -- - ---------------------------------------------------------------------------- - ----------------------------------------------------------------------------
55 The aggregate fair value of total short-term debt approximates its carrying amount because of the recent and frequent repricing based on market conditions. The fair value of long-term debt and lease obligations was based on quoted market prices for the same or similar issues, giving consideration to quality, interest rates, maturity and other significant characteristics. Although the company's litigation has not yet been settled, the estimated fair values of insurance receivables and long-term litigation liabilities were computed by discounting the expected cash flows based on currently available information. CONCENTRATION OF CREDIT RISK AND FINANCIAL INSTRUMENTS The company provides credit, in the normal course of business, to hospitals, private and government institutions, health-care agencies, insurance agencies and doctors' offices. The company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses which, when realized, have been within the range of management's expectations. Baxter utilizes forward contracts, options and interest rate swaps to minimize the company's exposure to adverse movements in interest rates related to various debt instruments. Gains, losses and premiums paid on financial instruments designated as hedges are deferred and amortized as a discount or premium over the expected life of the respective issues. The company had $500 million in interest rate swaps hedging its floating rate debt (at approximately 6.5%) which terminated on December 31, 1993. In October 1993, the company entered into new swaps effective through December 31, 1998 totaling $300 million (at fixed rates approximating 4.8%) and in January 1994 totaling an additional $200 million effective through December 31, 1996 (1994 fixed rate approximating 4.3%) to hedge its floating rate debt. The company also had interest rate agreements which had the effect of changing the fixed rate on $405 million outstanding swapped notes due 1997, 2002 and 2008 to a floating rate. In addition, $325 million in interest rate swaps will become effective after December 31, 1994, which provide protection against adverse movements in interest rates through December 31, 2003. The company also utilizes forward and option contracts to hedge exposure to fluctuations in foreign currency rates. At December 31, 1993, firm commitments and balance sheet exposures were hedged with forward contracts totaling a notional $191 million. The counterparties to the interest rate and foreign currency hedging agreements are characterized as well-respected, major financial institutions. To decrease the risk of nonperformance, the company diversifies its selection of counterparties. The company invests the majority of its excess cash, primarily generated through operations in Puerto Rico, in certificates of deposit with major banks there. These certificates typically have a maturity of 30 to 45 days. The company has not experienced any losses on its certificate of deposit investments. PREFERRED STOCK The stockholders have authorized the issuance of 100 million shares of no par value preferred stock. This stock can be issued in series with varying terms as determined by the board of directors. PREFERRED STOCK PURCHASE RIGHTS During 1989, common stockholders received a dividend of one preferred stock purchase right (collectively, the "Rights") for each share of common stock held of record. Each Right entitles the registered holder to purchase from the company one one-hundredth of a share of Series A Junior Participating Preferred Stock for $70. The Rights will become exercisable (and transferable apart from the common stock) on the earlier of (1) 10 days following a public announcement that a person or group has acquired 20% or more of the common stock, or (2) 10 business days following the commencement or announcement of an offer to acquire 20% or more of the common stock. If, after the Rights become exercisable, any person or group (the "Acquirer") acquires 20% or more of the common stock (except pursuant to an offer for all outstanding shares of common stock which the independent directors determine to be fair to and otherwise in the best interests of the company and its stockholders), each Right may be exercised for common stock (or, in certain circumstances, cash, other property or securities) having a value of $140. In specified circumstances, each Right may be exercised for common stock of an acquiring entity having a value of $140. All Rights held by the Acquirer will be null and void. The company may generally redeem the Rights at a price of $.01 per Right at any time until 10 days following a public 56 announcement that a person or group has acquired 20% or more of the common stock. The Rights will expire on March 20, 1999, unless earlier redeemed. ADJUSTABLE RATE PREFERRED STOCK On April 1, 1992, the company redeemed all of the 6,771,408 outstanding shares of its adjustable rate preferred stock, no par value, $50 liquidation value, for a redemption price of $50 per share together with the regular quarterly dividend of 78.75 cents per share. No shares of this security may be issued in the future. COMMON STOCK All common stock prices and outstanding shares for unfulfilled employee benefit plan obligations were, as of November 30, 1992, equitably adjusted to maintain the value of the benefits by taking into consideration the market price of Baxter stock before and after the Caremark distribution. The following tables reflect this adjustment. The company has employee stock purchase plans under which the sale of its common stock has been authorized. The purchase price is the lower of 85% of the closing market price on the date of subscription or 85% of the closing market price on the date sufficient funds have been withheld to purchase 20 shares. Stock purchase plan transactions for the three years ended December 31, 1993, are summarized below:
Shares subscribed 1993 1992 1991 - -------------------------------------------------------------------------- Beginning of year 1,704,735 1,726,738 1,899,589 Subscriptions 3,303,465 1,993,581 1,721,133 Equitable adjustment -- 479,477 -- Purchases (1,592,102) (1,488,925) (1,554,416) Cancellations (919,395) (1,006,136) (339,568) - -------------------------------------------------------------------------- End of year 2,496,703 1,704,735 1,726,738 - -------------------------------------------------------------------------- Subscription price per share outstanding, end of year $17.21-$32.78 $19.59-$32.78 $17.54-$34.32 - -------------------------------------------------------------------------- - --------------------------------------------------------------------------
At December 31, 1993, approximately 7,500 of approximately 37,000 eligible employees in the U.S. and Canada and approximately 1,000 of approximately 13,000 other eligible employees were participating in the plans. Expiration dates for these subscriptions run from 1994 to 1996. The weighted average subscription price approximated $21.35 for U.S. and Canadian employees and $20.87 for other employees at December 31, 1993. The company has various employee stock option plans. All outstanding options under these plans have been granted at 100% of market value on the dates of grant. Stock option transactions for employees and directors for the three years ended December 31, 1993, are summarized below:
Option shares outstanding 1993 1992 1991 - -------------------------------------------------------------------------- Beginning of year 8,887,657 9,125,182 8,728,413 Granted 3,496,709 2,166,200 2,480,800 Equitable adjustment -- 555,223 -- Exercised (466,105) (1,590,324) (1,760,151) Cancelled/Expired (692,696) (1,368,624) (323,880) - -------------------------------------------------------------------------- End of year 11,225,565 8,887,657 9,125,182 - -------------------------------------------------------------------------- Option price per share Exercised $10.32-$24.36 $8.74-$35.75 $7.94-$25.50 Outstanding, end of year $8.35-$36.66 $8.35-$36.66 $8.63-$37.13 - --------------------------------------------------------------------------
