-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LctJPR5DAaqeqZn3GUwC/27sjNo3DwFs9Tf9pAQlg2LQPZkSOPCqtgK7qVTKDOsd ITpKHqD2+sYhkbU9CD2X3w== 0000950131-02-000882.txt : 20020415 0000950131-02-000882.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950131-02-000882 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAXTER INTERNATIONAL INC CENTRAL INDEX KEY: 0000010456 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 360781620 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04448 FILM NUMBER: 02574293 BUSINESS ADDRESS: STREET 1: ONE BAXTER PKWY STREET 2: DF2-2W CITY: DEERFIELD STATE: IL ZIP: 60015 BUSINESS PHONE: 8479482212 MAIL ADDRESS: STREET 1: ONE BAXTER PARKWAY STREET 2: DF2-2W CITY: DEERFIELD STATE: IL ZIP: 60015 FORMER COMPANY: FORMER CONFORMED NAME: BAXTER LABORATORIES INC DATE OF NAME CHANGE: 19760608 FORMER COMPANY: FORMER CONFORMED NAME: BAXTER TRAVENOL LABORATORIES INC DATE OF NAME CHANGE: 19880522 10-K 1 d10k.txt FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (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, 2001 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 Baxter International Inc. (Exact Name of Registrant as Specified in its Charter) Delaware 36-0781620 (State or Other Jurisdiction of Incorporation or (I.R.S. Employer Organization) Identification No.) One Baxter Parkway, Deerfield, Illinois 60015 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: 847.948.2000 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- --------------------- Common stock, $1 par value New York Stock Exchange, Inc. Chicago Stock Exchange, Inc. Pacific Exchange, Inc. Preferred Stock Purchase Rights New York Stock Exchange, Inc. (currently traded with common stock) Chicago Stock Exchange, Inc. Pacific Exchange, Inc.
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 __(check mark) 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 definitive proxy or information statements 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 common equity held by non-affiliates of the registrant (based on the per share closing sale price of $55.37 on March 1, 2002, and for the purpose of this computation only, the assumption that all registrant's directors and executive officers are affiliates) was approximately $33.1 billion. There is no non-voting common equity held by non-affiliates of the registrant. The number of shares of the registrant's common stock, $1 par value, outstanding as of February 28, 2002, was 599,868,645. Documents Incorporated By Reference Portions of the registrant's annual report to stockholders for fiscal year ended December 31, 2001 are incorporated by reference into Parts I, II and IV of this report. Portions of the registrant's proxy statement for use in connection with its annual meeting of stockholders to be held on May 7, 2002 are incorporated by reference into Part III of this report. ================================================================================ - -------------------------------------------------------------------------------- TABLE OF CONTENTS - --------------------------------------------------------------------------------
Page Number ------ Item 1. Business (a) General Development of Business................................................. 1 (b) Financial Information about Segments............................................ 1 (c) Narrative Description of Business............................................... 1 (d) Financial Information about Foreign and Domestic Operations and Export Sales.... 7 Item 2. Properties.......................................................................... 7 Item 3. Legal Proceedings................................................................... 8 Item 4. Submission of Matters to a Vote of Security Holders................................. 12 Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........... 13 Item 6. Selected Financial Data............................................................. 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................ 13 Item 7A. Quantitative and Qualitative Disclosures about Market Risk.......................... 13 Item 8. Financial Statements and Supplementary Data......................................... 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 13 Item 10. Directors and Executive Officers of the Registrant.................................. 14 (a) Identification of Directors..................................................... 14 (b) Identification of Executive Officers............................................ 14 (c) Compliance with Section 16(a) of the Securities Exchange Act of 1934............ 16 Item 11. Executive Compensation.............................................................. 16 Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 16 Item 13. Certain Relationships and Related Transactions...................................... 16 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................... 17 (a) Financial Statements............................................................ 17 (b) Reports on Form 8-K............................................................. 17 (c) Exhibits........................................................................ 17
- -------------------------------------------------------------------------------- ALYX, Baxter, Ceprotin, Extraneal, HomeChoice Pediatric, INTERCEPT, Nanoedge, Neis Vac-C and Syntra are trademarks of Baxter International Inc. and its affiliates. - -------------------------------------------------------------------------------- [LOGO] Baxter 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 International" means Baxter International Inc. and "Baxter" or the "company" means Baxter International and its subsidiaries. Baxter engages in the worldwide development, manufacture and distribution of a diversified line of products, systems and services used primarily in the health care field. We manufacture products in 28 countries and sell them in over 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. Our products are used by hospitals, clinical and medical research laboratories, blood and blood dialysis centers, rehabilitation centers, nursing homes, doctors' offices and by patients, at home, under physician supervision. For information regarding significant acquisitions, see our Annual Report to Stockholders for the year ended December 31, 2001 (Annual Report), pages 45--47, section entitled "Notes to Consolidated Financial Statements--Acquisitions" which is incorporated by reference. (b) Financial Information About Segments. Incorporated by reference from the Annual Report, pages 57--58, section entitled "Notes to Consolidated Financial Statements--Segment Information." (c) Narrative Description of Business. Company Overview Baxter operates as a global leader in critical therapies for life-threatening conditions. Our continuing operations are comprised of three segments: Medication Delivery, which provides a range of intravenous solutions and specialty products that are used in combination for fluid replenishment, nutrition therapy, pain management, antibiotic therapy and chemotherapy; BioScience, which develops biopharmaceuticals, biosurgery products, vaccines and blood collection, processing and storage products and technologies; and Renal, which develops products and provides services to treat end-stage kidney disease. Our three businesses enjoy leading positions in the medical products and services fields. Unless otherwise indicated, each of the factors discussed in this Part I do not materially differ in their impact across each of our three segments. Information about operating results is incorporated by reference from Annual Report pages 27--36, section entitled "Management's Discussion and Analysis" and pages 57--58, section entitled "Notes to Consolidated Financial Statements--Segment Information." Medication Delivery Business Description. Baxter was founded in 1931 as the first commercial manufacturer of intravenous (IV) solutions in glass bottles. Forty years later, the company set a new standard for IV therapy with the 1 introduction of the first plastic IV containers. Today, Baxter manufactures a range of products that deliver fluids, therapies and medications to patients. IV solutions represent only 20 percent of Baxter's Medication Delivery sales, while 80 percent of the revenue comes from specialty products that include anesthetic agents, premixed drugs and drug-reconstitution systems, nutrition products and delivery devices. These products are used in combination for fluid replenishment, nutrition therapy, pain management, antibiotic therapy and chemotherapy. Growth Strategy. Baxter continues to participate in the consolidation of the global marketplace for medication-delivery products, particularly in developing markets. Baxter expects to accelerate growth through expansion of its higher-margin specialty products outside the United States, building on its strong base in IV solutions. The company continues to broaden its portfolio of new products and technologies for medication delivery through internal development, acquisitions and alliances. Baxter also leverages its strengths in anesthesia, drug delivery and infusion systems to provide customers with innovative solutions at all points of care. In 2001, Baxter's oncology business was expanded with the acquisition of ASTA Medica Oncology, a German-based manufacturer of chemotherapy drugs. Product Development. Baxter is developing a next-generation volumetric infusion system with enhanced features and continues to expand its line of drug-delivery platforms. In 2001, Baxter acquired Cook Pharmaceutical Solutions, adding the capability to formulate and package injectable drugs in vials and syringes, and licensed RTP Pharma's proprietary Nanoedge technology to develop injectable formulations of insoluble medications. Baxter signed 18 new agreements with pharmaceutical companies in 2001 to package their drugs in Baxter's systems, and launched generic propofol, an injectable anesthetic, in the United Kingdom. The company also has several nutraceuticals in the pipeline and continues to pursue new film technologies for manufacturing IV containers and sets without polyvinyl chloride. BioScience Business Description. Baxter introduced the first commercially produced Factor VIII concentrate to treat hemophilia in 1966. Today, Baxter is a leading producer of both plasma-based and recombinant clotting factors for hemophilia, as well as biopharmaceuticals used to treat immune deficiencies, cancer and other disorders. The business also develops biosurgery products, used for hemostasis, tissue-sealing and tissue-regeneration, and vaccines. Baxter also is a leading manufacturer of manual and automated blood-collection, processing and storage systems, used by hospitals, blood banks and plasma-collection centers to collect and process blood components for therapeutic use. Therapeutic blood components are used in surgery, cancer therapy and other critical therapies. Growth Strategy. Baxter's strategy for increasing growth in its BioScience business includes: expanding manufacturing capacity to meet current and future demand, which today for most products far exceeds supply; penetrating new markets outside North America and Europe, which currently account for more than 80 percent of sales; making acquisitions and forming other alliances and partnerships to bring new and complementary technologies and product platforms to Baxter; expanding the use of current products through additional indications and establishing new standards of care; and introducing new products to encompass additional therapies. In transfusion therapies, the focus remains on increasing production and blood safety through advanced automation, leukoreduction and pathogen inactivation. Product Development. In 2001, Baxter received European licensure for Ceprotin, a new protein C concentrate used to treat congenital protein C deficiency. Recombinant proteins in development include a protein-free-method recombinant Factor VIII, alpha-1-antitrypsin to treat emphysema and asthma, and recombinant hemoglobin. Baxter also began clinical trials on a Factor VIII gene therapy last year with its partner GenStar. In the area of vaccines, Baxter received additional approvals for its NeisVac-C vaccine for meningitis C in 2001. The company also is developing cell-culture-derived vaccines for influenza, smallpox and other diseases. Also in 2001, Baxter applied for FDA approval on its ALYX automated blood component collection system and filed in Europe for approval of the INTERCEPT Blood System for platelets. 2 Renal Business Description. Baxter is a leading provider worldwide of products and services for the treatment of kidney disease. In 1956, the company pioneered hemodialysis (HD) with the introduction of the first widely available artificial kidney machine. Nearly 20 years later, Baxter introduced products and services for peritoneal dialysis (PD), a home-based therapy. Today, Baxter is the world's leading manufacturer of PD products, which include dialysis solutions, container systems and automated cyclers. Baxter also manufactures HD instruments and dialyzers. In addition, the company owns and operates dialysis clinics in partnership with local physicians outside the United States. In the United States, Baxter works with payers to provide disease-management services and with nephrologists to operate interventional outpatient centers. Growth Strategy. Baxter is growing its presence in renal care by addressing the needs of kidney-disease patients over their lifetime of care--from initial diagnosis through dialysis and organ replacement. Baxter's "integrated care" strategy looks at that spectrum of care and considers where it makes sense for Baxter to participate. For example, in 2001, Baxter acquired the assets and exclusive rights to a proprietary recombinant drug for the treatment of anemia. The company also conducted a landmark clinical trial with evidence suggesting broader applicability for PD therapy, which could yield a shift in practice patterns that could expand use of PD over time. Other growth will come through continued product innovation, e-health initiatives, additional acquisitions and alliances, and further expansion in developing markets. Product Development. Innovation remains key to Baxter's continued leadership and growth in renal care, with several new product launches planned in 2002. These include Baxter's first synthetic HD dialyzer, called Syntra, and new HD instruments for self-care centers, the home and the acute-care setting. Also in 2002, the company plans to introduce new and improved approaches to PD that provide unique patient benefits. Baxter expects to receive approval from the U.S. Food and Drug Administration for Extraneal PD solution. Baxter also will be launching HomeChoice Pediatric, an updated automated PD machine designed for patients who require lower volumes of fluid, particularly children. The system offers new safety features and makes the dialysis process even more convenient for pediatric patients and their parents. United States Markets The health care marketplace continues to be highly competitive. There has been consolidation in the company's customer base, and by its competitors, which has resulted in pricing and market share pressures. These industry trends are expected to continue. The company intends to continue to manage these issues by developing new products and services, leveraging its cost structure, making acquisitions and entering alliances. International Markets Baxter generates close to 50 percent of its revenues outside the United States. While health care cost containment continues to be a focus around the world, demand for health care products and services continues to be strong worldwide, particularly in developing markets. The company's strategies emphasize global expansion and technological innovation to advance medical care worldwide. Joint Ventures and Affiliations Baxter's joint venture with Gambro A.B., named Tandem Healthcare LLC, manufactures dialyzers from a Baxter production facility in Mountain Home, Arkansas. Baxter manages the day-to-day operations on behalf of the joint venture. Gambro is an international medical technology and health care company based in Sweden. The company conducts a non-material amount of business through joint ventures. In March 2000, Baxter teamed with other experienced companies in the health care industry to form the Global Healthcare Exchange (GHX). GHX provides business-to-business procurement for the health care 3 industry. Utilizing Internet-based technology, GHX integrates hospitals and suppliers, in an attempt to improve efficiencies and add value throughout the supply chain. GHX now is comprised of more than 100 supplier members and nearly 600 hospital members. In November 2001, GHX and HealthNexis combined their operations into a single, comprehensive Internet-based exchange operating under the Global Healthcare Exchange name. Baxter also owns minority positions in certain other publicly-traded companies, including Cerus Corporation, with which it is jointly developing a pathogen inactivation system for platelets, plasma and red blood cells for transfusion, and Acambis, a British vaccine developer with which Baxter is producing smallpox vaccine for the U.S. government. Methods of Distribution Baxter 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 and through independent distributors and drug wholesalers acting as sales agents. In the United States, Allegiance Healthcare Corporation warehouses and ships a significant portion of the company's products through its distribution centers. These distribution centers are generally stocked with adequate inventories to facilitate prompt customer service. Sales and distribution methods include frequent contact by sales representatives, automated communications via various electronic purchasing systems, circulation of catalogs and merchandising bulletins, direct-mail campaigns, trade publications and advertising. Customers may return defective merchandise for credit or replacement. In recent years, such returns have been immaterial. International sales are made and products are distributed in over 100 countries either on a direct basis or through independent local distributors. International subsidiaries employ their own field sales forces in Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, the Czech Republic, Denmark, Ecuador, Finland, France, Germany, Greece, Guatemala, Hungary, India, Ireland, Italy, Japan, Korea, Mexico, The Netherlands, New Zealand, Norway, Panama, Peru, the Philippines, Portugal, Russia, Singapore, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom and Venezuela. 