As of December 31, 1993, options were held by approximately 6,700 employees, of which 5,934,730 shares were exercisable. Expiration dates for these options range from 1994 to 2003. The weighted average option price approximated $28.02 at December 31, 1993. In addition, stock options were granted to The Baxter Foundation (a philanthropic organization), as follows: an option to purchase 1,047,000 shares of common stocks, at $33.78 per share (both equitably adjusted) was granted on April 22, 1991, and expires in 2001; and an option to purchase 1 million shares of common stock, at $33.75 per share, was granted on December 2, 1992, and expires in 2002. The Baxter Foundation sold its option to purchase 250,000 shares of common stock, exercisable at $18.1875 per share, to an unrelated not-for-profit organization, which then exercised the option during 1992. Certain plans provided for the discretionary grant of stock appreciation rights ("SAR") or limited rights in conjunction with stock options. SARs permit the holder to receive an amount, in cash and/or stock, equal to the difference between the current market value of a share of stock and the option price of such share of stock. There were 14,000 SARs outstanding on January 1, 1991; the SARs expired on December 31, 1991. 57 Under various plans, the company has made grants of restricted stock and performance shares in the form of the company's common stock to provide incentive compensation to key employees and non-employee directors. Restricted stock transactions for the three years ended December 31, 1993, are summarized below:
Restricted stock outstanding 1993 1992 1991 - ------------------------------------------------------------------------------- Beginning of year 2,052,777 2,336,023 2,593,430 Granted 5,400 858,211 149,691 Vested (free of restrictions) (313,353) (904,488) (353,644) Cancelled (278,624) (236,969) (53,454) - ------------------------------------------------------------------------------- End of year 1,466,200 2,052,777 2,336,023 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
At December 31, 1993, 373,633 shares were subject to restrictions which lapse between 1994 and 1998, and 1,092,567 shares were subject to restrictions that lapse upon achievement of future performance objectives. Performance share transactions for the three years ended December 31, 1993, are summarized below:
Performance shares outstanding 1993 1992 1991 - ---------------------------------------------------------------------------- Beginning of the year 57,736 57,736 293,434 Granted/awarded 12,000 12,000 12,000 Issued (20,189) (12,000) (127,813) Cancelled -- -- (119,885) - ---------------------------------------------------------------------------- End of year 49,547 57,736 57,736 - ---------------------------------------------------------------------------- - ----------------------------------------------------------------------------
The company's board of directors authorized the purchase of common stock to fund various employee-benefit plans, for conversion of convertible securities and for other corporate purposes. The company purchased 4.5 million shares of common stock for $124 million in 1993, and may purchase up to an additional 11 million shares under this authority. At December 31, 1993, the company's common stock was reserved for issuance as follows: - ------------------------------------------------------------------------- Acquisitions 986,525 Stock purchase plans 6,458,994 Management incentive compensation programs 12,423,784 Other 2,047,000 - ------------------------------------------------------------------------- Total shares reserved 21,916,303 - ------------------------------------------------------------------------- - -------------------------------------------------------------------------
RETIREMENT AND OTHER BENEFIT PROGRAMS The company and its subsidiaries sponsor qualified and non-qualified non-contributory, defined benefit pension plans covering substantially all employees in the U.S. and Puerto Rico. The benefits are based on years of service and the employee's compensation during 5 of the last 10 years of employment as defined by the plans. The company's funding policy is to make contributions to the trust of the Qualified Plan which meet or exceed the minimum requirements of the Employee Retirement Income Security Act of 1974. Assets held by the trusts of the plans consist primarily of equity and fixed income securities. The company also has various retirement plans in locations outside the U.S. and Puerto Rico. The assumed discount rate applied to benefit obligations to determine 1993 pension expense was 8% and the assumed long-term rate of return on assets was 10.5% for the U.S. and Puerto Rico plans. These rates averaged 7.7% and 8.4% respectively, for the foreign plans. Pension expense includes the following components (in millions):
1993 1992 1991 - ------------------------------------------------------------------------------- Service cost-benefits earned during the period $50 $42 $29 Interest cost on projected benefit obligations 72 63 55 Actual return on assets (67) (50) (45) Net amortization and deferral 21 7 13 - ------------------------------------------------------------------------------- Total pension expense $76 $62 $52 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Assumptions used in determining the funded status of these plans as of December 31, 1993 and 1992 were:
December 31, 1993 1992 - ------------------------------------------------------------------------------- Annual rate of increase in compensation levels: U.S. plans 4.5% 6.5% Puerto Rico plan 4.0% 4.0% Foreign plans (average) 4.6% 5.5% Discount rate applied to benefit obligations: U.S. plans 7.5% 8.0% Puerto Rico plan 7.5% 8.0% Foreign plans (average) 7.7% 7.8% - -------------------------------------------------------------------------------
58 The following table sets forth the funded status and amount included in the consolidated balance sheets at December 31, 1993 and 1992 (in millions):
Plans whose Plans whose accumulated assets exceed benefits exceed accumulated assets benefits - ----------------------------------------------------------------------------- December 31, December 31, 1993 1992 1993 1992 - ----------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefits $789 $616 $46 $55 - --------------------------------------------------------------------------- Accumulated benefits $817 $645 $48 $59 - --------------------------------------------------------------------------- Projected benefits $924 $797 $61 $84 Less plan assets at fair value 675 520 73 80 - --------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets 249 277 (12) 4 Unrecognized net gains and unrecognized prior service cost (100) (119) (4) (8) Unrecognized obligation at January 1, net of amortization (59) (61) 4 (2) Additional minimum liability 62 42 -- -- - ---------------------------------------------------------------------------- Net pension liability (asset) $152 $139 $(12) $(6) - ---------------------------------------------------------------------------- - ----------------------------------------------------------------------------
Most U.S. Employees are eligible to participate in a qualified 401(k) plan. Participants may contribute up to 12% of their annual compensation (limited in 1993 to $8,994 per individual) to the plan and the company matches the participants' contributions, up to 3% of compensation. Matching contributions made by the company were $28 million in 1993, $27 million in 1992 and $24 million in 1991. In addition to pension benefits, the company sponsors certain contributory health-care and life insurance benefits for substantially all domestic retired employees. Effective January 1, 1992, the company adopted FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" which requires companies to accrue costs for postretirement benefits over the service years of employees. The company recorded the transition obligation as a cumulative effect of an accounting change for $165 million (net of $50 million in related income tax benefits). Net postretirement health-care and life insurance expense includes the following components (in millions):
1993 1992 - -------------------------------------------------------------------------- Service cost-benefits earned during the period $7 $8 Interest cost on projected benefit obligation 16 17 - -------------------------------------------------------------------------- Net postretirement benefits cost $23 $25 - --------------------------------------------------------------------------
Assumptions used in determining the net postretirement benefits cost in 1993 and 1992 were:
1993 1992 - --------------------------------------------------------------------------- Discount rate 8% 8% Annual rate of increase in the per capita cost 14% 16% Rate to decrease to 6% 6% by the year ended 2003 2002 - ---------------------------------------------------------------------------
The expense in 1991, under the prior method, which recognized the expense as benefits to retirees when actually paid, was $4 million. The postretirement benefit plans are not funded. The present value of the company's obligation included in the consolidated balance sheets at December 31, 1993 and 1992 is as follows (in millions):
December 31, 1993 1992 - -------------------------------------------------------------------------- Accumulated postretirement benefit obligation ("APBO"): Retirees $112 $110 Fully eligible active participants 11 16 Other active participants 85 111 Unrecognized net gains 45 -- - -------------------------------------------------------------------------- Accrued postretirement benefit liability $253 $237 - --------------------------------------------------------------------------
Assumptions used in determining the APBO at December 31, 1993 and 1992 were:
December 31, 1993 1992 - -------------------------------------------------------------------------- Discount rate applied to APBO 7.5% 8% Annual rate of increase in the per capita cost 13% 16% Rate to decrease to 5% 6% By the year ended 2003 2002 Increase if health-care trend rates increase by 1% each year (in millions) APBO $30 $32 Expense $ 3 $ 3 - -------------------------------------------------------------------------
59 Effective January 1, 1993, the company adopted FASB Statement No. 112, "Employers' Accounting for Postemployment Benefits" which requires accrual accounting for postemployment benefits such as disability-related and workers compensation payments. The company recorded the obligation as a cumulative effect of an accounting change for $11 million (net of $7 million in related income tax benefits). The effect of this change on 1993 operating income versus the prior method of accounting for these benefits was not material. At December 31, 1993, the company's liability for these benefits was approximately $29 million. OTHER NON-OPERATING EXPENSES For the three years ended December 31, 1993, the components of other non-operating expenses (income) are as follows (in millions):
1993 1992 1991 - -------------------------------------------------------------------------- Equity in losses of affiliates $ 25 $ 32 $32 Asset dispositions, net (44) 21 6 Minority interests 11 13 11 Foreign exchange 28 26 25 Settlement of anti-boycott investigations 8 -- -- Sundry 19 13 6 - -------------------------------------------------------------------------- Total other non-operating expenses $ 47 $105 $80 - -------------------------------------------------------------------------- - --------------------------------------------------------------------------
INCOME TAXES U.S. federal income tax returns filed by Baxter International Inc. through December 31, 1986, have been examined and closed by the Internal Revenue Service. In the opinion of management, the company has made adequate provisions for tax expenses for all open years. Income (loss) before tax expenses by category is as follows (in millions):
1993 1992 1991 - -------------------------------------------------------------------------- Domestic $(585) $390 $363 Foreign 255 363 325 - -------------------------------------------------------------------------- Income (loss) from continuing operations before income tax expense $(330) $753 $688 - -------------------------------------------------------------------------- - --------------------------------------------------------------------------
Income tax expense (benefit) related to continuing operations and before cumulative effect of accounting changes by category and by income statement classification is as follows (in millions):
1993 1992 1991 - -------------------------------------------------------------------------- Current Domestic Federal $ 15 $ 55 $ 20 State and local 35 55 32 Foreign 60 50 51 - --------------------------------------------------------------------------- Current income tax expense 110 160 103 - --------------------------------------------------------------------------- Deferred Domestic Federal (137) 4 33 State and local (24) 4 12 Foreign (11) 24 33 - -------------------------------------------------------------------------- Deferred income tax expense (benefit) (172) 32 78 - ------------------------------------------------------------------------- Income tax expense (benefit) $ (62) $192 $181 - ------------------------------------------------------------------------- - -------------------------------------------------------------------------
Effective January 1, 1993, the company adopted FASB Statement No. 109, "Accounting for Income Taxes." Baxter recorded a tax benefit of $81 million, or 29 cents per common share reflecting the cumulative effect of the accounting change. The components of deferred tax assets and liabilities at December 31, 1993 and January 1, 1993 are as follows (in millions):
DECEMBER 31, January 1, 1993 1993 - -------------------------------------------------------------------------- Deferred tax assets Accrued expenses $302 $237 Accrued postretirement benefits 90 82 Merger and restructuring costs 262 46 Alternative minimum tax credit 75 73 Tax credits and net operating losses 24 16 Valuation allowances (37) (23) - -------------------------------------------------------------------------- Total deferred tax assets 716 431 - -------------------------------------------------------------------------- Deferred tax liabilities Asset basis differences 337 317 Subsidiaries, unremitted earnings 195 87 Other 47 81 - -------------------------------------------------------------------------- Total deferred tax liabilities 579 485 - --------------------------------------------------------------------------- Net deferred tax assets (liabilities) $137 $(54) - --------------------------------------------------------------------------- - ---------------------------------------------------------------------------
60 Prior to 1993, deferred income taxes were provided under the accounting rules then in effect. The components of the deferred income tax provisions were (in millions):
1992 1991 - -------------------------------------------------------------------------- Accelerated depreciation and amortization $ 15 $ 9 Restructuring costs 27 77 Alternative minimum tax (2) (7) Asset dispositions (3) (11) Accrued expenses (16) 11 Other timing differences 11 (1) - -------------------------------------------------------------------------- Deferred income tax expense $32 $78 - -------------------------------------------------------------------------- - --------------------------------------------------------------------------
Income tax expense before cumulative effect of accounting changes applicable to consolidated income from continuing operations differs from income tax expense calculated by using the U.S. federal income tax rate for the following reasons (in millions):
1993 1992 1991 - ------------------------------------------------------------------------------- Income tax expense (benefit) at statutory rate $(116) $256 $234 Tax-exempt operations (128) (123) (94) Unremitted foreign earnings 151 -- -- Nondeductible goodwill 30 22 23 State and local taxes (18) 12 3 Tax credit carryforwards -- 12 7 Foreign tax expense 20 8 7 Other factors (1) 5 1 - ------------------------------------------------------------------------------- Income tax expense (benefit) $(62) $192 $181 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
The company has received a tax exemption grant from Puerto Rico which provides that manufacturing operations will be partially exempt from local taxes until the year 2002. Appropriate taxes have been provided for these operations assuming repatriation of all available earnings. In addition, the Company has other manufacturing operations outside the U.S. which benefit from reductions in local tax rates under tax incentives that will continue at least through 1997. U.S. federal income taxes, net of available foreign tax credits, on unremitted earnings deemed permanently reinvested would be approximately $86 million as of December 31, 1993. A federal tax provision of $151 million was made in 1993 for unremitted foreign earnings to allow the transfer of $430 million cash to the U.S. for restructuring costs. Approximately $150 million of this cash was transferred in 1993. LEGAL PROCEEDINGS During 1993, the company incurred significant charges for major litigation settlements and minimum liability exposures, and recorded significant estimated insurance recoveries with respect to those liabilities. The net results of the charges and recoveries are as follows (in millions):