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. Although the vast majority of these materials are generally available, the company has experienced occasional shortages in supply of source plasma and of bulk recombinant factor VIII used by Baxter in its BioScience business. In addition, certain raw materials used in producing some of the company's products are available only from a small number of suppliers. Baxter works closely with its suppliers to assure continuity of supply while maintaining high quality and reliability. The company also continues to develop new sources of supply and does not believe that periodic shortages in supply of raw materials will have a material adverse effect on the company's business. In some of these situations, the company has long-term supply contracts with its suppliers, although it does not consider its obligations under such contracts to be material. Baxter does not always recover cost increases through customer pricing due to contractual limits and market pressure on such price increases. See "Contractual Arrangements." Patents and Trademarks Products manufactured by Baxter 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. 4 Baxter owns a number of patents and trademarks throughout the world and is licensed under patents owned by others. Baxter's policy is to protect its products and technology through patents and trademarks on a worldwide basis. This protection is sought in a manner that balances the cost of such protection against obtaining the greatest value for the company. The company also recognizes the need to promote the enforcement of its patents and trademarks. Over the past few years, Baxter has increased its enforcement activities by aggressively taking action in various countries to protect its patents and trademarks. Baxter will continue taking all commercially reasonable steps to enforce its patents and trademarks around the world against potential infringers. However, there can be no assurance that any action will result in favorable decisions. While the protection of its patents and trademarks is important to Baxter's business strategy, Baxter believes that its overall business position is not materially dependent upon any single patent or trademark. Competition Historically, competition in the health care industry has been characterized by the search for technological and therapeutic innovations in the prevention, diagnosis and treatment of disease. The company believes that it has benefited from the technological advantages of certain of its products. While competitors will continue to introduce new products that compete with those sold by Baxter, the company believes that its research and development efforts will permit it to remain competitive in all presently material product areas. Although no single company competes with Baxter in all of its businesses, Baxter is faced with substantial competition in all of its markets. The changing health care environment in recent years has led to increasingly intense competition among United States and certain European health care suppliers. Competition is focused on price, service and product performance. Pressure in these areas is expected to continue. The company continues to increase its efforts to minimize costs and meet 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 intends to continue to develop new products and services, invest in human resources and capital to upgrade and expand facilities, leverage its cost structure and make selected acquisitions. Credit and Working Capital Practices As of March 1, 2002, Baxter's debt ratings on senior debt were A3 by Moody's, A by Standard & Poor's and A by Fitch. The company's credit practices and related working capital needs are comparable to those of other market participants. Collection periods tend to be longer for sales outside the United States. Quality Management Baxter places significant emphasis on providing quality products and services to its customers. A major portion of the company's quality systems relate to the design and development manufacturing, packaging, sterilization, handling, distribution and labeling of the products by the company. These quality systems, including control procedures that are developed and implemented by technically trained professionals, result in rigid specifications for product design, raw materials, components, packaging materials, labels, sterilization procedures and overall manufacturing process control. The quality systems integrate the efforts of suppliers of raw materials, components and finished goods to ensure we meet customer and regulatory requirements. These systems are designed to ensure that all appropriate standards and requirements are met before goods are released. In addition to other quality processes, Baxter initiated a Six Sigma Quality process several years ago to train all appropriate individuals in statistical process control and related subjects to ensure continuous improvement. 5 Research and Development Baxter is actively engaged in research and development programs to develop innovative products, systems and manufacturing methods. These activities are performed at research and development centers located around the world and include facilities in Australia, Austria, Belgium, France, Germany, Italy, Japan, Malta, Sweden, the United States and Venezuela. Expenditures for Baxter-sponsored research and development activities were $427 million in 2001, $379 million in 2000 and $332 million in 1999. Principal areas of strategic focus for research and development include recombinant therapeutics, plasma-based therapeutics, vaccines, small molecule drugs, pathogen inactivation, drug formulation technologies, medication delivery systems and kidney dialysis. 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 immune and 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. Government Regulation Most products manufactured or sold by the company are subject to regulation by numerous governmental agencies, both within and outside the United States. In the United States, the federal agencies that regulate the company's facilities, operations, personnel and products (their manufacture, sale, import and export) include the Food and Drug Administration (FDA), the Environmental Protection Agency, the Occupational Health & Safety Administration, the Customs Service, the Department of Commerce, the Treasury Department and others. State agencies also regulate the facilities, operations, products and personnel of the company within their respective states. Government agencies outside the United States also regulate public health, product manufacturing, environmental conditions, employment, export, customs and other aspects of the company's global operations. With regard to the company's facilities and products, various governmental agencies, including the FDA in the United States, regulate manufacturing, labeling, promotion and advertising. In addition, the agencies have the authority to halt the distribution of medical products, detain or seize adulterated or misbranded medical products, or order the company to take other steps to correct issues surrounding the products. The agencies may also require notification of health professionals and others with regard to medical products that present risks of substantial harm to the public health. From time to time, the company has removed products from the market that were found not to meet acceptable standards. 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 Baxter during 2001 and similar expenditures are planned for 2002. See Item 3.--"Legal Proceedings." Employees As of December 31, 2001, Baxter employed approximately 48,000 people. Contractual Arrangements A substantial portion of the company's products are sold through contracts with customers, both within and outside the United States. Some of these contracts have terms of more than one year and 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. In keeping with the increased emphasis on cost-effectiveness in health care delivery, the current trend among hospitals and other customers of medical products manufacturers is to consolidate into larger purchasing groups to enhance purchasing power. The medical products industry has also experienced some consolidation, partly in order to offer a broader range of products to large purchasers. As a result, transactions with customers are larger, more complex and tend to involve more long-term contracts than in the past. The enhanced purchasing power of these larger customers may also increase the pressure on product pricing, although management is unable to estimate the potential impact at this time. 6 Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 Statements throughout this report that are not historical facts are forward-looking statements. These statements are based on the company's current expectations and involve numerous risks and uncertainties. Some of these risks and uncertainties are factors that affect all international businesses, while some are specific to the company and the health care arenas in which it operates. Many factors could affect the company's actual results, causing results to differ, and possibly differ materially, from those expressed in any such forward-looking statements. These factors include, but are not limited to, interest rates; technological advances in the medical field; economic conditions; demand and market acceptance risks for new and existing products, technologies and health care services; the impact of competitive products and pricing; manufacturing capacity; new plant start-ups; global regulatory, trade and tax policies; regulatory, legal or other developments relating to the company's Series A, AF and AX dialyzers; continued price competition; product development risks, including technological difficulties; ability to enforce patents; actions of regulatory bodies and other government authorities; reimbursement policies of government agencies; commercialization factors; results of product testing; and other factors described elsewhere in this report or in the company's other filings with the Securities and Exchange Commission. Additionally, as discussed in Item 3.-- "Legal Proceedings," upon the resolution of certain legal matters, the company may incur charges in excess of presently established reserves. Any such charge could have a material adverse effect on the company's results of operations or cash flows in the period in which it is recorded. Currency fluctuations are also a significant variable for global companies, especially fluctuations in local currencies where hedging opportunities are unreasonably expensive or unavailable. If the United States dollar strengthens significantly against most foreign currencies, the company's ability to realize projected growth rates in its sales and net earnings outside the United States could be negatively impacted. The company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, but there can be no assurance that the actual results or performance of the company will conform to any future results or performance expressed or implied by such forward-looking statements. (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 57--58, section entitled "Notes to Consolidated Financial Statements--Segment Information." - -------------------------------------------------------------------------------- Item 2. Properties. Baxter owns or has long-term leases on substantially all of its major manufacturing facilities. With respect to its current operations, the company maintains 25 manufacturing facilities in the United States and its territories, including five in Puerto Rico. The company also manufactures in Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Costa Rica, the Dominican Republic, France, Germany, India, Ireland, Italy, Japan, Malta, Mexico, New Zealand, the Philippines, Poland, Singapore, Spain, Switzerland, Tunisia, Turkey and the United Kingdom. While the majority of these facilities are shared by more than one of the company's business segments, ten domestic facilities and sixteen international facilities exclusively manufacture for the Medication Delivery operations; eleven domestic and eighteen international facilities exclusively manufacture for BioScience operations; and the Renal business is the exclusive operator of five international facilities. The 7 company also owns or operates shared distribution facilities throughout the world, including ten in the United States and Puerto Rico and 115 located in 34 foreign countries. The company maintains a continuing program for improving its properties, including the retirement or improvement of older facilities and the construction of new facilities. This program includes improvement of manufacturing facilities to enable production and quality control programs to conform to the current state of technology and government regulations. Capital expenditures relating to continuing operations were $669 million in 2001, $547 million in 2000 and $529 million in 1999. Additions to the installed base of equipment leased to customers were $118 million in 2001, $101 million in 2000 and $102 million in 1999. - -------------------------------------------------------------------------------- Item 3. Legal Proceedings. Baxter International and certain of its subsidiaries are named as defendants in a number of lawsuits, claims and proceedings, including product liability claims involving products now or formerly manufactured or sold by the company or by companies that were acquired by the company. These cases and claims raise difficult and complex factual and legal issues and are subject to many uncertainties and complexities, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is brought, and differences in applicable law. Accordingly, in many cases, Baxter International is not able to estimate the amount of its liabilities with respect to such matters. Upon resolution of any of the legal matters discussed below, Baxter International 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 and net cash flows in the period in which it is recorded or paid, management believes that no such charge would have a material adverse effect on Baxter International's consolidated financial position. Mammary Implant Litigation Baxter International, together with certain of its subsidiaries, is currently a defendant in various courts in a number of lawsuits brought by individuals, all seeking damages for injuries of various types allegedly caused by silicone mammary implants previously manufactured by the Heyer-Schulte division (Heyer-Schulte) of American Hospital Supply Corporation (AHSC). AHSC, which was acquired by Baxter in 1985, divested its Heyer-Schulte division in 1984. In December 1998, a panel of independent medical experts appointed by a federal judge announced its findings that reported medical studies contained no clear evidence of a connection between silicone mammary implants and traditional or atypical systemic diseases. In June 1999, a similar conclusion was announced by a committee of independent medical experts from the Institute of Medicine, a part of the National Academy of Sciences. As of December 31, 2001, Baxter International, together with certain of its subsidiaries, was named as a defendant or co-defendant in 303 lawsuits and two claims relating to mammary implants, brought by approximately 618 plaintiffs, of which 503 are implant plaintiffs and the remainder are consortium or second generation plaintiffs. Of those plaintiffs, 15 currently are included in the Lindsey class action Revised Settlement described below, which accounts for 14 of the pending lawsuits against the company. Additionally, 392 plaintiffs have opted out of the Revised Settlement (representing 243 pending lawsuits), and the status of the remaining plaintiffs with pending lawsuits is unknown. Some of the opt-out plaintiffs filed their cases naming multiple defendants and without product identification; thus, not all of the opt-out plaintiffs will have viable claims against the company. As of December 31, 2001, 232 of the opt-out plaintiffs had confirmed Heyer-Schulte mammary implant product identification. Furthermore, during 2001, Baxter obtained dismissals, or agreements for dismissals, with respect to 802 plaintiffs. In addition to the individual suits against the company, a class action on behalf of all women with silicone mammary implants was filed on March 23, 1994 and is pending in the United States District Court (U.S.D.C.) for 8 the Northern District of Alabama involving most manufacturers of such implants, including Baxter, as successor to AHSC (Lindsey, et al., v. Dow Corning, et al., U.S.D.C., N. Dist. Ala., CV 94-P-11558-S). The class action was certified for settlement purposes only by the court on September 1, 1994, and the settlement terms were subsequently revised and approved on December 22, 1995 (Revised Settlement). The monetary provisions of the Revised Settlement provide compensation for all present and future plaintiffs and claimants through a series of specific funds and a disease-compensation program involving certain specified medical conditions. All appeals directly challenging the Revised Settlement have been dismissed. On January 16, 1996, Baxter, Bristol-Myers Squibb Company and Minnesota Mining and Manufacturing Company each paid $125 million into the court-established fund as an initial fund to pay claims under the Revised Settlement. Union Carbide Corporation and McGhan Medical Corporation also are parties to the Revised Settlement. In addition to the Lindsey class action, the company also has been named in three other purported class actions in various state and provincial courts, only one of which is certified: Harrington v. Dow Corning Corp., et al., Supreme Court, British Columbia, C954330. The class action in British Columbia has been certified solely with respect to the issue of whether silicone gel breast implants are reasonably fit for their intended purpose. On March 31, 2000, the United States Department of Justice filed an action in the federal district court in Birmingham, Alabama against Baxter and other manufacturers of breast implants, as well as the escrow agent for the revised settlement fund, seeking reimbursement under various federal statutes for medical care provided to various women with mammary implants. On September 26, 2001 the district court granted the motion of all defendants, including Baxter, to dismiss the action. The federal government has appealed the dismissal. Baxter believes that a substantial portion of its liability and defense costs for mammary implant litigation will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. The company has entered into "coverage-in-place" agreements with almost all of its insurers, each of which issued or subscribed to policies of insurance between 1974 and 1985. These agreements resolve the signatory insurers' coverage defenses and specify rules and procedures for allocation and payment of defense and indemnity costs pursuant to which signatory insurers will reimburse Baxter for mammary implant losses. Five of the company's claims-made insurers, which issued policies subsequent to 1985, have agreed to pay under their policies with respect to mammary implant claims. The combined total of the amount thus far paid by insurers, committed for payment, and projected by Baxter to be paid by insurers under these agreements is in excess of $800 million, based on the company's current estimate of mammary implant expenditures. Plasma-Based Therapies Litigation Baxter currently is a defendant in a number of claims and lawsuits brought by individuals who have hemophilia, all seeking damages for injuries allegedly caused by anti-hemophilic factor concentrates VIII or IX derived from human blood plasma (factor concentrates) processed by the company from the late 1970s to the mid-1980s. The typical case or claim alleges that the individual was infected with the HIV virus by factor concentrates, which contained the HIV virus. None of these cases involves factor concentrates currently processed by the company. As of December 31, 2001, Baxter was named in 49 lawsuits and 98 claims in the United States, France, Ireland, Italy, Japan, Spain, Taiwan and The Netherlands. All U.S. federal court factor concentrate cases were transferred to the U.S.D.C. for the Northern District of Illinois for case management under Multi District Litigation (MDL) rules (MDL Docket No. MDL-986), and were remanded in 2000 to the courts in which they were filed. In most states, Baxter's potential liability is limited by "blood shield" laws that provide that the sale of blood or blood derivatives, including factor concentrates, is not covered by the doctrine of strict liability. As a result, each claimant must prove that his or her injuries were caused by the company's negligence. 9 On May 6, 1997, the U.S.D.C. approved a class action settlement submitted by the plaintiffs' steering committee for the MDL, Baxter, Alpha Therapeutic Corporation, Armour Pharmaceutical and Bayer Corporation. The essential terms of the settlement provide payments of $100,000 to each HIV-positive person with hemophilia in the United States who can demonstrate use of factor concentrates produced by one of the settling defendants between 1978 and 1985. Additionally, the defendants have established a $40 million fund for payment of attorneys' fees, costs and court-administration expenses. Baxter's agreed contribution to the proposed settlement is 20 percent of the total settlement proceeds. Baxter and the other defendants have reached agreements to settle potential subrogation and reimbursement claims with most private insurers, the federal government and all 50 states, the District of Columbia and Puerto Rico. As of December 31, 2001, approximately 6,500 claimant groups had been found eligible to participate in the settlement, and approximately 350 claimants had opted out of the settlement. Approximately 6,233 claimant groups had received payments as of December 31, 2001, and seven claimant groups remain as of that date. In Japan, Baxter is a defendant, along with the Japanese government and four other co-defendants, in factor concentrates cases in Osaka, Tokyo, Nagoya, Tohoku, Fukuoka, Sapporo and Kumamoto. As of December 31, 2001, the cases involved 1,348 plaintiffs, of whom 1,338 have settled their claims. Based upon the Osaka and Tokyo courts' recommendations, the parties have agreed to a settlement of all pending and future factor concentrate cases. In general, the settlement provides for payment of an up-front, lump-sum amount of approximately $360,000 per plaintiff to be funded 40 percent by the Japanese government and 60 percent by the corporate defendants. The share of the settlement to be paid by each corporate defendant was determined based upon its market share, resulting in a contribution by Baxter of 15.36 percent. The portion of the settlement to be funded by the corporate defendants will include credits for certain prior payments made by the corporate defendants under a separate Japanese government-administered program, which pays monthly amounts to HIV-positive and AIDS-manifested people with hemophilia and their survivors. Additionally, monthly payments will be made to each plaintiff according to a set schedule. In addition, Immuno International AG (Immuno), acquired by Baxter in 1996, has unsettled claims for damages for injuries allegedly caused by its plasma-based therapies. The typical claim alleges that the individual with hemophilia was infected with HIV by factor concentrates containing the HIV virus. Additionally, Immuno faces multiple claims stemming from its vaccines and other biologically-derived therapies. A portion of the liability and defense costs related to these claims will be covered by insurance, subject to exclusions, conditions, policy limits and other factors. Pursuant to the stock purchase agreement between the company and Immuno, as revised in April 1999 in consideration for payment by the company of 29 million Swiss francs to Immuno as additional purchase price, approximately 26 million Swiss francs of the purchase price is being withheld to cover these contingent liabilities. Baxter is also currently a defendant in a number of claims and lawsuits brought by individuals who infused the company's Gammagard(R) IVIG (intravenous immuno-globulin), all of whom are seeking damages for Hepatitis C infections allegedly caused by infusing Gammagard(R) IVIG. As of December 31, 2001, Baxter was a defendant in 21 lawsuits and 13 claims in the United States, Denmark, France, Germany, Italy, Spain and the United Kingdom. One class action in the United States has been certified. All U.S. federal court Gammagard(R) IVIG cases have been transferred to the U.S.D.C. for the Central District of California for case management under MDL rules. On February 21, 1996, the court certified a nationwide class of persons who had infused Gammagard(R) IVIG (Geary, et al., v. Baxter Healthcare Corporation, U.S.D.C., C.D., CA, ML-95-160-R). On September 18, 2000, the U.S.D.C. for the Central District of California approved a settlement of the class action that would provide financial compensation for U.S. individuals who used Gammagard(R) IVIG between January 1993 and February 1994. Baxter has entered into coverage in place agreements covering factor concentrates lawsuits with substantially all of its insurers that issued or subscribed to pertinent policies of insurance between 1978 and 1985. 10 These agreements resolve the signatory insurers' coverage defenses and specify rules and procedures for allocation and payment of defense and indemnity costs pursuant to which the signatory insurers will reimburse the company for factor concentrates losses. The company believes that a substantial portion of the liability and defense costs related to all of its plasma-based therapies litigation will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. Net Litigation Charges Baxter began accruing for its estimated liability resulting from the settlement of the mammary implant related class action and to litigate or settle cases and claims involving opt-outs in 1993. In 1998, the company accrued an additional $250 million for its estimated liability resulting from the class action settlement and remaining opt-out cases and claims, and recorded a receivable for related estimated insurance recoveries of $121 million, resulting in an additional net charge of $129 million. Baxter began accruing for its estimated worldwide liability for litigation and settlement costs involving plasma-based therapies cases in 1993. The company revised its estimate of liabilities and insurance recoveries in 1998, and accrued an additional $180 million for its estimated liability for plasma-based therapies litigation and other litigation and recorded a receivable for related estimated insurance recoveries of $131 million, for a net charge of $49 million. Other As of December 31, 2001, Baxter International and certain of its subsidiaries were named as defendants in two civil lawsuits, one of which is a purported class action, seeking damages on behalf of persons who allegedly died or were injured as a result of exposure to Baxter's A, AF and AX series dialyzers. The cases, which were filed in November 2001, are pending in the U.S.D.C. for the Middle District of Louisiana and the U.S.D.C. for the Northern District of Illinois. The company has reached settlements with a number of the families of patients who died in Spain and Croatia after undergoing hemodialysis on Baxter Althane series dialyzers. Government criminal investigations concerning the patient deaths are pending in Spain and Croatia. Other lawsuits and claims may be filed in the United States and elsewhere. As of December 31, 2001, Baxter International and certain of its subsidiaries were named as defendants, along with others, in four lawsuits pending in U.S. federal courts on behalf of various classes of purchasers of Medicare and Medicaid eligible drugs alleged to have been injured by Baxter and other defendants as a result of pricing practices for such drugs, which are alleged to be artificially inflated. These cases, which were filed in the fourth quarter of 2001, are pending in the U.S. District Courts for the Central District of California, Northern District of Illinois, Eastern District of Texas and District of Massachusetts. Claimants seek damages and declaratory and injunctive relief under various state and/or federal statutes. In addition, in January 2002, the Attorney General of Nevada filed a civil suit in the Second Judicial District Court of Washoe County, Nevada naming a subsidiary of Baxter International as a defendant. The lawsuit, which seeks damages, injunctive relief, civil penalties and restitution, alleges that prices for Medicare and Medicaid eligible drugs were artificially inflated in violation of various state laws. Various state and federal agencies are conducting civil investigations into the marketing and pricing practices of Baxter and others with respect to Medicare and Medicaid reimbursement. As of September 30, 1996, the date of the spin-off of Allegiance Corporation ("Allegiance") from Baxter International, Allegiance assumed the defense of litigation involving claims related to Allegiance's businesses, including certain claims of alleged personal injuries as a result of exposure to natural rubber latex gloves. Allegiance has not been named in most of this litigation but will be defending and indemnifying Baxter pursuant to certain contractual obligations for all expenses and potential liabilities associated with claims pertaining to latex gloves. As of December 31, 2001, the company was named as a defendant in 557 lawsuits, including the following purported class action: Swartz v. Baxter Healthcare Corporation, et al., Court of Common Pleas, 11 Jefferson County, PA, 656-1997 C.D. On February 26, 1997, all federal cases involving latex gloves were ordered to be transferred to the U.S.D.C. for the Eastern District of Pennsylvania for case management under the MDL rules (MDL Docket No. 1148). Baxter has been named a potentially responsible party (PRP) for environmental clean-up costs at a number of hazardous-waste sites. Under the United States Superfund statute and many state laws, generators of hazardous waste that is sent to a disposal or recycling site are liable for clean-up of the site if contaminants from that property later leak into the environment. The laws generally provide that a PRP may be held jointly and severally liable for the costs of investigating and remediating the site. Allegiance has assumed responsibility for all but six of these sites. The estimated exposure for Baxter's remaining six sites is approximately $2 million, which has been accrued (and not discounted) in the company's financial statements. In addition to the cases discussed above, Baxter is a defendant in a number of other claims, investigations and lawsuits. Based on the advice of counsel, management does not believe that, individually or in the aggregate, these other claims, investigations and lawsuits will have a material adverse effect on the company's results of operations, cash flows or consolidated financial position. - -------------------------------------------------------------------------------- Item 4. Submission of Matters to a Vote of Security Holders. None. 12 - -------------------------------------------------------------------------------- PART II - -------------------------------------------------------------------------------- Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. Incorporated by reference from the Annual Report, page 59, section entitled "Notes to Consolidated Financial Statements--Quarterly Financial Results and Market for the Company's Stock (Unaudited)." On December 7, 2001, pursuant to the exemption from registration under Section 4(2) of the Securities Act, Baxter International issued 9,656,237 shares of its common stock to a financial institution in order to fund the company's acquisition of ASTA Medica Onkologie GmbH & CoKG. The shares are subject to transfer restrictions. - -------------------------------------------------------------------------------- Item 6. Selected Financial Data. Incorporated by reference from the Annual Report, page 62, section entitled "Five-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 27-36, section entitled "Management's Discussion and Analysis." - -------------------------------------------------------------------------------- Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Incorporated by reference from the Annual Report, pages 34-36, section entitled "Financial Instrument Market Risk." - -------------------------------------------------------------------------------- Item 8. Financial Statements and Supplementary Data. Incorporated by reference from the Annual Report, pages 37-59, sections entitled "Report of Independent Accountants," "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Cash Flows," "Consolidated Statements of Stockholders' Equity and Comprehensive Income" and "Notes to Consolidated Financial Statements." - -------------------------------------------------------------------------------- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 13 - -------------------------------------------------------------------------------- PART III - -------------------------------------------------------------------------------- Item 10. Directors and Executive Officers of the Registrant. (a) Identification of Directors Incorporated by reference from Baxter's proxy statement for use in connection with its annual meeting of stockholders to be held on May 7, 2002 (Proxy Statement), page 4, section entitled "Election of Directors--Proposal 1 on the Proxy Card," and pages 9-11, section entitled "Board of Directors--Director Biographies." (b) Identification of Executive Officers Following are the names and ages, as of March 1, 2002, of the executive officers of Baxter International, and one or both of its two principal operating subsidiaries, Baxter Healthcare Corporation and Baxter World Trade Corporation, their positions and summaries of their backgrounds and business experience. All executive officers of Baxter International 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 on the date of the annual meeting of stockholders. All executive officers of Baxter Healthcare Corporation and Baxter World Trade Corporation are elected or appointed by the boards of directors of the applicable subsidiary and hold office until their respective successors are elected and qualified. As permitted by applicable law, actions by these boards (and their sole stockholder, Baxter International) may be taken by written consent in lieu of a meeting. (1) Baxter International Inc. Executive Officers Harry M. Jansen Kraemer, Jr., age 47, has been a director of Baxter International since 1995 and chairman of the board since January 1, 2000. Mr. Kraemer has been president of Baxter International since 1997 and chief executive officer since January 1, 1999. From 1993 to 1997, he served as senior vice president and chief financial officer of Baxter International. Mr. Kraemer also serves as a director of Comdisco Inc. and Science Applications International Corporation. Brian P. Anderson, age 51, is senior vice president and chief financial officer of Baxter International, having served in those capacities since February 1998. Mr. Anderson previously was corporate vice president of finance of Baxter International beginning in May 1997, and was the corporate controller from 1993 