Gross Estimated Net litigation insurance litigation charge recoveries charge - ------------------------------------------------------------------------------- Mammary implant product liabilities $556 $426 $130 HIV/hemophilia product liabilities 131 83 48 Patent infringement settlement 105 -- 105 Legal fees and other 47 -- 47 - ------------------------------------------------------------------------------- Total litigation, net of insurance recoveries $839 $509 $330 - -------------------------------------------------------------------------------
As of December 31, 1993, the company was a defendant, together with other defendants, in 3,445 lawsuits and had 1,425 pending claims from individuals, all of which seek damages for injuries allegedly caused by silicone mammary prostheses ("mammary implants") manufactured by the American Heyer-Schulte division of American. The company's responsibility for mammary implants results from the American Heyer-Schulte division of American which manufactured these products from 1974 until 1984, at which time the products and related assets were sold to Mentor Corporation. American retained the product liability responsibility for products sold before the divestiture, and that responsibility was assumed by a subsidiary of the company as part of the 1985 acquisition of American. The company has not manufactured or sold this product since 1984 nor does it have any of the product in its inventory. The typical case or claim alleges that the individual's mammary implants caused one or more of a wide range of ailments, including non-specific autoimmune disease, scleroderma, lupus, rheumatoid arthritis, fibromyalgia, mixed connective tissue disease, Sjogren's Syndrome, dermatomyositis, polymyositis, and chronic fatigue. The comparable number of cases and claims was 137 as of December 31, 1991 and 1,612 as of December 31, 1992. In 1991, 76 cases and claims were disposed of; in 1992, 309 cases and claims were disposed of; and in 1993, 634 cases and claims were disposed of. 61 In addition to the individual suits against the company, a class action on behalf of all women with mammary implants filed against all manufacturers of such implants has been conditionally certified and is pending (DANTE, ET AL. V. DOW CORNING, ET AL., part of IN RE: SILICONE GEL BREAST IMPLANT PRODUCT LIABILITY LITIGATION, U.S.D.C., N. Dist. Ala., MDL 926). The company has been named in several other similar certified or purported class actions. Additionally, the company has been served with a purported class action brought on behalf of children allegedly exposed to silicone in utero and through breast milk. The suit names all mammary implant manufacturers as defendants and seeks to establish a medical monitoring fund. These implant cases and claims generally raise difficult and complex factual and legal issues and are subject to many uncertainties and complexities, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is brought, and differences in applicable law. Many of the cases and claims are at very preliminary stages, and the company has not been able to obtain information sufficient to evaluate each case and claim. There also are issues concerning which of the company's insurers is responsible for covering each matter and the extent of the company's claims for contribution against third parties. The company believes that a substantial portion of the liability and defense costs related to mammary implant cases and claims will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. Most of the company's insurers have reserved (i.e., neither admitted nor denied), and may attempt to reserve in the future, the right to deny coverage, in whole or in part, due to differing theories regarding, among other things, the applicability of coverage and when coverage may attach. The company has been, and will continue to be, engaged in active negotiations with its insurers concerning coverages and the potential settlement described below. Also, some of the mammary implant cases pending against the company seek punitive damages and compensatory damages arising out of alleged intentional torts. Depending on policy language, applicable law and agreements with insurers, the damages awarded pursuant to such claims may or may not be covered, in whole or in part, by insurance. On February 7, 1994, the company filed suit against all of the insurance companies which issued product liability policies to American, American Heyer Schulte and Baxter for a declaratory judgment that: the policies cover each year of injury or claim; the company may choose among multiple coverages; coverage begins with the date of implant; and legal fees and punitive damages are covered. Representatives of the plaintiffs and defendants in these cases have negotiated a global settlement of the issues under the jurisdiction of the Court in the DANTE V. DOW CORNING case. The monetary provisions of the settlement proposal providing compensation for all present and future plaintiffs and claimants based on a series of specific funds and scheduled medical conditions have been agreed upon by most of the significant defendants and representatives of the plaintiffs. Under the proposal, the total of all of the specific funds, which would be paid-in and made available over approximately thirty years following final approval of the settlement by the Courts, is capped at $4.75 billion. The settling defendants have agreed to fund $4 billion of this amount. The company's share of this settlement has been established by the settlement negotiations at $556 million. This settlement is subject to a series of court proceedings, including a court review of its fairness, and the opportunity for individual plaintiffs and claimants to elect to remove themselves from the settlement ("opt-out"). At present the company is not able to estimate the nature and extent of its potential or ultimate future liability with respect to opt-outs. In the fourth quarter of 1993, the company accrued $556 million for its estimated liability resulting from a potential global settlement of the mammary implant class action and recorded a receivable for estimated insurance recovery of $426 million, resulting in a net charge of $130 million. The reserves for the settlement do not include any provisions for opt-outs and are in addition to the general reserves for the mammary implant cases discussed below. In connection with its acquisition of American, the company had established reserves at the time of the merger for product liability, including mammary implant cases and claims. At December 31, 1993 the reserve allocated to mammary implant cases and claims was approximately $42 million. Based on current information, management believes that this reserve represents the company's minimum net exposure in connection with future mammary implant cases and claims beyond the effect of the global settlement described above. Upon resolution of any of the uncertainties concerning these cases, the company may ultimately incur charges in excess of presently established reserves. While such a future charge could 62 have a material adverse impact on the company's net income in the period in which it is recorded, management believes that any outcome of this litigation will not have a material adverse effect on the company's consolidated financial position. As of December 31, 1993, the company was a defendant, together with other defendants, in 121 lawsuits, and has one pending claim, in the United States and Canada involving individuals who have hemophilia, or their representatives. Those cases and claims seek damages for injuries allegedly caused by antihemophilic factor concentrates VIII and IX derived from human blood plasma processed and sold by the company. Furthermore, 58 lawsuits seeking damages based on similar allegations are pending in Ireland and Japan. The typical case or claim alleges that the individual with hemophilia was infected with HIV by infusing Factor VIII or Factor IX concentrates ("Factor Concentrates") containing HIV. The total number of cases and claims asserted against the company as of December 31, 1991, was 16, and as of December 31, 1992, was 52. In 1991, 11 cases and claims were disposed of; in 1992, 9 cases and claims were disposed of; and in 1993, 11 cases and claims were disposed of. In addition to the individual suits against the company, a purported class action was filed on September 30, 1993, on behalf of all U.S. residents with hemophilia (and their families) who were treated with Factor Concentrates and who allegedly are infected with HIV as a result of the use of such Factor Concentrates (WADLEIGH, ET AL., V. RHONE-POULENC RORER, ET AL., U.S.D.C., N. Dist., Ill., 93C 5969). A state-wide class action also has been filed on behalf of all New Jersey residents with hemophilia and HIV. Neither class action has yet been certified. Many of the cases and claims are at very preliminary stages, and the company has not been able to obtain information sufficient to evaluate each case and claim. In most states, the company's potential liability is limited by laws which provide that the sale of blood or blood derivatives, including Factor Concentrates, is not the sale of a "good" and thus is not covered by the doctrine of strict liability. As a result, each claimant will have to prove that his or her injuries were caused by the company's negligence. The WADLEIGH case alleges that the company was negligent in failing: to use available purification technology; to promote research and development for product safety; to withdraw Factor Concentrates once it knew or should have known of viral contamination of such concentrates; to screen plasma donors properly; to recall contaminated Factor Concentrates; and to warn of risks known at the time the product was used. The company denies these allegations and will file a challenge to the class proceedings later in 1994. The company is not able to estimate the nature and extent of its potential or ultimate future liability with respect to these cases and claims, but as a result of settlement discussions and opinions of litigation counsel, has established the reserve described below. The company believes that a substantial portion of the liability and defense costs related to anti-hemophilic factor concentrates cases and claims will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. Most of the company's insurers have reserved (i.e., neither admitted nor denied), and may attempt to reserve in the future, the right to deny coverage, in whole or in part, due to differing theories regarding, among other things, the applicability of coverage and when coverage may attach. Zurich Insurance Co., one of the company's comprehensive general liability insurance carriers, on February 1, 1994, filed a suit against the company seeking a declaratory judgment that the policies it had issued do not cover the losses that the company has notified it of for a number of reasons, including that Factor Concentrates are products, not services, and are, therefore, excluded from the policy coverage, and that the company has failed to comply with various obligations of tender, notice, and the like under the policies. On February 8, 1994, the company filed suit against all of the insurance companies which issued comprehensive general liability and product liability policies to the company for a declaratory judgment that the policies for all of the excess insurance carriers covered both products and services. In that suit, the company also sued Zurich for failure to defend it and Zurich and Columbia Casualty Company for failure to indemnify it. The company is engaged in notifying its insurers concerning coverages and the potential settlement discussed below. Also, some of the anti-hemophilic factor concentrates cases pending against the company seek punitive damages and compensatory damages arising out of alleged intentional torts. Depending on policy language, applicable law and agreements with insurers, the damages awarded pursuant to such claims may or may not be covered, in whole or in part, by insurance. Accordingly, the company is not currently in a position to estimate the amount of the potential future recoveries from its insurers, but has estimated 63 its recovery with respect to the reserves it has established. The National Hemophilia Foundation ("NHF") asked the U.S. commercial producers of anti-hemophilic factor concentrates (Alpha Therapeutics, Armour Pharmaceuticals, Baxter Healthcare Corporation and Miles Laboratories) to provide $1.5 billion as part of a fund for HIV positive hemophiliacs. The company and some of the other producers made a counter-proposal that the NHF rejected. The company is vigorously defending each of the cases and claims against it. At the same time, it is likely that the company will continue to seek ways to resolve pending and threatened litigation concerning these issues through a negotiated resolution. In Canada, the provincial governments created a settlement fund to which all of the fractionators, including the company, have contributed. The company's contribution to the fund was approximately $3 million. Those Canadian claimants who avail themselves of this fund must sign releases in favor of the company against further litigation. The period in which to file a claim against the fund expires on March 15, 1994. In the fourth quarter of 1993, the company accrued $131 million for its estimated worldwide liability for litigation and settlement expenses involving anti-hemophilic Factor Concentrate cases, and recorded a receivable for insurance coverage of $83 million, resulting in a net charge of $48 million. The expense of the Canadian settlement is covered by this reserve. Upon resolution of any of the uncertainties concerning these cases, or if the company, along with the other defendants, enters into a comprehensive settlement of the class actions described above, the company may incur charges in excess of presently established reserves. While such a future charge could have a material adverse impact on the company's net income in the period in which it is recorded, management believes that any outcome of this litigation will not have a material adverse effect on the company's consolidated financial position. At the start of 1993, the company was a defendant in patent litigation brought by Scripps Clinic and Research Foundation ("Scripps") and Rhone-Poulenc Rorer, Inc. (formerly Rorer Group, Inc.) ("Rorer") in which the plaintiffs alleged that the company's monoclonal anti-hemophilic Factor VIII and its recombinant Factor VIII infringed a patent originally owned by Scripps and subsequently licensed to Rorer. Trial of this litigation before a judge without a jury was concluded in 1992. Before a ruling on the trial was received, the company entered into a worldwide settlement of the litigation with Scripps and Rorer. The settlement agreement required Baxter to pay $105 million to Rorer to settle claims relating to certain anti-hemophilic Factor VIII products manufactured and sold prior to January 1, 1993. As part of this agreement, Baxter was also granted a non-exclusive sub-license for future use of the related patents. This license agreement is royalty-bearing when used in conjunction with the company's monoclonally purified and Recombinant Factor VIII products. Baxter Healthcare Corporation ("BHC") has been named as a defendant in a purported class action on behalf of all medical and dental personnel in the State of California who suffered allergic reactions to natural rubber latex gloves and other protective equipment or who have been exposed to natural rubber latex products. (KENNEDY, ET AL. V. BAXTER HEALTHCARE CORPORATION, ET AL., Sup. Ct., Sacramento Co., Cal., #535832.) The case, which was filed in August, 1993, alleges that users of various natural rubber latex products, including medical gloves made and sold by BHC and other manufacturers, suffered allergic reactions to the products ranging from skin irritation to systemic anaphylaxis. BHC filed a demurrer to the complaint, which was granted, and the complaint was dismissed with leave to file an amended complaint. The amended complaint was filed in December, 1993, and BHC has filed a demurrer to the amended complaint. Management believes that the outcome of this matter will not have a material adverse effect on the company's results of operations or consolidated financial position. The company is a defendant in a number of other claims, investigations and lawsuits. Based on the advice of counsel, management does not believe that the other claims, investigations and lawsuits individually or in the aggregate, will have a material adverse effect on the company's operations or its consolidated financial condition. 