to 1997. Timothy B. Anderson, age 55, is senior vice president, corporate strategy and development, of Baxter International, having served in that capacity since May 2001. He was group vice president, corporate strategy and development, from November 1999 to May 2001. Prior to that Mr. Anderson served as group vice president of Baxter Healthcare Corporation and Baxter World Trade Corporation. J. Robert Hurley, age 52, is a corporate vice president, integration management, of Baxter International. Prior to that from 1993 to 2000, he was a corporate vice president of Baxter World Trade Corporation and president--Japan. Neville J. Jeharajah, age 48, is a corporate vice president, investor relations and financial planning, of Baxter International, having served in that capacity since February 2001. Prior to that since 1982, Mr. Jeharajah held various finance positions with the company, the most recent of which was vice president, financial planning and investor relations. Karen J. May, age 43, is a corporate vice president, human resources, of Baxter International, having served in that capacity since February 2001. Prior to her current appointment she was vice president, human resources 14 from 2000 until 2001, vice president, global planning and staffing from 1998 to 2000, vice president, international finance from 1997 to 1998 and vice president, corporate audit from 1994 to 1997. Steven J. Meyer, age 45, is treasurer of Baxter International, having served in that capacity since February 1997. John L. Quick, age 57, is a corporate vice president, quality/regulatory, of Baxter International, having served in that capacity since 1996. Jan Stern Reed, age 42, is corporate secretary and associate general counsel of Baxter International, having served in those capacities since February 1998. Prior to that she was assistant corporate secretary and assistant general counsel from February 1997 to February 1998. Norbert G. Reidel, age 44, is a corporate vice president and chief scientific officer of Baxter International, having served in those capacities since May 2001. From 1998 to 2001 he served as president of the recombinant business unit of the BioScience division of Baxter Healthcare Corporation. Prior to joining Baxter in 1998 he was head of worldwide biotechnology and worldwide core research functions at Hoechst Marion Roussel. Thomas J. Sabatino, Jr., age 43, is a senior vice president and general counsel of Baxter International, having served as a senior vice president since May 2001 and as general counsel since December 1997. He was a corporate vice president from December 1997 to May 2001 and assistant secretary from February 1997 to December 1997. From 1995 to December 1997, Mr. Sabatino was an associate general counsel of Baxter Healthcare Corporation. Michael J. Tucker, age 49, is a senior vice president of Baxter International, responsible for human resources, communications and Europe. He has served as senior vice president, human resources since September 1995, of communications since May 2000 and of Europe since February 2001. (2) Baxter Healthcare Corporation and Baxter World Trade Corporation Executive Officers Eric A. Beard, age 50, is a corporate vice president of Baxter World Trade Corporation and president--Baxter Europe, Africa and Middle East, having served in those capacities since October 1998. Prior to that, Mr. Beard was president of a division of a subsidiary of Baxter World Trade Corporation. Carlos del Salto, age 59, is a senior vice president Intercontinental/Asia of Baxter World Trade Corporation, having served in that capacity since 1996, and president--Latin America. David F. Drohan, age 63, is a senior vice president of Baxter Healthcare Corporation and president--Medication Delivery, having served as a senior vice president since May 2001 and as president--Medication Delivery since 1996. He was a corporate vice president from 1996 to May 2001. James M. Gatling, age 52, is a corporate vice president, manufacturing operations, of Baxter Healthcare Corporation, having served in that capacity since December 1996. Thomas H. Glanzmann, age 43, is a senior vice president of Baxter World Trade Corporation and Baxter Healthcare Corporation, and president--BioScience. He has served as a senior vice president since May 2001 and was a corporate vice president from October 1998 to May 2001. Prior to that, Mr. Glanzmann was president of a division of a subsidiary of Baxter World Trade Corporation. Alan L. Heller, age 48, is a senior vice president of Baxter Healthcare Corporation and Baxter World Trade Corporation, and president--Renal, having served as a senior vice president since May 2001 and as president--Renal since he joined the Company in October 2000. He was a group vice president from October 2000 to May 2001. Prior to that, Mr. Heller was co-president and chief operating officer of G.D. Searle & Co. 15 David C. McKee, age 54, is a corporate vice president and deputy general counsel of Baxter Healthcare Corporation and Baxter World Trade Corporation, having served as corporate vice president since 1997 and 1996, respectively, and as deputy general counsel of both entities since 1996. Mr. McKee has held various positions with Baxter International, including vice president from 1996 to 1997, corporate vice president from 1997 to 1999, deputy general counsel from 1996 to 1999, and corporate secretary from February 1997 to February 1998. Gregory P. Young, age 48, is a corporate vice president of Baxter Healthcare Corporation and president of the Fenwal division. He has served as a corporate vice president since February 2001 and as president of the Fenwal division since 1999. Prior to that from 1985 to 1999, Mr. Young served in roles of increasing responsibility within the Medication Delivery division of Baxter Healthcare Corporation. (c) Compliance with Section 16(a) of the Securities Exchange Act of 1934. Incorporated by reference from the Proxy Statement, page 25, section entitled "Section 16(a) Beneficial Ownership Reporting Compliance." - -------------------------------------------------------------------------------- Item 11. Executive Compensation. Incorporated by reference from the Proxy Statement, pages 13-14, section entitled "Board of Directors--Compensation of Directors" and pages 19-23, section entitled "Executive Compensation." - -------------------------------------------------------------------------------- Item 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated by reference from the Proxy Statement, pages 24-25, section entitled "Ownership of Baxter Stock." - -------------------------------------------------------------------------------- Item 13. Certain Relationships and Related Transactions. None. 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 38 Consolidated Statements of Income Annual Report, page 39 Consolidated Statements of Cash Flows Annual Report, page 40 Consolidated Statements of Stockholders' Equity and Comprehensive Income Annual Report, page 41 Notes to Consolidated Financial Statements Annual Report, pages 42-59 Report of Independent Accountants Annual Report, page 37 Schedules Required By Article 12 of Regulation S-X Report of Independent Accountants on Financial Statement Schedule page 18 Schedule II--Valuation and Qualifying Accounts page 19
All other schedules have been omitted because they are not applicable or not required. (b) Reports on Form 8-K On November 5, 2001, Baxter International filed a current report on Form 8-K under Item 5, ''Other Events,'' which reported that a Baxter International subsidiary announced that preliminary tests lead the company to believe that a processing fluid used in the manufacturing operation in its Ronneby, Sweden facility may have played a role in hemodialysis patient deaths. On November 28, 2001, Baxter International filed a current report on Form 8-K under Item 5, "Other Events," which reported that a Baxter International subsidiary reached a settlement of certain claims in connection with its Althane dialyzers. On November 29, 2001, Baxter International filed a current report on Form 8-K under Item 5, "Other Events," relating to Baxter Healthcare Corporation's participation in the production of smallpox vaccine with Acambis at the request of the U.S. government. (c) Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated herein by reference. Exhibits in the Exhibit Index marked with a "C" in the left margin constitute management contracts or compensatory plans or arrangements contemplated by Item 14(a) of Form 10-K. The list of exhibits so designated is incorporated by reference in this Part IV, Item 14. 17 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Baxter International Inc. Our audits of the consolidated financial statements referred to in our report dated February 14, 2002 appearing in the 2001 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 schedule listed in Item 14(a) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Chicago, Illinois February 14, 2002 18 - -------------------------------------------------------------------------------- SCHEDULE II - -------------------------------------------------------------------------------- Valuation and Qualifying Accounts (in million of dollars) - --------------------------------------------------------------------------------
Additions ---------------------- Balance at Charged to Charged to Balance beginning of costs and other Deductions at end of period expenses accounts (a) from reserves period - ------------------------------------------------------------------------------------------------------- Year ended December 31, 2001: Allowance for doubtful accounts 43 17 -- (3) 57 Inventory reserves 110 116 (7) (94) 125 Litigation reserves 326 -- 3 (109) 220 Deferred tax asset valuation allowance 50 17 -- (9) 58 - ------------------------------------------------------------------------------------------------------- Year ended December 31, 2000: Allowance for doubtful accounts 34 10 3 (4) 43 Inventory reserves 78 73 4 (45) 110 Litigation reserves 426 31 -- (131) 326 Deferred tax asset valuation allowance 43 12 -- (5) 50 - ------------------------------------------------------------------------------------------------------- Year ended December 31, 1999: Allowance for doubtful accounts 37 6 -- (9) 34 Inventory reserves 97 68 -- (87) 78 Litigation reserves 698 -- -- (272) 426 Deferred tax asset valuation allowance 34 14 -- (5) 43 - -------------------------------------------------------------------------------------------------------
(a) Valuation accounts of acquired or divested companies and foreign currency translation adjustments. Reserves are deducted from assets to which they apply. 19 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/ HARRY M. JANSEN KRAEMER, JR. -------------------------------- Harry M. Jansen Kraemer, Jr. Chairman and Chief Executive Officer DATE: March 13, 2002 KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Harry M. Jansen Kraemer, Jr. and Jan Stern Reed, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, in any and all capacities, to sign any or all amendments to this Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof. 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 indicated on March 13, 2002. Signature Title --------- ----- /s/ HARRY M. JANSEN KRAEMER, JR. Chairman of the Board of Directors and Chief - -------------------------------- Executive Officer (principal executive Harry M. Jansen Kraemer, Jr. officer) /s/ BRIAN P. ANDERSON Senior Vice President and Chief Financial - -------------------------------- Officer (principal financial officer and Brian P. Anderson principal accounting officer) /s/ WALTER E. BOOMER Director - ------------------------------- Walter E. Boomer /s/ PEI-YUAN CHIA Director - ------------------------------- Pei-yuan Chia /s/ JOHN W. COLLOTON Director - ------------------------------- John W. Colloton /s/ SUSAN CROWN Director - ------------------------------- Susan Crown /s/ BRIAN D. FINN Director - ------------------------------- Brian D. Finn 20 Signature Title --------- ----- /s/ GAIL D. FOSLER Director - ---------------------------------- Gail D. Fosler /s/ MARTHA R. INGRAM Director - ---------------------------------- Martha R. Ingram /s/ JOSEPH B. MARTIN, M.D., PH.D. Director - ---------------------------------- Joseph B. Martin, M.D., Ph.D. /s/ THOMAS T. STALLKAMP Director - ---------------------------------- Thomas T. Stallkamp /s/ MONROE E. TROUT, M.D. Director - ---------------------------------- Monroe E. Trout, M.D. /s/ FRED L. TURNER Director - ---------------------------------- Fred L. Turner 21 EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
Number and Description of Exhibit --------------------------------- 3. Certificate of Incorporation and Bylaws 3.1* Restated Certificate of Incorporation, as amended, including Certificate of Designation of Series B Junior Participating Preferred Stock and Certificate of Elimination of Series A Junior Participating Preferred Stock, filed as exhibit 3.1 to the company's quarterly report on Form 10-Q for the quarter ended March 31, 2001, (the "March 2001 Form 10-Q"). 3.2* Certificate of Designation of Series A Junior Participating Preferred Stock, filed under the Securities Act of 1933 as Exhibit 4.3 to the company's registration statement on Form S-8 (No. 33-28428). 3.3* Amended and Restated Bylaws dated February 27, 2001, filed as exhibit 3.3 to the company's annual report on Form 10-K for the year ended December 31, 2000 (the "2000 Form 10-K"). 4. Instruments defining the rights of security holders, including indentures 4.1* Amended and Restated Indenture dated November 15, 1985 (the "Indenture"), between the company and First Trust N.A. ("First Trust") as successor in interest to Continental Illinois National Bank and Trust Company of Chicago ("Continental"), filed under the Securities Act of 1933 as exhibit 4.1 to the company's registration statement on Form S-3 (No. 33-1665). 4.2* First Supplemental Indenture to the Indenture between the company and First Trust (as successor in interest to Continental), 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). 4.3* Supplemental Indenture dated as of January 29, 1997, between the company and First Trust (as successor to Continental), filed under the Securities Act of 1933 as exhibit 4.1B to the company's debt securities shelf registration statement on Form S-3 (No. 333-19025) (the "1997 Shelf"). 4.4* 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 (the "1987 Form 10-K"). 4.5* Specimen 91/2% Note, filed as exhibit 4.3(a) to the company's current report on Form 8-K dated June 23, 1988. 4.6* Specimen 91/4% Note, filed as exhibit 4.3(a) to the company's current report on Form 8-K dated September 13, 1989. 4.7* Specimen 91/4% Note, filed as exhibit 4.3(a) to the company's current report on Form 8-K dated December 7, 1989. 4.8* Specimen 7.125% Note, filed as exhibit 4.10 to the company's annual report on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K"). 4.9* Specimen 7.65% Debenture, filed as exhibit 4.11 to the 1996 Form 10-K. 4.10* Contingent Payment Rights Agreement, filed under the Securities Act of 1933 as exhibit 2 to the Company's registration statement on Form S-4 (No. 333-47927). 4.11* Rights Agreement dated as of December 9, 1998, between the company and First Chicago Trust Company of New York, filed as Exhibit 1 to a registration statement on Form 8-A dated February 23, 1999. 4.12* Indenture dated as of May 21, 2001 by and among the company and Bank One Trust Company, N.A. as trustee, filed as exhibit 4.6 to the company's registration statement on Form S-3 (No. 333-67772).
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Number and Description of Exhibit --------------------------------- 4.13* Form of Debenture, filed as exhibit 4.7 to the company's registration statement on Form S-3 (No. 333-67772). 4.14* Registration Rights Agreement dated May 16, 2001 by and among the company and the initial purchasers of the Debentures, filed as exhibit 4.8 to the company's registration statement on Form S-3 (No. 333-67772). 10. Material Contracts C 10.1* 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. C 10.2 Baxter International Inc. International Retirement Plan. C 10.3* Baxter International Inc. and Subsidiaries Supplemental Pension Plan, filed as exhibit 10.18 to the company's annual report on Form 10-K for the year ended December 31, 1988. 10.4 Intentionally omitted. 10.5 Intentionally omitted. C 10.6* 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. C 10.7* Amendment to 1987 Incentive Compensation Program, filed as exhibit 19.1 to September 1989 Form 10-Q. C 10.8 Non-Employee Director Stock Option Plan for Annual Grant, as amended and restated effective February 25, 2002. C 10.9* Deferred Compensation Plan, amended and restated effective January 1, 1998, filed as exhibit 10.17 to the company's annual report on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K"). 10.10 Intentionally omitted. 10.11 Intentionally omitted. C 10.12* Corporate Aviation Policy, filed as exhibit 10.33 to the company's annual report on Form 10-K for the year ended December 31, 1992. C 10.13* 1994 Incentive Compensation Program, filed as exhibit A to the company's proxy statement for use in connection with its April 29, 1994 annual meeting of stockholders. C 10.14* 1999 Shared Investment Plan, filed as exhibit 10.1 to the company's quarterly report on Form 10-Q for the quarter ended June 30, 1999. C 10.15 Officer Incentive Compensation Plan. C 10.16* Baxter International Inc. Restricted Stock Plan for Non-Employee Directors, as amended and restated effective May 1, 2001, filed as exhibit 10.16 to the March 2001 Form 10-Q. C 10.17* 1995 Stock Option Grant Terms and Conditions, filed as exhibit 10.34 to the company's annual report on Form 10-K for the year ended December 31, 1995. 10.18 Intentionally omitted. C 10.19* November 1996 Stock Option Grant Terms and Conditions, filed as exhibit 10.33 to the 1996 Form 10-K. C 10.20* November 1996 Premium Price Stock Option Grant Terms and Conditions, filed as exhibit 10.34 to the 1996 Form 10-K.