64 SEGMENT INFORMATION INDUSTRY SEGMENTS Baxter is a world leader in global manufacturing and distribution of health-care products and services for use in hospitals and other health-care and industrial settings. It offers a broad array of products and services. Baxter announced a significant restructuring in the fourth quarter of 1993 designed to make the company's domestic medical/laboratory products and distribution segment more efficient and more responsive in addressing the sweeping changes occurring in the U.S. healthcare system and to accelerate growth of its medical specialties business worldwide. As a consequence, the company has redefined its industry segments to be consistent with its strategic direction and management process. The company's operations are reported in the following two industry segments: MEDICAL SPECIALTIES Baxter develops, manufactures and markets on a global basis highly specialized medical products for treating kidney and heart disease and blood disorders and for collecting and processing blood. These products include dialysis equipment and supplies; prosthetic heart valves and cardiac catheters; blood-clotting therapies; and machines and supplies for collecting, separating and storing blood. These products require extensive research and development and investment in worldwide distribution, marketing, and administrative infrastructure. The company's International Hospital unit, which manufactures and distributes intravenous solutions and other medical products outside the United States is also included in this segment because it shares facilities, resources and customers with the other medical specialty businesses in several locations worldwide. MEDICAL/LABORATORY PRODUCTS AND DISTRIBUTION Baxter manufactures medical and laboratory supplies and equipment, including intravenous fluids and pumps, diagnostic-testing equipment and reagents, surgical instruments and procedure kits, and a range of disposable and reusable medical products. These self-manufactured products, as well as a significant volume of third party manufactured medical products, are primarily distributed through the company's extensive distribution system to U.S. hospitals, alternate-site care facilities, medical laboratories, and industrial and educational facilities. Financial information by industry segments for the three years ended December 31, 1993, is summarized as follows (in millions):
Medical/laboratory Medical products and General 1993 specialties distribution corporate Total - ----------------------------------------------------------------------------------------------------------------------- Net sales $3,250 5,629 -- $ 8,879 Operating income before restructuring charge $ 643 418 (122) $ 939 Restructuring charge $ (100) (550) (50) $ (700) - ----------------------------------------------------------------------------------------------------------------------- Operating income (loss) $ 543 (132) (172) $ 239 Identifiable assets $2,946 4,788 2,811 $10,545 Capital expenditures(1) $ 266 300 39 $ 605 Depreciation and amortization $ 170 253 71 $ 494 - ----------------------------------------------------------------------------------------------------------------------- 1992 - ----------------------------------------------------------------------------------------------------------------------- Net sales $3,096 5,375 -- $ 8,471 Operating income $ 606 551 (112) $ 1,045 Identifiable assets $2,783 4,589 1,783 $ 9,155 Capital expenditures(1) $ 259 365 16 $ 640 Depreciation and amortization $ 150 226 71 $ 447 - ----------------------------------------------------------------------------------------------------------------------- 1991 - ----------------------------------------------------------------------------------------------------------------------- Net sales $2,785 5,014 -- $ 7,799 Operating income $ 535 539 (114) $ 960 Identifiable assets $2,640 4,234 2,297 $ 9,171 Capital expenditures(1) $ 195 363 34 $ 592 Depreciation and amortization $ 140 200 71 $ 411 - ----------------------------------------------------------------------------------------------------------------------- (1) Includes additions to the pool of equipment leased to customers.
65 GEOGRAPHIC SEGMENTS Financial information by geographic area for the three years ended December 31, 1993, is summarized as follows (in millions):
Other General Inter-area 1993 United States Europe international corporate eliminations Total - ------------------------------------------------------------------------------------------------------------------------ Trade sales $6,581 1,177 1,121 -- -- $ 8,879 Inter-area sales $ 524 107 329 -- (960) -- - ------------------------------------------------------------------------------------------------------------------------ Total sales $7,105 1,284 1,450 -- (960) $ 8,879 Operating income (loss) $ (80) 224 275 (172) (8) $ 239 Identifiable assets $5,925 1,045 884 2,811 (120) $10,545 - ------------------------------------------------------------------------------------------------------------------------ 1992 - ------------------------------------------------------------------------------------------------------------------------ Trade sales $6,215 1,227 1,029 -- -- $ 8,471 Inter-area sales $ 559 86 278 -- (923) -- - ------------------------------------------------------------------------------------------------------------------------ Total sales $6,774 1,313 1,307 -- (923) $ 8,471 Operating income $ 539 296 329 (112) (7) $ 1,045 Identifiable assets $5,570 1,094 813 1,783 (105) $ 9,155 - ------------------------------------------------------------------------------------------------------------------------ 1991 - ------------------------------------------------------------------------------------------------------------------------ Trade sales $5,792 1,044 963 -- -- $ 7,799 Inter-area sales $ 486 82 189 -- (757) -- - ------------------------------------------------------------------------------------------------------------------------ Total sales $6,278 1,126 1,152 -- (757) $ 7,799 Operating income $ 532 283 255 (114) 4 $ 960 Identifiable assets $5,130 1,077 748 2,297 (81) $ 9,171 - ------------------------------------------------------------------------------------------------------------------------
Inter-area transactions are accounted for using arm's-length principles. Identifiable assets are those assets associated with a specific industry segment or geographic area. General corporate assets consist primarily of cash and equivalents, the corporate headquarters facility and various other investments and assets that are not specific to an industry segment or geographic area. Goodwill and amortization have been allocated to industry segments as applicable. Foreign net sales (including U.S. export sales) and net assets (including advances from the company and its subsidiaries) of all consolidated foreign subsidiaries and branches located outside the U.S., its territories and possessions for the three years ended December 31, 1993, are as follows (in millions):
1993 1992 1991 - ------------------------------------------------------------------------ Foreign net sales $2,428 $2,391 $2,131 Foreign assets net of liabilities at end of year $1,248 $1,287 $1,104 - ------------------------------------------------------------------------
66 QUARTERLY FINANCIAL RESULTS AND MARKET FOR THE COMPANY'S STOCK
First Second Third Fourth Total (Unaudited, in millions, except per share data) Quarter Quarter Quarter Quarter year - ------------------------------------------------------------------------------------------------------------------------ 1993 Net sales $2,041 $2,215 $2,228 $2,395 $8,879 Gross profit(3) 748 802 805 867 3,222 Income (loss) from continuing operations before cumulative effect of accounting changes(2) 57 132 135 (592) (268) Net income (loss)(2) 127 132 135 (592) (198) Per common share Income (loss) from continuing operations(2) .20 .48 .49 (2.14) (.97) Net income (loss)(2) .45 .48 .49 (2.14) (.72) Dividends .25 .25 .25 .25 1.00 Market price High 32.75 30.63 29.00 24.75 Low 27.13 27.25 20.00 21.38 - ------------------------------------------------------------------------------------------------------------------------ 1992 Net sales $1,972 $2,080 $2,116 $2,303 $8,471 Gross profit(3) 735 792 803 897 3,227 Income from continuing operations before cumulative effect of accounting changes 109 129 148 175 561 Net income (loss) (37) 124 170 184 441 Per common share Income from continuing operations .37 .46 .53 .63 1.99 Net income (loss) (.15) .44 .61 .66 1.56 Dividends(1) .215 .215 .215 .215 .86 Market price(1) High 40.50 39.38 38.88 36.63 Low 34.25 33.75 31.50 30.50 - ------------------------------------------------------------------------------------------------------------------------ 1. On April 1, 1992, the company redeemed all of the outstanding shares of its adjustable rate preferred stock. During the first quarter of 1992, the stock traded at a high market price of $50.63 and a low market price of $43.00, and a dividend of $.7875 per share was declared. 2. In the fourth quarter of 1993, the company recorded pre-tax charges of $925 million against earnings. The charges include $700 million to cover the costs associated with restructuring initiatives (see "Restructuring Charge" note) and $225 million for future costs of litigation (see "Legal Proceedings" note). 3. Includes certain immaterial reclassifications.
Baxter common stock is listed on the New York, Midwest and Pacific Stock Exchanges, on The London Stock Exchange and on the Swiss stock exchanges of Zurich, Basel and Geneva. The New York Stock Exchange is the principal market on which the company's common stock is traded. Until April 1992, the adjustable rate preferred stock was traded on the New York Stock Exchange also. At January 28, 1994, there were approximately 81,000 holders of record of the company's common stock. 67 SIX-YEAR SUMMARY OF SELECTED FINANCIAL DATA
Year ended December 31 1993(1) 1992 1991 1990(2) 1989 1988 - ---------------------------------------------------------------------------------------------------------------------- Operations Net sales $ 8,879 8,471 7,799 7,234 6,740 6,359 (in millions) Operating income $ 239 1,045 960 262 698 616 Income (loss) from continuing operations $ (268) 561 507 (24) 410 360 Net income (loss) $ (198) 441 591 40 446 388 Depreciation and amortization $ 494 447 411 368 356 327 Research and development expenses $ 337 317 288 262 245 237 - ---------------------------------------------------------------------------------------------------------------------- Capital Employed Working capital $ 1,489 1,221 1,470 1,007 1,378 1,233 (in millions) Capital expenditures(3) $ 605 640 592 417 370 483 Net property, plant and equipment $ 2,655 2,647 2,387 2,122 2,058 1,983 Total assets $ 10,545 9,155 9,171 8,407 8,401 8,442 Net debt(4) $ 3,143 2,901 2,336 2,143 2,388 2,661 Long-term obligations $ 2,800 2,433 2,246 1,727 2,048 2,311 Stockholders' equity--continuing operations $ 3,185 3,795 4,086 3,877 4,032 3,750 --discontinued operations $ -- -- 287 215 214 226 --total $ 3,185 3,795 4,373 4,092 4,246 3,976 Total capitalization $ 5,985 6,228 6,619 5,819 6,294 6,287 - ---------------------------------------------------------------------------------------------------------------------- Per Common Average number of common shares Share outstanding (in millions)(5) 277 279 280 253 248 243 Earnings (loss) Continuing operations $ (0.97) 1.99 1.73 (0.30) 1.37 1.21 Net income $ (0.72) 1.56 2.03 (0.05) 1.50 1.31 Cash dividends declared $ 1.00 0.86 0.74 0.64 0.56 0.50 Market price--high $ 32.75 40.50 40.88 29.38 25.88 26.13 Market price--low $ 20.00 30.50 25.63 20.50 17.63 16.25 Net book value $ 11.52 13.59 14.45 13.45 13.49 12.61 - ---------------------------------------------------------------------------------------------------------------------- Productivity Employees at year-end 60,400 61,300 60,400 60,600 61,000 61,500 Measures Sales per year-end employee $147,003 138,189 129,123 119,373 110,492 103,398 Operating income per employee $ 3,957 17,047 15,894 4,323 11,443 10,016 Operating assets per employee(6) $101,043 96,988 90,613 82,937 82,000 76,407 - ---------------------------------------------------------------------------------------------------------------------- Growth Statistics Net sales 4.8% 8.6 7.8 7.3 6.0 9.1 (percent change Income (loss) from continuing operations (147.8%) 10.7 N/A (105.9) 13.9 19.6 from prior year) Cash dividends per common share 16.3% 16.2 15.6 14.3 12.0 13.6 Net book value per year-end common share (15.2%) (5.9) 7.4 (0.3) 7.0 7.0 - ---------------------------------------------------------------------------------------------------------------------- Financial Returns Operating income as a percent of sales 2.7% 12.3 12.3 3.6 10.4 9.7 and Statistics Income from continuing operations as a percent of sales (3.0%) 6.6 6.5 (0.3) 6.1 5.7 Return on average common stockholders' equity--continuing operations (7.7%) 14.7 13.3 (1.3) 10.9 10.1 Long-term debt as a percent of total year-end capital 46.8% 39.1 33.9 29.7 32.5 36.8 - ---------------------------------------------------------------------------------------------------------------------- 1. Results include a provision for restructuring charges of a pre-tax amount of $700 million and a provision for litigation charges of a pre-tax amount of $330 million. 2. Results include a provision for restructuring program costs of a pre-tax amount of $562 million. 3. Includes additions to the pool of equipment leased or rented to customers. 4. Total debt and lease obligations net cash and equivalents. 5. Excludes common stock equivalents. 6. Accounts receivable, notes and other current receivables, inventories and net property, plant and equipment.
Inside Back Cover Appendix of Graphs: The following is a listing of the graphs contained within the Annual Report, pages 35-46, section entitled "Financial Review" which is incorporated by reference. NET SALES On page 35 of the annual report there is a graphical representation of the relationship between total company international net sales and total company domestic net sales. The data points in billions of dollars are as follows:
International Domestic Sales Sales ----------------------- 1989 1.7 5.0 1990 1.9 5.3 1991 2.1 5.7 1992 2.4 6.1 1993 2.4 6.5
SALES PER EMPLOYEE On page 35 of the annual report there is a graphical representation of the sales per employee. The data points in thousands of dollars are as follows: 1989 110 1990 119 1991 129 1992 138 1993 147 OPERATING INCOME On page 36 of the annual report there is a graphical representation of total company operating income. The data points in millions of dollars are as follows: 1989 698 1990 262 1991 960 1992 1,045 1993 239 MARKETING AND ADMINISTRATIVE EXPENSES On page 36 of the annual report there is a graphical representation of total company marketing and administrative expenses as a percentage of total company net sales. The data points are as follows: 1989 21.3% 1990 21.3% 1991 21.1% 1992 21.2% 1993 21.2% R&D EXPENSES On page 37 of the annual report there is a graphical representation of total company research and development expenses. The data points in millions of dollars are as follows: 1989 245 1990 262 1991 288 1992 317 1993 337 EARNINGS (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS On page 37 of the annual report there is a graphical representation of earnings (loss) per common share from continuing operations. The data points in dollars are as follows: 1989 1.37 1990 (0.30) 1991 1.73 1992 1.99 1993 (0.97) CASH FLOW PROVIDED BY CONTINUING OPERATIONS On page 38 of the annual report there is a graphical representation of cash flow provided by continuing operations. The data points in millions of dollars are as follows: 1989 545 1990 716 1991 697 1992 742 1993 765 CAPITAL EXPENDITURES On page 38 of the annual report there is a graphical representation of total company capital expenditures. The data points in millions of dollars are as follows: 1989 370 1990 417 1991 592 1992 640 1993 605 TOTAL CAPITAL On page 39 of the annual report there is a graphical representation of the relationship between long-term obligations and stockholders' equity in the company's total capital structure. The data points in billions of dollars are as follows:
Long-Term Stockholders' Obligations Equity ----------------------- 1989 2.1 4.2 1990 1.7 4.1 1991 2.2 4.4 1992 2.4 3.8 1993 2.8 3.2