23
Number and Description of Exhibit --------------------------------- C 10.21* November 1997 Stock Option Grant Terms and Conditions, filed as exhibit 10.36 to the 1997 Form 10-K. C 10.22* 1998 Incentive Compensation Program, filed as exhibit 10.37 to the 1997 Form 10-K. C 10.23* Long Term Incentive Plan, filed as exhibit 10.38 to the 1997 Form 10-K. C 10.24* 1997 Scientific Advisory Board Option Plan, filed as exhibit 4.4 to the company's registration statement on Form S-8 (No. 333-71533). C 10.25* 2000 Incentive Compensation Program, filed as Exhibit A to the company's proxy statement for use in connection with its May 2, 2000 annual meeting of stockholders. C 10.26* Employee Stock Purchase Plan for United States Employees (as amended and restated effective October 1, 1999), filed as exhibit 10 to the company's quarterly report on Form 10-Q for the quarter ended September 30, 1999. C 10.27 2001 Incentive Compensation Program and Amendment No. 1 thereto. C 10.28* Consulting Agreement with Arnold J. Levine, Ph.D., filed as exhibit 10.28 to Amendment No. 1 to the 2000 Form 10-K. 12. Computation of Ratio of Earnings to Fixed Charges. 13. Selections from the 2001 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 Baxter International Inc. 23. Consent of PricewaterhouseCoopers LLP. 24. Powers of Attorney (included in signature page)
- -------- * Incorporated herein by reference. C Exhibit contemplated by Item 14(a)(3) of Form 10-K. 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 24 cents per page from the Public Reference Room of the Securities and Exchange Commission, Washington, D.C., 20549. 24 EX-10.2 3 dex102.txt BAXTER INTL., INC. INTERNATIONAL RETIREMENT PLAN EXHIBIT 10.2 - -------------------------------------------------------------------------------- THE INTERNATIONAL RETIREMENT PLAN OF BAXTER INTERNATIONAL INC. THE INTERNATIONAL PLAN OF BAXTER INTERNATIONAL INC. TABLE OF CONTENTS ARTICLE I INTRODUCTION............................................... 1 ARTICLE II DEFINITIONS............................................... 1 ARTICLE III SERVICE RULES............................................ 5 ARTICLE IV PARTICIPATION............................................. 5 ARTICLE V RETIREMENT BENEFITS........................................ 7 ARTICLE VI RETIREMENT BENEFIT OPTIONS................................ 8 ARTICLE VII BENEFITS PAYABLE UPON THE DEATH OF A PARTICIPANT PRIOR TO RETIREMENT......................................................... 8 ARTICLE VIII FORFEITURE OF BENEFITS.................................. 8 ARTICLE IX PLAN ADMINISTRATION....................................... 9 ARTICLE X GENERAL PROVISIONS......................................... 10
i ARTICLE I INTRODUCTION 1.1 The program for provision of benefits hereunder shall be known as the International Retirement Plan of Baxter International Inc. 1.2 The objective of the Plan is to provide retirement income, and other benefits, based on the employee's service with the Company to those international employees specifically named by the Administrative Committee as Participants under the Plan who, by reason of special circumstances including, but not limited to, transfer of employment from one country to another, are unable to accumulate such benefits through regular private and statutory plans. This Plan is designed to provide Participants under the Plan with a level of benefits consistent with the employee benefits philosophy of Baxter International Inc. ARTICLE II DEFINITIONS 2.1 "Administrative Committee", also referred to as the "Committee", means the committee appointed by the Board responsible for the administration, interpretation, and control of the Plan, pursuant to the Provisions of the Article IX. 2.2 "Affiliate" means any corporation (other than the Company) more than 50% of the outstanding stock of which is owned, directly or indirectly, by Baxter International Inc. or any other business organization of which Baxter International Inc. owns more than 50% of the profit or capital interest. 2.3 "Beneficiary" means the person or persons designated in writing by a Participant to receive death benefits, if any, provided for in Article VI and/or Article VII and, if and to the extent that such a designation shall not be in force, the Participant's spouse, or if he has no spouse, his estate. 2.4 "Board" means the Board of Directors of the Company. 2.5 "Company" means Baxter International Inc., a Delaware corporation, or its successors. 2.6 "Compensation" means (a) for employees other than fully commissioned sales representatives described in Section 2.6(b) below, Compensation shall include the amounts paid by the Company or any of its Affiliates during the Plan Year to a Participant for services as an employee which is included in such Compensation under the rules set forth in Section 2.6(a)(i) below, other than such Compensation which is excluded under the rules set forth in Section 2.6(a)(ii) below. (i) Included Pay. For purposes of this subsection 2.6(a), a Participant's Compensation will include the items described in (A) and (B), below: (A) The portion of such earnings of an Employee which is or would be required to be reported as taxable income on United States Internal Revenue Service Form W-2 but for the fact that such Compensation is not US source income or is not paid by an Employer subject to US income tax reporting rules, including: 1. bonuses, including Management Incentive Compensation Plan bonuses and Christmas bonuses; payments in lieu of salary increases; bonuses paid to sales representatives if included in the compensation plan; and other bonuses under bonus plans approved by the Company or its delegate as constituting Compensation hereunder, other than bonuses described in Section 2.6(a)(ii)(C)(7); 2. call-in pay; 3. commission pay; 1 4. double time pay; 5. draws toward commissions; 6. funeral pay; 7. holiday pay; 8. jury duty pay; 9. lead pay; 10. mileage pay for long haul truckers; 11. military pay; 12. on-call (beeper) pay; 13. overtime pay; 14. paid absences; 15. retroactive pay; 16. salary or other regular pay; 17. shift differentials; 18. sick pay or other short-term disability pay; 19. straight time pay; 20. vacation pay. (B) the amount of any salary reduction or cash or deferred contributions made by such Participant under any plan maintained by the Employer which is similar to a plan that is described in US Internal Revenue Code Section 125 or Section 401(k), other than the amounts described in Sections 2.6(a)(ii)(C)(11) and (12) below. (ii) Excluded Pay. For purposes of this Section 2.6, a Participant's Compensation will exclude: (A) Amounts which might be considered as imputed income arising from the Participant's employer's moving expense reimbursement policies, the Participant's employer's life insurance plans or the Participant's employer's other fringe benefit plans; (B) Amounts paid to replace benefits not provided under any retirement plan due to the contribution or benefit limitations or non-discrimination restrictions; and (C) The following amounts paid, accrued or imputed: 1. attendance awards; 2. automobile allowances; 3. business expense reimbursements; 4. cash prizes or awards; 5. gifts; 6. contest pay; 7. deferred compensation, including deferred bonuses; 8. discretionary awards; 9. employee referral awards; 10. executive perquisite allowances; 11. flex credits; 2 12. flex cash; 13. hiring bonuses; 14. income from sale of stock; 15. income from the exercise of stock options; 16. interest earnings on deferred compensation, including deferred bonuses; 17. invention fees and awards; 18. long term disability pay; 19. mortgage differential payments; 20. non cash prizes or awards; 21. pay for unused sick time; 22. performance shares; 23. promotional awards; 24. relocation expense reimbursements; 25. restricted stock rights; 26. retention bonuses; 27. severance pay; 28. stock appreciation rights; 29. tax equalization payments to expatriates; 30. technical achievement awards; 31. travel allowances; 32. tuition reimbursements; and 33. workers' compensation benefits. (b) for Participants who are fully commissioned sales representatives who do not receive reimbursement for expenses, Compensation shall be as defined in Section 2.6(a), except that only eighty-five percent (85%) of the amounts included in Compensation under the rules of Section 2.6(a) shall be recognized. 2.7 "Continuous Service" means the period of continuous full-time employment by the Company or any Affiliate by any Participant from his most recent date of hire by the Company or any Affiliate. Continuous Service shall, in all cases, be determined by the Administrative Committee under the rules set forth in Article III and shall include completed calendar years of such service. For purposes of a Participant who becomes a Participant pursuant to Section 4.4, Continuous Service shall mean the period of continuous full-time employment by the Company or any Affiliate by any Participant from his most recent date of rehire by the Company or any Affiliate. 2.8 "Credited Service" means the portion of Continuous Service that is used to determine benefit levels under this Plan, calculated in accordance with the rules set forth in Article III. 2.9 "Country" means a self-governing jurisdiction recognized as a separate country by the Administrative Committee. The Commonwealth of Puerto Rico shall not be considered a separate Country for the purposes of this Plan. 2.10 "Effective Date" means January 1, 1999. 2.11 "Entry Date" means January 1, April 1, July 1 and October 1 of each calendar year. 3 2.12 "Final Average Compensation" means the average of Compensation for the period of three (3) consecutive full calendar years of Continuous Service immediately preceding the Retirement Date. The average shall be calculated by converting Compensation earned in a year into U.S. dollars using the exchange rate in effect as of December 31 of that year, as determined below or has determined by the Administrative Committee, and then calculating the average based on such dollar amounts. The Participant shall be considered to have incurred a full calendar year of Continuous Service for a year if the Participant has not terminated employment prior to December 31 of such year. Exchange rates shall be determined by using the currency trading exchange rates published in the Wall Street Journal. If such rates are not published, the Administrative Committee may select an alternative or successor publication that shall most closely reflect such currency trading rates. 2.13 "Former Plan" shall mean the Baxter World Trade Corporation International Retirement Plan. 2.14 "Normal Retirement Benefit" shall mean the lump sum benefit to which the Participant would be entitled at his Retirement Date, calculated in accordance with Article V of this Plan. 2.15 "Normal Retirement Date" means the first day of the month coinciding with or next following the sixty-fifth (65/th) birthday of a Participant. / 2.16 "Participant" means a person who has met the requirements for participation as set forth in Article IV. 2.17 "Past Service" shall mean the period of Continuous Service that has been previously been performed by an employee as of the date he becomes a Participant in this Plan. 2.18 "Plan" means the "International Retirement Plan of Baxter International Inc." as set forth in this document and as it may be amended from time to time. 2.19 "Retirement Date" means the first day of the month immediately following the date that the Participant terminates employment with the Company and its Affiliates. 2.20 "Social Security Benefits" means all benefits sponsored by a government (including lump sum payments) for which the Participant and the Company or Affiliate contribute, or for which the Company or an Affiliate has contributed, other than benefits payable in the event of death of the Participant, to which a Participant is entitled, as a single male or female, and which he collects, or could collect, upon proper application, at total disability or at a deemed retirement age from any Social Security benefit program in any Country in which the Participant has been employed. 2.21 "Social Security Transfer" means a transfer of employment from one Country to another at the request of the Company or an Affiliate under circumstances that cause the employee to cease to accrue Social Security Benefits under the Social Security benefit program of the Country from which he transfers. A Social Security Transfer shall be deemed to occur only after the completion of twelve (12) months Continuous Service in the Country to which the employee has been transferred. 2.22 "Termination for Cause" shall mean the involuntary termination of an employee by the Company or any Affiliate because of conviction of a crime or because of theft, embezzlement or other actions involving an intentional desire to damage the business of the Company or any of its Affiliates. 2.23 "Total Disability" and "Totally Disabled" mean disability during any period for which the Participant is considered to be totally and permanently disabled by the Administrative Committee. 2.24 "U.S./P.R. Expatriate Employee" shall mean an employee who is assigned to work outside the United States or Puerto Rico but who remains on a United States or Puerto Rican payroll and who is a participant in the United States or Puerto Rican qualified retirement plans of the Company. 4 ARTICLE III SERVICE RULES 3.1 Subject to the approval of the Administrative Committee, Continuous Service of a Participant shall not be deemed broken by any of the following events: (a) temporary absence because of vacation, illness or accidental injury within the normal duration of absence permitted by the Employer in such cases; (b) absence while on a leave granted with the consent of the Employer; (c) transfer of employment from one employer to another among the Company and its Affiliates. 3.2 If a Participant is deemed to be Totally Disabled pursuant to Section 2.23, he shall remain a Participant in the Plan during such disability and be entitled to accumulate Continuous Service for retirement income purposes, and be entitled to eligibility for death benefits according to the provisions of Article VII for so long as he remains Totally Disabled. For purposes of Section 2.12 and Section 3.2, a Participant's Retirement Date shall be the date the earlier of the date his employment actually terminates or the date he is first deemed to be Totally Disabled. 3.3 If a Participant ceases to be Totally Disabled prior to his Normal Retirement Date and fails to return to active employment with the Company or an Affiliate, he shall be considered, for the purposes of the Plan, as having terminated his employment at the time he became Totally Disabled. 3.4 Any breaks in Continuous Service with the Company other than those described in Sections 3.1 and 3.2 constitute a termination of employment. 3.5 Credited Service shall include all Continuous Service performed after the date an employee becomes a Participant in the Plan plus one fifth ( 1/5) of the Participant's Past Service for each of the first five (5) full years of Continuous Service performed after the date the employee became a Participant in the Plan. Notwithstanding the foregoing, a person who was a participant under the Former Plan and who is employed by the Company on the Effective Date shall immediately be granted full credit for the Participant's Past Service. Furthermore, this Section 3.5 shall not apply to a Participant who again becomes a Participant pursuant to Section 4.4. 3.6 In the event that the Participant is terminated from service involuntarily (other than a Termination for Cause) Credited Service shall include all Continuous Service. ARTICLE IV PARTICIPATION 4.1 A person who was a participant under the Former Plan and who is employed by the Company on the Effective Date shall become a Participant under the Plan on the Effective Date. Each other person who is a regular full-time employee of the Company or an Affiliate shall become a Participant under the Plan on an Entry Date coincident with or following the Effective Date on which he has met the requirements of either Section 4.2 or Section 4.3 below. 4.2 On a quarterly basis, the Administrative Committee shall name an employee to become a Participant if he has: (a) Incurred a Social Security Transfer after having incurred a previous Social Security Transfer, provided that the second Social Security Transfer does not result in his transfer of employment back to the Country from which he transferred employment in the previous Social Security Transfer, (b) He is earning pay in Broad Pay Groupings E or above (as defined by the Baxter compensation scheme), and (c) He is not a U.S./P.R. Expatriate Employee. 5 4.3 On a quarterly basis, the Administrative Committee may name an employee who has not satisfied the criteria set forth in Section 4.2, but who has satisfied such other criteria as the Committee may from time to time establish, such as incurring a Social Security Transfer to a location where it is not expected that the employee will ever qualify for Social Security benefits. The Committee shall not exercise such discretion unless the executive management team of his business unit has nominated the employee, and delivered such nomination to the Committee at least two (2) calendar months prior to the employee's proposed Entry Date. 4.4 A former Participant who is subsequently rehired by the Company or an Affiliate shall automatically become a Participant again as of the Entry Date coincident with or following the Participant's rehire date. 4.5 Participants shall not be required or permitted to contribute to the Plan. 6 ARTICLE V RETIREMENT BENEFITS 5.1 The Normal Retirement Benefit shall be a lump sum amount that shall depend upon the Participant's Final Average Compensation and number of whole years of Credited Service at the Participant's Retirement Date in accordance with the following table:
Whole Years Percentage of of Credited Service Final Average Compensation ------------------- -------------------------- 1 0% 2 0% 3 0% 4 0% 5 0% 6 10% 7 20% 8 30% 9 40% 10 50% 11 70% 12 90% 13 110% 14 130% 15 150% 16 170% 17 190% 18 210% 19 230% 20 260% 21 290% 22 320% 23 350% 24 380% 25 410% 26 440% 27 470% 28 500% 29 530% 30 or more 560%