DIVIDENDS PER COMMON SHARE On page 40 of the annual report there is a graphical representation of dividends per common share. The data points in dollars are as follows: 1989 0.56 1990 0.64 1991 0.74 1992 0.86 1993 1.00 MEDICAL SPECIALITIES NET SALES On page 41 of the annual report there is a graphical representation of the relationship between domestic net sales and foreign net sales in the medical specialities segment. The data points in billions of dollars are as follows:
Domestic Foreign Sales Sales -------------------- 1991 0.9 1.9 1992 1.0 2.1 1993 1.1 2.2
MEDICAL SPECIALITIES OPERATING INCOME On page 42 of the annual report there is a graphical representation of operating income for the medical specialities segment. The data points in millions of dollars are as follows: 1991 535 1992 606 1993 543 MEDICAL SPECIALITIES R&D EXPENSE On page 43 of the annual report there is a graphical representation of R&D expense for the medical specialities segment as a percentage of self-manufactured net sales for the medical specialties segment. The data points are as follows: 1991 7.6% 1992 7.9% 1993 8.3% MEDICAL SPECIALITIES CAPITAL EXPENDITURES On page 43 of the annual report there is a graphical representation of capital expenditures for the medical specialities segment. The data points in millions of dollars are as follows: 1991 195 1992 259 1993 266 MEDICAL/LABORATORY PRODUCTS NET SALES On page 44 of the annual report there is a graphical representation of the relationship between foreign net sales and domestic net sales in the medical/laboratories segment. The data points in billions of dollars are as follows:
Foreign Domestic Sales Sales -------------------- 1991 0.3 4.7 1992 0.3 5.1 1993 0.3 5.3
MEDICAL/LABORATORY PRODUCTS NET SALES On page 45 of the annual report there is a graphical representation of the relationship between manufacturing net sales and distribution net sales in the medical/laboratories segment. The data points in billions of dollars are as follows:
Manufacturing Distribution -------------------------- 1991 2.9 2.1 1992 3.2 2.2 1993 3.2 2.4
MEDICAL/LABORATORY PRODUCTS OPERATING INCOME On page 46 of the annual report there is a graphical representation of operating income for the medical/laboratory segment. The data points in millions of dollars are as follows: 1991 539 1992 551 1993 (132) MEDICAL/LABORATORY PRODUCTS CAPITAL EXPENDITURES On page 46 of the annual report there is a graphical representation of capital expenditures for the medical/laboratory segment. The data points in millions of dollars are as follows: 1991 363 1992 365 1993 300 EX-21 9 EXHIBIT 21 EXHIBIT 21 - -------------------------------------------------------------------------------- SUBSIDIARIES OF THE COMPANY, AS OF FEBRUARY 28, 1994
% OWNED BY ORGANIZED UNDER IMMEDIATE SUBSIDIARY LAWS OF PARENT(1)(2) - ------------------------------------------------------------------------------------------------------------------ Baxter International Inc. (parent company)...................................... Delaware Baxter World Trade Corporation................................................ Delaware 100 Baxter, S.A................................................................. Belgium 93(4) Baxter S.A................................................................ France 64(4) Baxter Healthcare, S.A...................................................... Panama 100 Baxter Sales Corporation.................................................... Delaware 100(3) Baxter Healthcare Corporation of Puerto Rico.............................. Alaska 100(3) Baxter Healthcare Pte., Ltd................................................. Singapore 100 Baxter World Trade S.A.................................................... Belgium 52(4) AHFI/Netherlands, B.V....................................................... Netherlands 100 Xenomedica, A.G........................................................... Switzerland 99(4) Laboratorios Baxter, S.A. (Colombia)........................................ Delaware 100 Baxter Limited.............................................................. Japan 100 Baxter Export Corporation................................................... Nevada 100 Baxter Healthcare Pty. Ltd.................................................. Australia 99(4) Baxter S.A. de C.V.......................................................... Mexico 99(4) Baxter Healthcare (Holdings) Ltd.......................................... United Kingdom 99(4) Baxter Healthcare Limited................................................. United Kingdom 99(4) Baxter Corporation.......................................................... Canada 100 Baxter Deutschland G.m.b.H.................................................. Germany 100 Baxter S.A.................................................................. Spain 99(4) Baxter Healthcare Corporation................................................. Delaware 100 Baxter Diagnostics Inc...................................................... Delaware 100 - ------------------------------------------------------------------------------------------- Subsidiaries omitted from this list, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. * * * * * (1) Including director's qualifying and other nominee shares. (2) All subsidiaries set forth herein are reported in the Company's financial statements through consolidations or under the equity method of accounting. (3) Of common stock. (4) Remaining shares owned by the Company, its subsidiaries or employees.
33 EX-23 10 EXHIBIT 23 EXHIBIT 23 CONSENT OF PRICE WATERHOUSE We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-8 (Nos. 2-82667, 2-86993, 2-97607, 33-8812, 33-15523, 33-15787, 33-28428 and 33-33750), on Form S-3 (Nos. 33-5044, 33-23450, 33-27505, 33-31388 and 33-49820) and on Form S-4 (Nos. 33-808 and 33-15357) of Baxter International Inc. of our report dated February 10, 1994 appearing on page 48 of the Annual Report to Stockholders incorporated by reference herein. We also consent to the incorporation by reference of our report on the Financial Statement Schedules, which appears on page 18 of this Form 10-K. /s/ Price Waterhouse - -------------------- PRICE WATERHOUSE Chicago, Illinois March 21, 1994 EX-24 11 EXHIBIT 24 Exhibit 24 POWER OF ATTORNEY ANNUAL REPORT ON FORM 10-K The undersigned director of Baxter International Inc., a Delaware corporation (the "Company"), which proposes to file with the Securities and Exchange Commission its annual report on Form 10-K for year ended December 31, 1993, pursuant to the Securities Exchange Act of 1934, as approved by the Company's principal executive and financial officers and controller, hereby appoints Vernon R. Loucks Jr. for [him or her] and in [his or her] name as a director to be [his or her] lawful attorney-in-fact, with full power (i) to sign and file with the Securities and Exchange Commission the proposed report and (ii) to perform every other act which said attorney-in-fact may deem necessary or proper in connection with such report. Executed by: Silas S. Cathcart David C.K. Chin, M.D. John W. Colloton Susan Crown James D. Ebert Mary Johnston Evans Frank R. Frame David W. Grainger Martha R. Ingram Georges C. St. Laurent, Jr. Fred L. Turner Dated: As of March 13, 1994 -----END PRIVACY-ENHANCED MESSAGE-----