5.2 The Normal Retirement Benefit of a Participant who was a participant in the Former Plan shall be the Normal Retirement Benefit calculated under the terms of Section 5.1. 5.3 A Participant shall receive his Normal Retirement Benefit if he shall cease employment with the Company and all of its Affiliates, unless the Administrative Committee shall determine that his Normal Retirement Benefit shall be deferred or forfeited in accordance with the provisions of Article VIII below. 7 5.4 All benefits payable under the Plan shall be calculated in United States dollars and shall be payable from and in the currency of the last country from which the Participant was paid prior to the Participant's Retirement Date. The benefit shall be converted to local currency using the exchange rate in effect as of the Participant's Retirement Date, as determined below or has determined by the Administrative Committee. Exchange rates shall be determined by using the currency trading exchange rates published in the Wall Street Journal. If such rates are not published, the Administrative Committee may select an alternative or successor publication that shall most closely reflect such currency trading rates. 5.5 Notwithstanding any of the provisions of this Article, the retirement of any Participant under this Plan shall not become effective while he is employed by the Company or an Affiliate. ARTICLE VI RETIREMENT BENEFIT OPTIONS 6.1 In lieu of the lump sum benefit described in Article V, a Participant may elect, prior to his Retirement Date, an optional form of payment described in Section 6.2. Notwithstanding any election by the Participant, if the Participant's Retirement Date is on or after his Normal Retirement Date the optional form of payment described in Section 6.2 is not available. 6.2 A Participant may elect to have his Normal Retirement Benefit paid in annual installments over a period no longer than four (4) years, without interest, commencing as soon as administratively feasible after his Retirement Date. In the event that the Participant dies, his Beneficiary shall receive any remaining installments. If his Beneficiary shall die before receiving all payments to which he is entitled, the remaining payments shall be paid to the estate of the Beneficiary. 6.3 A participant must elect a form of benefit upon his entry into the Plan. A Participant may change his form of benefit at any time; however, provided that if the Participant desires to elect an optional form of retirement benefit according to Section 6.2, he must do so not less than one year prior to his Retirement Date, unless permission is obtained from the Administrative Committee for an election at a later date. 6.4 An elected option may be changed, provided that the revised election is made not less than one year prior to the Participant's Retirement Date. 6.5 Payment under Section 6.1 or the first payment under 6.2, whichever is applicable, shall occur no more than 45 days after the Participant's Retirement Date. ARTICLE VII BENEFITS PAYABLE UPON THE DEATH OF A PARTICIPANT PRIOR TO RETIREMENT 7.1 In the event of a Participant's death prior to his retirement while still employed by the Company or any Affiliate, a death benefit equal to his Normal Retirement Benefit, calculated as if he had terminated employment on the date of his death, shall be paid in a lump sum to his designated Beneficiary. 7.2 Proof of the death of the Participant and of eligibility of the Beneficiary for benefit must be furnished, in a form satisfactory to the Administrative Committee, before any benefits are payable hereunder. ARTICLE VIII FORFEITURE OF BENEFITS 8.1 Benefits otherwise payable hereunder shall be nonforfeitable except in accordance with this Article and, if applicable, Section 10.12. In the event of forfeiture in accordance with the provisions of this Article, the Participant shall receive solely the benefits, if any, allowed under this Article and shall have no further rights to payments under this Plan. 8 8.2 A Participant shall forfeit his entire Normal Retirement Benefit and shall have no right to any benefit hereunder if the Administrative Committee determines that he incurs a Termination for Cause. If a Participant who was a participant in the Former Plan elects to exercise any contractual rights he may have under the Former Plan and receives a benefit under the terms of the Former Plan he shall forfeit his Normal Retirement Benefit under the Plan and shall have no rights under this Plan, except as may be granted under Section 8.3. 8.3 In the event of a complete forfeiture described in Section 8.2, the Administrative Committee may, in its discretion, nevertheless pay a benefit to the Participant, calculated by assuming that the Participant's Credited Service equals the amount determined under Section 3.5, or such lesser amount that the Committee shall deem reasonable. The Administrative Committee shall not be obligated to make such a payment, and the Participant shall have no rights under this plan to contest a decision of the Committee. ARTICLE IX PLAN ADMINISTRATION 9.1 The Plan shall be administered by the Administrative Committee, which shall have the power to administer and construe the Plan, determine questions of law and fact arising under the Plan, establish a funding policy if deemed appropriate, determine the amount and authorize payment of benefits under the Plan, and exercise the other rights and powers specified herein. The Committee shall consist of at least three members appointed by the Board. 9.2 Any member of the Committee may at any time resign by giving written notice of such resignation to the Committee and to the Company. The Board may at any time remove one or more of the members of the Committee by giving written notice of such removal to the Committee and to each member so removed. In the event of the resignation, removal or death of any member of the Committee, the Board shall designate the successor of such member. 9.3 A quorum for the transaction of business by the Committee shall consist of a majority of the members of the Committee then in office. All action taken by the Committee at any meeting shall be by the vote of a majority of those present. No member of the Committee shall participate in any decision, which constitutes an exercise of discretion by the Committee, relating specifically to such member. Any action may be taken by the Committee without a meeting upon the written approval of a majority of the members then acting. The Committee may at any time adopt rules, not inconsistent with the provisions of the Plan for the administration of the Plan and the transaction of its business, and may at any time revoke or amend any such rules theretofore adopted. 9.4 The Committee may retain auditors, accountants, actuaries and legal counsel and the Committee may retain such other persons as it deems appropriate in connection with administering the Plan. Any member of the Committee may himself act in any such capacity, and any such auditors, accountants, actuaries, and legal counsel may be persons acting in a similar capacity for the Company or any Affiliate and may be employees of the Company or any Affiliate. To the extent permitted by the law, the opinion of any such auditor, accountant, actuary or legal counsel shall be full and complete authority and protection in respect of any action taken, suffered, or omitted by the Committee in good faith and in accordance with such opinion. 9.5 The Committee members may allocate responsibility among themselves, and the Committee may designate other persons to carry out its responsibilities under the Plan. All of the members of the Committee at any time acting hereunder may, by a written instrument, designate each or any of such members severally, or any two or more of them, jointly, and/or any one or more other persons, severally or jointly, to execute on behalf of the Committee all documents and other instruments proper, necessary or desirable in order to effectuate the purposes of the Plan, and any member of the Committee at any time acting hereunder may similarly revoke any such designation. 9.6 To the extent permitted by law, all determinations hereunder by the Committee shall be made in the sole and absolute discretion of the Committee. In the event that any disputed matter shall arise hereunder, including, without any matter limiting the generality of the foregoing, any matter relating to the eligibility of any 9 person therein, the amounts payable to any person hereunder and the applicability and interpretation of the provisions hereof, the decision of the Committee upon such matter shall be binding and conclusive upon all persons, including without in any manner limiting the generality of the foregoing, the Company, its Affiliates, all persons at any time in the employ of the Company or an Affiliate, the Participants, the former Participants, the Vested Former Participants, and their respective beneficiaries, and upon the respective successors, assigns, executors and administrators of all the foregoing. 9.7 No member of the Committee shall receive any compensation for his services as such. ARTICLE X GENERAL PROVISIONS 10.1 The Company reserves the right by action of the Board to amend, modify, terminate, or discontinue the Plan in whole or in part at any time. No such amendment shall adversely affect the retirement benefits applicable to a Participant who has already retired or shall reduce the Normal Retirement Benefit that a Participant would receive if he were to incur a Retirement Date on the date of such amendment, without such Participant's prior consent. Any amendment so proposed shall be authorized or ratified by the Board and shall be evidenced in writing, executed by the Company, and directed to the Administrative Committee. 10.2 While the Company intends to continue the Plan indefinitely, nevertheless, subject to the provision of Section 10.1, it assumes no contractual obligations as to its continuance or the making of any contributions thereunder. The Company reserves the right at any time to terminate the Plan for any reason. 10.3 The Plan is unfunded and no Participant shall have any right or claim against any assets or pool of assets held by any person or entity. The Company or any Affiliate may establish such funds or book reserves as it deems necessary or desirable, but all such reserves or funds shall be considered assets of the Company or its Affiliate. The Company and its Affiliates shall be under no obligation to establish any such funds or book reserves. Nothing contained in this Plan shall be deemed to create a trust or create a fiduciary relationship with respect to benefits hereunder or with respect to any funds or reserves established by the Company or any Affiliate. The right of a Participant or Beneficiary to receive payment under the Plan shall be no greater than the right of any unsecured creditor of the Company or Affiliate. 10.4 The Company shall pay the entire costs of the Plan, provided that its Affiliates may be required to share in such cost on an equitable basis. 10.5 No benefit payable under the Plan shall be subject in any manner to alienation, anticipation, assignment, garnishment or pledge; and any attempt to alienate, anticipate, assign, garnish or pledge the same shall be void. No person or entity paying benefits under the Plan shall be in any manner liable for or subject to the debts, liabilities, engagements or torts of any person entitled to such benefits. If any person entitled to benefits under the Plan is adjudicated bankrupt or attempts to alienate, anticipate, assign or pledge any benefits, then such benefits shall, in the discretion of the Committee, cease. In this event, the Committee shall have the authority to hold or apply such benefits, or any part of them, to or for the benefit of the person entitled to them, his spouse, his children or other dependents, in such manner and in such proportion as the Committee may deem proper. 10.6 Nothing in the Plan shall restrict the right of an employer to terminate the service or reduce the compensation of a Participant; neither shall the benefits to which a Participant might claim to be entitled to under the Plan, be used as a ground for increasing damages in any action brought by him, against the Company or any Affiliate, in respect to the termination of service. 10.7 If the Administrative Committee determines that any person to whom a payment is due hereunder is unable to care for his affairs by reason of physical or mental disability, or if a minor, the Committee shall have the power to direct that any benefit payment due or becoming due to such person, be paid to a member of his immediate family or any duly qualified legal representative, without any responsibility of the Committee to see to the application of such payment, and any such payment so made, shall be a complete discharge of the liabilities of the Plan therefor. 10 10.8 If the Committee for any reason deems it advisable, any or all of the retirement benefits payable under the Plan may be provided through the purchase of annuities from such insurance company or companies as may be approved by the Committee. 10.9 No person, whether a Participant or otherwise, shall have any claim, right or interest upon, to, or in respect of the benefits from this Plan except under and in accordance with the provisions of the Plan as contained herein. 10.10 If a Participant covered under this Plan is considered to be in receipt of taxable emoluments under the personal income tax laws of any country in which he is employed during his career by virtue of his coverage under this Plan, the benefits provided herein are withdrawn as they apply to such employee as long as he is considered to be in constructive receipt of such benefits by such laws. 10.11 The Company hereby indemnifies each member of the Administrative Committee, each officer, and each employee of the Company or any Affiliate against any liabilities or expenses, including attorneys' fees, reasonably incurred by him in connection with any actual or threatened legal action to which he might become a party by reason of being a fiduciary with respect to the Plan, except to the extent that he shall be judged in such action to be liable for gross negligence or willful misconduct in the performance of this duties as a fiduciary. 10.12 If the Committee cannot make payment of any amounts payable hereunder within five (5) years after such amount becomes payable because the identity or whereabouts of the person entitled to such payment cannot be ascertained, the Committee, at the end of such 5-year period, may direct that such unpaid amount be forfeited. 10.13 Copies of the Plan shall be maintained by the Company and shall be subject to inspection by Participants upon request to the Administrative Committee. 10.14 The masculine pronoun, whenever used herein, shall include the feminine, and the singular includes the plural unless the context indicates otherwise. IN WITNESS WHEREOF, the company has caused this instrument to be executed on the day of , 1999. BAXTER INTERNATIONAL INC. By: /S/ MICHAEL TUCKER Its: Senior Vice President of Human Resources ACKNOWLEDGEMENT The undersigned, as Secretary of the Administrative Committee under the International Retirement Plan of Baxter International Inc. and on behalf of the other members of such Committee, acknowledges receipt of the foregoing amended and restated instrument and approves thereof. Dated this day of , 1999. ADMINISTRATIVE COMMITTEE UNDER THE INTERNATIONAL RETIREMENT PLAN OF BAXTER INTERNATIONAL INC. By: _______________________________ Its: Secretary 11 EX-10.8 4 dex108.txt NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN EXHIBIT 10.8 - -------------------------------------------------------------------------------- BAXTER INTERNATIONAL INC. Non-Employee Director Stock Option Plan adopted April 30, 2001 [Plan for Annual Grant] Terms and Conditions As amended and restated effective February 25, 2002 1. Purpose This Non-Employee Director Stock Option Plan (the "Plan") is adopted by the Compensation Committee (the "Committee") of the Board of Directors (the "Board") of Baxter International Inc. ("Baxter"). This Plan is adopted pursuant to the Baxter International Inc. 2001 Incentive Compensation Program (the "Program"), for the purposes stated in the Program. Capitalized terms defined in the Program that are used without being defined in the Plan will have the same meaning as in the Program. 2. Participants Each member of the Board who is not an employee of Baxter or any of its subsidiaries shall participate in the Plan (a "Participant"). 3. Awards 3.1 On the date of Baxter's annual meeting of stockholders (the "Annual Meeting") in each year beginning with the Annual Meeting on May 1, 2001, and subject to availability of shares of Common Stock under Section 4.2, each Participant upon completion of the Annual Meeting shall, automatically and without necessity of any action by the Board or any committee thereof, be granted an option (an "Option") to purchase the number of shares of Common Stock determined pursuant to Section 4.1 of this Plan. 3.2 Each Participant elected or appointed on a date other than the date of an Annual Meeting shall, on the date of such election or appointment and automatically and without necessity of any action by the Board or any committee thereof, be granted an Option to purchase that number of shares of Common Stock equal to the product of (A) the Annual Stock Option Grant Amount (as defined in Section 4.1) for each Option granted on the date of the immediately preceding Annual Meeting, multiplied by (B) the quotient of (i) the number of full calendar months before the next Annual Meeting divided by (ii) 12 (rounded to the nearest whole number which is a multiple of ten). The number of shares of Common Stock subject to any Option granted under this Section 3.2 shall not exceed the number available under Section 4.2 on the date of grant. 3.3 The purchase price for each share of Common Stock subject to an Option shall be the Fair Market Value of a share of Common Stock on the date of grant. The terms of each Option will be as set forth in the Plan and the Program. To the extent that any provision of the Plan is inconsistent with the Program, the Program shall control. The Options are not intended to qualify as Incentive Stock Options within the meaning of Section 422 of the United States Internal Revenue Code. 4. Number of Shares 4.1 The number of shares of Common Stock subject to each Option granted pursuant to this Plan on the date of an Annual Meeting ("Annual Stock Option Grant Amount") shall be determined in accordance with this Section 4.1. Each Participant shall be assigned an annual stock option target equal to 10,000 shares of Common Stock, subject to adjustment in accordance with the Program ("Annual Stock Option Target"). The Annual Stock Option Grant Amount shall be equal to the product of (A) the Annual Stock Option Target multiplied by (B) the stock performance multiplier ("Stock Performance Multiplier") set forth on Exhibit A attached to this Plan, which is based on Baxter's total shareholder return ("Baxter TSR") 1 compared to the total shareholder return for the Standard and Poor's (S&P) 500 Health Care Index ("HCI TSR") for the 12-month period ending on the most recent September 30 prior to the date of an Annual Meeting. The Annual Stock Option Grant Amount shall not be more than 150% of the Annual Stock Option Target or less than 75% of the Annual Stock Option Target. 4.2 The total number of shares of Common Stock available for Options granted under this Plan shall be 500,000 shares, subject to adjustment in accordance with the Program. If on any grant date, the number of shares of Common Stock which would otherwise be subject to Options granted under the Plan shall exceed the number of shares of Common Stock then remaining available under the Plan, the available shares shall be allocated among the Options to be granted Participants in proportion to the number of shares subject to Options that Participants would otherwise be entitled to receive. 5. Exercise and Expiration 5.1 Subject to Section 11.10 of the Program and except as expressly provided in Sections 5.5, 5.6 and 5.7, Options shall first become exercisable on the first anniversary of the date of grant, or if that date is not a Business Day, then on the next succeeding Business Day. A "Business Day" is any day on which the Common Stock is traded on the New York Stock Exchange. 5.2 After an Option becomes exercisable and until it expires, it may be exercised in whole or in part, in the manner specified by the Company. If exercised in part, the Option must be exercised in increments of 100 shares of Common Stock or, if the Option is not then exercisable for 100 shares of Common Stock, to the full extent the Option can then be exercised. Under no circumstances may an Option be exercised after it has expired. Shares of Common Stock may be used to pay the purchase price for shares of Common Stock to be acquired upon exercise of an Option in accordance with the requirements specified by the Company. 5.3 Except as provided in Sections 5.5, 5.6 and 5.7, if a Participant ceases service as a member of the Board before his or her Option becomes exercisable, the Option will expire when the Participant ceases service as a member of the Board. 5.4 If a Participant ceases service as a member of the Board after his or her Option becomes exercisable, the Option will not expire but will remain exercisable. Subject to Sections 5.5, 5.6, 5.7 and 5.8, the Option will expire three months after the Participant ceases service as a member of the Board, unless the Participant dies or becomes disabled during such three month period in which case the Option will expire on the first anniversary of the date the Participant ceased serving as a member of the Board. 5.5 If a Participant dies while serving as a member of the Board, his or her Option will not expire and will remain, or immediately become, fully exercisable, as the case may be. Subject to Sections 5.7 and 5.8, the Option will expire on the first anniversary of the Participant's death. 5.6 If a Participant becomes disabled and unable to continue service as a member of the Board, his or her Option will not expire and will remain, or when the Participant ceases to serve as member of the Board become, fully exercisable, as the case may be. Subject to Sections 5.7 and 5.8, the Option will expire on the first anniversary of the date the Participant ceases service as a member of the Board. 5.7 If a Participant who has served as a member of the Board for a continuous period of at least ten years or who is at least 72 years of age ceases to serve as a member of the Board (including without limitation by reason of death or disability), his or her Option will not expire and will remain, or when the Participant ceases to serve as member of the Board become, fully exercisable, as the case may be. Subject to Section 5.8, the Option will expire on the fifth anniversary of the date the Participant ceases service as a member of the Board. 5.8 Options that have not previously expired will expire at the close of business on the tenth anniversary of the date of grant. If an Option would expire on a date that is not a Business Day, it will expire at the close of business on the last Business Day preceding that date. 5.9 An exercisable Option may only be exercised by the Participant, his or her legal representative, or a person to whom the Participant's rights in the Option are transferred by will or the laws of descent and distribution or in accordance with rules and procedures established by the Committee. 2 6. General Provisions 6.1 Subject to the limitations contained in Section 11.9 of the Program, the Board or the Committee may, at any time and in any manner, amend, suspend, or terminate the Plan or any Option outstanding under the Plan. 6.2 Participation in the Plan does not give any Participant any right to continue as a member of the Board for any period of time or any right or claim to any benefit unless such right or claim has specifically accrued hereunder. 3 EXHIBIT A To Plan For Annual Grants Stock Option Performance Multiplier
Annual Stock Baxter TSR Performance TSR Multiplier Target Option Award ---------------------- -------------- ------ ------------ Above HCI TSR by 25%. 150% 10,000 15,000 Above HCI TSR by 15%. 130% 10,000 13,000 Above HCI TSR by 10%. 120% 10,000 12,000 Equal to HCI TSR 100% 10,000 10,000 ---------------- -------------- ------ ------------ Below HCI TSR by 10%. 90% 10,000 9,000 Below HCI TSR by 15%. 85% 10,000 8,500 Below HCI TSR by 25%. 75% 10,000 7,500
- -------- NOTE: Results that fall between performance levels will be interpolated (e.g., A performance of 12.5% above HCI TSR would equate to a 125% multiplier) 4 EX-10.15 5 dex1015.txt OFFICER INCENTIVE COMPENSATION PLAN EXHIBIT 10.15 - -------------------------------------------------------------------------------- BAXTER INTERNATIONAL INC. OFFICER INCENTIVE COMPENSATION PLAN This Officer Incentive Compensation Plan ("Plan") of Baxter International Inc. ("Baxter") and its subsidiaries (collectively, the "Company") is adopted pursuant to the Baxter International Inc. 2001 Incentive Compensation Program (the "Program") for the purposes stated in the Program. The Plan is intended to comply with the requirements of Section 162(m)(4)(C) of the Internal Revenue Code of 1986 ("IRC"), as amended, and the related income tax regulations issued thereunder. 1. Eligibility Officers of the Company are eligible to participate in the Plan if the officer's participation for a calendar year (or portion of such calendar year) ("Plan Year") is approved by the Compensation Committee of the Board of Directors of Baxter ("Committee"). Officers so approved by the Committee shall be referred to herein as "Participants". 2. Bonus Award 2.1 For each Plan Year, each Participant shall be eligible to receive a cash payment ("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 which will include one or more of the following performance measures: net income, operational cash flow, sales, the Common Stock price of Baxter, earnings per share, total shareholder return, gross profit ratio, economic value added, return on assets, and return on equity ("Company Performance Criteria"), b) a "Bonus Range" for each Participant for the Plan Year, and c) the amount within a Participant's Bonus Range that will be payable to a Participant based upon the achievement of the Company Performance Criteria for the Plan Year. The terms described in the preceding sentence must be established by April 1 of the Plan Year, and such terms shall not thereafter be changed, except as permitted by paragraph 2.2. 2.2 By March 31 of each year, the Committee shall assess the extent to which the Company has achieved the Company Performance Criteria for the preceding Plan Year, based on the Company's publicly reported results. The Committee shall exclude the effect of acquisitions, divestitures, changes in accounting principles, and other extraordinary or non-recurring events which occurred during the Plan Year when assessing the extent to which the Company has achieved the Company Performance Criteria for such Plan Year, but only if such exclusion would enhance the Company's performance relative to the Company Performance Criteria. The exclusion authorized by the preceding sentence shall only apply to the extent it is consistent with IRC Section 162(m)(4)(C) and the related regulations described above. The Committee shall then determine each Participant's Bonus Award based upon the terms described in paragraph 2.1 above. The Committee, however, has the discretion to reduce the amount of a Participant's Bonus Award determined under the preceding sentence. The Committee's determination shall be consistent with IRC Section 162(m)(4)(C) and the related regulations described above. No Participant shall receive a Bonus Award in excess of $3.0 million for any Plan Year for which the Participant is subject to IRC Section 162(m). The committee may exercise discretion in the determination of the Bonus Awards earned under the Plan with respect to participants who are not subject to IRC Section 162(m). 2.3 If an officer's participation in the Plan becomes effective after January 1 of a Plan Year, the Committee shall establish a prorated Bonus Range for such Participant based on the number of full months remaining in the Plan Year after he or she becomes a Participant. To the extent applicable, the determination of a prorated Bonus Range shall be consistent with IRC Section 162(m)(4)(C) and the related regulations described above. 3. Payment 3.1 Except as otherwise determined by the Committee and except with respect to Participants who have filed deferral elections pursuant to paragraph 4, all Bonus Awards will be paid in cash as soon as possible following determination of Bonus Awards by the Committee. 1 3.2 No Participant will be eligible to receive a Bonus Award for a Plan Year unless he or she continues to be employed by the Company through February 1 of the following year except as otherwise determined by the Committee. The Committee's Bonus Award determination with respect to such participant may be determined in the same manner as provided in paragraphs 2.1 and 2.2 above. 4. Deferral of Payment Participants may elect to defer payment in accordance with the Baxter International Inc. and Subsidiaries Deferred Compensation Plan. 2 EX-10.27 6 dex1027.txt 2001 INCENTIVE COMPENSATION PROGRAM EXHIBIT 10.27 BAXTER INTERNATIONAL INC. 2001 INCENTIVE COMPENSATION PROGRAM 1. Purpose. The purpose of the Baxter International Inc. 2001 Incentive Compensation Program ("Program") is to increase stockholder value and to advance the interests of Baxter International Inc. ("Baxter") and its subsidiaries (collectively, the "Company") by providing a variety of economic incentives designed to attract, retain and motivate directors, officers, other employees, consultants, independent contractors and agents. As used in this Program, the term "subsidiary" means any entity, whether or not incorporated, in which Baxter has a direct or indirect interest in the equity of the entity. 2. Administration. 2.1 Administration by Committee. The Program shall be administered by the Compensation Committee of the Baxter Board of Directors ("Committee"), which shall consist of two or more non-employee directors within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934, as amended ("Exchange Act") who also qualify as outside directors within the meaning of Section 162(m) and the related regulations under the Internal Revenue Code of 1986, as amended, except as otherwise determined by the Board of Directors. The Board of Directors may also exercise any or all authority otherwise delegated to the Committee under the terms of the Program with respect to the grant or administration of incentives. 2.2 Authority. Subject to the provisions of the Program, the Committee shall have the authority to (a) interpret the provisions of the Program, and prescribe, amend, and rescind rules and procedures relating to the Program, (b) grant incentives under the Program, in such forms and amounts and subject to such terms and conditions as it deems appropriate, including, without limitation, incentives which are made in combination with or in tandem with other incentives (whether or not contemporaneously granted) or compensation or in lieu of current or deferred compensation, (c) modify the terms of, cancel and reissue, or repurchase outstanding incentives, subject to subsection 11.9(b), (d) prescribe the form of agreement, certificate or other instrument evidencing any incentive under the Program, (e) correct any defect or omission and reconcile any inconsistency in the Program or in any incentive hereunder, and (f) make all other determinations and take all other actions as it deems necessary or desirable for the administration of the Program; provided, however, that in no event shall the Committee cancel any outstanding stock option for the purpose of reissuing an option to the option holder at a lower exercise price. The determination of the Committee on matters within its authority shall be conclusive and binding on the Company and all other persons. The Committee shall comply with all applicable law in administering the Plan. 3. Participation. Subject to the terms and conditions of the Program, the Committee shall determine and designate from time to time the directors (including non-employee directors), officers and other employees of the Company, persons expected to become directors, officers and other employees, consultants, independent contractors and agents of the Company who shall receive incentives under the Program ("Participants"). All employees of the Company are eligible to receive incentives under the Program. Participation in the Program, the grant of incentives, and any related performance goals for persons subject to section 16(a) of the Exchange Act, must be approved by the Committee. The Committee's authority with respect to participation, the grant of incentives and related performance objectives for others (persons not subject to section 16(a)) may be delegated. For purposes of the Program, references to employment shall also mean service as a director of Baxter as well as an agency or independent contractor relationship. 4. Shares Subject to the Program. 4.1 Number of Shares Reserved. Shares of common stock, $1.00 par value, of Baxter ("Common Stock") shall be available for incentives under the Program. To the extent provided by resolution of the Baxter Board of Directors, such shares may be uncertificated. Subject to adjustment in accordance with subsections 4.3 and 4.4, the aggregate number of shares of Common Stock available for incentives under the Program shall be 10,000,000 shares. 4.2 Type of Common Stock. Common Stock issued under the Program in connection with Stock Options and Performance Shares may be authorized and unissued shares or issued shares held as treasury shares. 1 Common Stock issued under the Program in connection with Restricted Stock or Stock Awards shall be issued shares held as treasury shares; provided, however, that authorized and unissued shares may be issued in connection with Restricted Stock or Stock Awards to the extent that the Committee determines that past services of the Participant constitute adequate consideration for at least the par value thereof. 4.3 Reusage of Shares. (a) In the event of the exercise or termination (by reason of forfeiture, expiration, cancellation, surrender or otherwise) of any incentive under the Program, that number of shares of Common Stock that was subject to the incentive but not delivered shall again be available for incentives under the Program. (b) In the event that shares of Common Stock are delivered under the Program as Restricted Stock or pursuant to a Stock Award and are thereafter forfeited or reacquired by the Company pursuant to rights reserved upon the award thereof, such forfeited or reacquired shares shall again be available for incentives under the Program. (c) Notwithstanding the provisions of paragraphs (a) or (b), the following shares of Common Stock shall not be available for reissuance under the Program: (1) shares which are withheld from any award or payment under the Program to satisfy tax withholding obligations (as described in subsection 11.5(e)); (2) shares which are surrendered to fulfill tax obligations (as described in subsection 11.5(e)); and (3) shares which are surrendered in payment of the Option Price (as defined in subsection 5.1) upon the exercise of a Stock Option. 4.4 Adjustments to Shares Reserved. In the event of any merger, consolidation, reorganization, recapitalization, spinoff, stock dividend, stock split, reverse stock split, exchange, or other distribution with respect to shares of Common Stock or other change in the corporate structure or capitalization affecting the Common Stock, the type and number of shares of stock which are or may be subject to incentives under the Program, the terms of any outstanding incentives (including the price at which shares of stock may be issued pursuant to an outstanding incentive) and the limitations set forth in Sections 5.1, 6, 7.1, and 8.1 shall be equitably adjusted by the Committee, in its sole discretion, to preserve the value of incentives awarded or to be awarded to Participants under the Program. 5. Stock Options. 5.1 Awards. Subject to the terms and conditions of the Program, the Committee shall designate the employees to whom options to purchase shares of Common Stock ("Stock Options") are to be awarded under the Program and shall determine the number, type, and terms of the Stock Options to be awarded to each of them. Stock Option awards are subject to the following specific limitations. Each Stock Option shall expire on the earlier of the date provided by the option terms or the date which is 10 years and one day after the date of grant. The option price per share ("Option Price") for any Stock Option awarded shall not be less than the greater of par value or the Fair Market Value of a share of Common Stock on the date the Stock Option is awarded. Each Stock Option awarded under the Program shall be a "nonqualified stock option" for tax purposes unless the Stock Option satisfies all of the requirements of section 422 of the Internal Revenue Code of 1986, as amended, and the Committee designates such Stock Option as an "Incentive Stock Option". No person shall receive, in any calendar year, Stock Options which, in the aggregate, represent more than 500,000 shares of Common Stock, subject to adjustment as set forth in Section 4.4. 5.2 Manner of Exercise. A Stock Option may be exercised, in whole or in part, by giving written notice to Baxter prior to the date on which the Stock Option expires; provided, however, that a Stock Option may only be exercised with respect to whole shares of Common Stock. Such notice shall specify the number of shares of Common Stock to be purchased and shall be accompanied by payment of the Option Price for such shares in such form and manner as the Committee may from time to time approve, provided, however, that shares of Common Stock may not be used to pay any portion of the Option Price unless such shares are shares of Common Stock for which the holder thereof has good title, free and clear of all liens and encumbrances and which such holder either (i) has held for at least six months or (ii) has purchased on the open market. The Committee may establish attestation procedures to be used in lieu of the actual delivery of shares in payment of the Option Price. 5.3 Substitution of Cash. Notwithstanding any provision in this Program to the contrary, or any provision in any agreement evidencing a Stock Option awarded hereunder to the contrary, in the event of a 2 Change in Control pursuant to paragraph (1) or (2) of subsection 11.10, or in the event of a Change in Control pursuant to paragraph (3) or (4) of subsection 11.10 in connection with which the holders of Common Stock receive consideration other than shares of Common Stock that are registered under Section 12 of the Exchange Act, the Committee shall have the authority to require that any outstanding Stock Option be surrendered to the Company by the holder thereof for cancellation by the Company, and the holder thereof shall receive, within ten days of the occurrence of such Change in Control, a cash payment from the Company in an amount equal to the number of shares of Common Stock then subject to such Stock Option, multiplied by the excess, if any, of the greater of (A) the highest per share price offered to stockholders of Baxter in any transaction whereby the Change in Control takes place or (B) the Fair Market Value of a share of Common Stock on the date of occurrence of the Change in Control, over the purchase price per share of Common Stock subject to the Stock Option. 6. Stock Awards. Subject to the terms and conditions of the Program, the Committee shall designate the employees who shall be awarded shares of Common Stock without restrictions ("Stock Awards"), under the Program and shall determine the number and terms of the Stock Awards to be awarded to each of them. Stock Awards are subject to the following specific limitations. No person subject to section 16(a) of the Exchange Act may receive a Stock Award, and no person eligible to receive a Stock Award may receive a Stock Award representing more than 2,500 shares of Common Stock in any calendar year, subject to adjustment as set forth in Section 4.4. 7. Restricted Stock. 7.1 Awards. Subject to the terms and conditions of the Program, the Committee shall designate the employees to whom shares of Common Stock, subject to restrictions ("Restricted Stock"), shall be awarded under the Program and determine the number of shares and the terms and conditions of each such award. Each Restricted Stock award shall entitle the Participant to receive shares of Common Stock upon the terms and conditions specified by the Committee and subject to the following provisions of this Section 7 and the provisions of Section 10, and no person eligible to receive Restricted Stock may receive more than 50,000 shares in any calendar year, subject to adjustment as set forth in Section 4.4. 7.2 Restrictions. All shares of Restricted Stock transferred or sold hereunder shall be subject to such restrictions as the Committee may determine, including, without limitation, any or all of the following: (a) a required period of employment with the Company, as determined by the Committee, prior to the vesting of the shares of Restricted Stock; (b) a prohibition against the sale, assignment, transfer, pledge, hypothecation or other encumbrance of the shares of Restricted Stock for a specified period as determined by the Committee; (c) a requirement that the holder of shares of Restricted Stock forfeit (or in the case of shares sold to a Participant, resell to the Company at his or her cost) all or a part of such shares in the event of termination of his or her employment during any period in which such shares are subject to restrictions; or (d) a prohibition against employment of the holder of such Restricted Stock by any competitor of the Company or against such holder's dissemination of any secret or confidential information belonging to the Company. All restrictions on shares of Restricted Stock awarded pursuant to the Program shall expire at such time or times as the Committee shall specify. 7.3 Registration of Shares. Shares of Restricted Stock awarded pursuant to the Program shall be registered in the name of the Participant and, if such shares are certificated, in the discretion of the Committee, may be deposited in a bank designated by the Committee or with Baxter. The Committee may require a stock power endorsed in blank with respect to shares of Restricted Stock whether or not certificated. 7.4 Stockholder Rights. Subject to the terms and conditions of the Program, during any period in which shares of Restricted Stock are subject to forfeiture or restrictions on transfer, each Participant who has been awarded shares of Restricted Stock shall have such rights of a stockholder with respect to such shares as the 3 Committee may designate at the time of the award, including the right to vote such shares and the right to receive all dividends paid on such shares. Unless otherwise provided by the Committee, stock dividends or non-cash dividends and, except as otherwise provided by subsection 11.10, any other securities distributed with respect to Restricted Stock shall be restricted to the same extent and subject to the same terms and conditions as the Restricted Stock to which they are attributable. 7.5 Lapse of Restrictions. Subject to the terms and conditions of the Program, at the end of any time period during which the shares of Restricted Stock are subject to forfeiture or restrictions on transfer, such shares will be delivered free of all restrictions to the Participant (or to the Participant's legal representative, beneficiary or heir). 7.6 Substitution of Cash. The Committee may, in its sole discretion, substitute cash equal to the Fair Market Value (determined as of the date of the distribution) of shares of Common Stock otherwise required to be distributed to a Participant in accordance with this Section 7. 8. Performance Shares. 8.1 Awards. A performance share is an award which shall be paid in shares of Common Stock, as described below. Subject to the terms and conditions of the Program, the Committee shall designate the employees to whom Performance Shares are to be awarded in accordance with this Section 8 and the number of shares subject to the award and the terms and conditions of such awards. No person eligible for a Performance Share Award shall receive more than 50,000 shares in any calendar year, subject to adjustment as set forth in Section 4.4. Each Performance Share awarded pursuant to this Section 8 shall entitle the Participant to a payment in the form of one share of Common Stock upon the attainment of such performance goals and other terms and conditions as may be specified by the Committee. 8.2 No Adjustments. Except as otherwise provided by the Committee, no adjustment shall be made in Performance Shares awarded on account of cash dividends which may be paid or other rights which may be provided to the holders of Common Stock prior to the end of any period for which performance goals were established. 8.3 Substitution of Cash. The Committee may, in its sole discretion, substitute cash equal to the Fair Market Value (determined as of the date of the issuance) of shares of Common Stock otherwise required to be issued to a Participant in accordance with this Section 8. 9. Other Incentives. In addition to the incentives described in Sections 5 through 8 above and subject to the terms and conditions of the Program, the Committee may grant other incentives ("Other Incentives"), payable in cash or in kind, under the Program as it determines to be in the best interest of the Company. 10. Performance Goals and Application of Tax Deduction Limitations. Compensation attributable to a Stock Option awarded to a Participant is intended to satisfy the requirements of the exception for qualified performance-based compensation within the meaning of section 162(m) and the related regulations under the Internal Revenue Code of 1986, as amended. All awards of Restricted Stock, Performance Shares, and Other Incentives under the Program, to persons subject to section 16(a) of the Exchange Act, shall be made subject to the attainment of performance goals relating to one or more of the business criteria within the meaning of section 162(m) identified above, including but not limited to, stock price, market share, sales, net earnings, earnings per share, return on equity, costs, and cash flow, as determined by the Committee from time to time. 11. General. 11.1 Effective Date. The Program will become effective upon its approval by the affirmative vote of the holders of a majority of the voting stock of Baxter present in person or represented by proxy and entitled to vote thereon at a meeting of Baxter's stockholders. Unless approved within one year after the date of the Program's adoption by the Board of Directors, the Program shall not be effective for any purpose. Prior to the approval of the Program by Baxter's stockholders, the Committee may award incentives, but if such approval is not received in the specified period, then such awards shall be of no effect. 4 11.2 Duration. The Program shall remain in effect until all incentives granted under the Program have either been satisfied by the issuance of shares of Common Stock or the payment of cash or been terminated in accordance with the terms of the Program or the incentive and until all restrictions imposed on shares of Common Stock issued under the Program have lapsed. No incentive may be granted under the Program after the tenth anniversary of the date the Program is approved by Baxter's stockholders. 11.3 Non-transferability of Incentives. No share of Restricted Stock, Performance Share, or Other Incentive under the Program may be transferred, pledged, or assigned by the holder thereof (except, in the event of the holder's death, by will or the laws of descent and distribution to the limited extent provided in the Program or in the terms of the incentive), and the Company shall not be required to recognize any attempted assignment of such rights by any Participant. Stock Options may be transferred by the holder thereof to the limited extent authorized by rules and procedures established by the Committee from time to time. 11.4 Effect of Termination of Employment or Death. If a Participant ceases to be an employee of the Company for any reason, including death, any incentives then outstanding may be exercised or shall expire in accordance with the terms of the incentive. 11.5 Compliance with Applicable Law and Withholding. (a) Notwithstanding any other provision of the Program, Baxter shall have no obligation to issue any shares of Common Stock under the Program if such issuance would violate any applicable law or any applicable regulation or requirement of any securities exchange or similar entity. (b) Prior to the issuance of any shares of Common Stock under the Program, Baxter or the Company may require a written statement that the recipient is acquiring the shares for investment and not for the purpose or with the intention of distributing the shares and that the recipient will not dispose of them in violation of the registration requirements of the Securities Act of 1933. (c) With respect to any person who is subject to section 16(a) of the Exchange Act, the Committee may, at any time, add such conditions and limitations to any incentive or payment under the Program or implement procedures for the administration of the Program which it deems necessary or desirable to comply with the requirements of Rule 16b-3 of the Exchange Act. (d) If, at any time, Baxter, in its sole discretion, determines that the listing, registration, or qualification (or any updating of any such document) of any type of incentive, or the shares of Common Stock issuable pursuant thereto, is necessary on any securities exchange or under any federal or state securities or blue sky law, or that the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, any incentive, the issuance of shares of Common Stock pursuant to any incentive, or the removal of any restrictions imposed on shares subject to an incentive, such incentive shall not be granted and the shares of Common Stock shall not be issued or such restrictions shall not be removed, as the case may be, in whole or in part, unless such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to Baxter. (e) All incentives and payments under the Program are subject to withholding of all applicable taxes and the Company shall have the right to withhold from any award under the Program or to collect as a condition of any payment under the Program, as applicable, any taxes required by law to be withheld. To the extent provided by the Committee, a Participant may elect to have any distribution, or a portion thereof, otherwise required to be made under the Program to be withheld or to surrender to the Company previously owned shares of Common Stock to fulfill any tax withholding obligation. 11.6 No Continued Employment. The Program does not constitute a contract of employment or continued service, and participation in the Program will not give any employee or Participant the right to be retained in the employ of the Company or the right to continue as a director of the Company or any right or claim to any benefit under the Program unless such right or claim has specifically accrued under the terms of the Program or the terms of any incentive under the Program. 11.7 Treatment as a Stockholder. No incentive granted to a Participant under the Program shall create any rights in such Participant as a stockholder of Baxter until shares of Common Stock related to the incentive are registered in the name of the Participant. 5 11.8 Deferral Permitted. Payment of cash to a Participant or distribution of any shares of Common Stock to which a Participant is entitled under any incentive shall be made as provided in the terms of the incentive. Payment may be deferred at the request of the Participant to the extent provided in the incentive. 11.9 Amendment of the Program. The Board may, at any time and in any manner, amend, suspend, or terminate the Program or any incentive outstanding under the Program; provided, however, that no such amendment or discontinuance shall: (a) be made without stockholder approval to the extent such approval is required by law, agreement or the rules of any exchange or automated quotation system upon which the Common Stock is listed or quoted; (b) alter or impair the rights of Participants with respect to incentives previously made under the Program without the consent of the holder thereof; or (c) make any change that would disqualify awards made under the Program, intended to be so qualified, from the exemption provided by Rule 16b-3 of the Exchange Act. 11.10 Acceleration of Incentives. Notwithstanding any provision in this Program to the contrary or the normal terms of vesting in any incentive, (a) the restrictions on all shares of Restricted Stock awarded shall lapse immediately, (b) all outstanding Stock Options will become exercisable immediately, and (c) all performance goals shall be deemed to be met and payment made immediately if a Change in Control occurs. For purposes of this Program, a "Change in Control" shall have occurred if: (1) any "Person", as such term is used in Section 13(d) and 14(d) of the Exchange Act (other than Baxter, any corporation owned, directly or indirectly, by the stockholders of Baxter in substantially the same proportions as their ownership of stock of Baxter, and any trustee or other fiduciary holding securities under an employee benefit plan of Baxter or such proportionately owned corporation), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Baxter representing 30% or more of the combined voting power of Baxter's then outstanding securities; (2) during any period of not more than 24 months, individuals who at the beginning of such period constitute the Board of Directors of Baxter, and any new director (other than a director designated by a Person who has entered into an agreement with Baxter to effect a transaction described in paragraph (1), (3) or (4) of this subsection 11.10) whose election by the board or nomination for election by Baxter's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (3) a merger or consolidation of Baxter with any other corporation shall be consummated, other than (A) a merger or consolidation which would result in the voting securities of Baxter outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 60% of the combined voting power of the voting securities of Baxter or such surviving entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of Baxter (or similar transaction) in which no Person acquires more than 30% of the combined voting power of Baxter's then outstanding securities; or (4) a plan of complete liquidation or dissolution of Baxter or an agreement for the sale or disposition by Baxter of all or substantially all of Baxter's assets (or any transaction having a similar effect) shall be consummated. 11.11 Definition of Fair Market Value. Except as otherwise determined by the Committee, the "Fair Market Value" of a share of Common Stock as of any date shall be equal to the closing sale price of a share of Common Stock as reported on The National Association of Securities Dealers' New York Stock Exchange Composite Reporting Tape (or if the Common Stock is not traded on the New York Stock Exchange, the closing sale price on the exchange on which it is traded or as reported by an applicable automated quotation system) ("Composite Tape") on the applicable date or, if no sales of Common Stock are reported on such date, the closing sale price of a share of Common Stock on the date the Common Stock was last reported on the Composite Tape (or such other exchange or automated quotation system, if applicable). 6 Amendment No. 1 to Baxter International Inc. 2001 Incentive Compensation Program Effective as of February 26, 2002, the third sentence of Section 5.1 of the Baxter International Inc. 2001 Incentive Compensation Program is amended to read in its entirety as follows: Each Stock Option shall expire on (i) the date provided by the option terms, which date shall be no later than 11 years after the date of grant or, (ii) if the option terms do not provide for an expiration date, the date which is 10 years and one day after the date of grant. 7 EX-12 7 dex12.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 Baxter International Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges (unaudited--in millions, except ratios) - --------------------------------------------------------------------------------
2001 2000 1999 1998 1997 Years ended December 31, (B) (B) (B) (B) - ------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes and cumulative effect of accounting change $964 $946 $1,052 $493 $570 - ------------------------------------------------------------------------------------------------------- Fixed charges Interest costs 130 135 123 152 166 Estimated interest in rentals (A) 36 33 30 26 26 - ------------------------------------------------------------------------------------------------------- Fixed charges as defined 166 168 153 178 192 - ------------------------------------------------------------------------------------------------------- Adjustments to income Interest costs capitalized (22) (14) (10) (4) (6) Losses of less than majority owned affiliates, net of dividends (1) (2) (2) -- -- - ------------------------------------------------------------------------------------------------------- Income as adjusted $1,107 $1,098 $1,193 $667 $756 - ------------------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges 6.67 6.54 7.80 3.75 3.94 - -------------------------------------------------------------------------------------------------------
(A) Represents the estimated interest portion of rents. (B) Excluding the following significant unusual charges, the ratio of earnings to fixed charges was 9.49, 8.24, 6.08 and 5.08 in 2001, 2000, 1998 and 1997, respectively. 2001: $280 million charge for in-process research and development and acquisition-related costs, $189 million charge relating to discontinuing the A, AF and AX series dialyzers. 2000: $286 million charge for in-process research and development and acquisition-related costs. 1998: $116 million in-process research and development charge, $178 million net litigation charge, $122 million exit and reorganization costs charge. 1997: $220 million in-process research and development charge. EX-13 8 dex13.txt SELECTIONS FROM THE 2001 ANNUAL REPORT EXHIBIT 13 26. financial information Management's Discussion and Analysis 27 Management's Responsibilities for Financial Reporting 37 Report of Independent Accountants 37 Consolidated Balance Sheets 38 Consolidated Statements of Income 39 Consolidated Statements of Cash Flows 40 Consolidated Statements of Stockholders' Equity and Comprehensive Income 41 Notes to Consolidated Financial Statements 42 Directors and Executive Officers 60 Company Information 61 Five-Year Summary of Selected Financial Data 62 management's discussion and analysis 27 This discussion and analysis presents the factors that had a material effect on Baxter International Inc.'s (Baxter or the company) results of operations and cash flows during the three years ended December 31, 2001, and the company's financial position at that date. The information below pertains to continuing operations only. As discussed in Note 2 to the consolidated financial statements, the cardiovascular business was distributed to shareholders on March 31, 2000, and the company's consolidated financial statements and related notes have been restated to reflect the financial position, results of operations and cash flows of the cardiovascular business as a discontinued operation. The matters discussed in this Annual Report that are not historical facts include forward-looking statements that involve risks and uncertainties. Actual results could differ materially. Factors that could cause actual results to differ include but are not limited to currency exchange rates; interest rates; technological advances in the medical field; economic conditions; demand and market acceptance risks for new and existing products, technologies and health-care services; the impact of competitive products and pricing; manufacturing capacity; new plant start-ups; global regulatory, trade and tax policies; regulatory, legal or other developments relating to the company's A, AF and AX series dialyzers; continued price competition; product development risks, including technological difficulties; ability to enforce patents; actions of regulatory bodies and other government authorities; reimbursement policies of government agencies; commercialization factors; results of product testing; and other factors described elsewhere in this report or in the company's filings with the Securities and Exchange Commission. Management's financial objectives for 2001 were outlined in last year's Annual Report and are summarized below, along with the company's results relative to those objectives. Key Financial Objectives and Results
2001 Objectives Results - ------------------------------------------------------------------------------------------------------------------------------------ Increase net sales in the low double digits. Net sales increased 11 percent in 2001. Excluding fluctuations in currency exchange rates, net sales increased 15 percent. - ------------------------------------------------------------------------------------------------------------------------------------ Increase net earnings in the mid-teens. Net earnings from continuing operations increased 16 percent in 2001, excluding the cumulative effect of a change in accounting prin- ciple, charges for in-process research and development (IPR&D) and acquisition-related costs, and the special charge in 2001 relating to the company's A, AF and AX series dialyzers. - ------------------------------------------------------------------------------------------------------------------------------------ Generate more than $500 million in operational cash flow, The company generated operational cash flow of $503 million during after investing more than $1 billion in capital expenditures 2001. The total of capital expenditures and research and development and research and development. expenses (excluding IPR&D) was $1.2 billion. - ------------------------------------------------------------------------------------------------------------------------------------
Refer to the consolidated financial statements and accompanying notes for information regarding the company's financial position, results of operations and cash flows prepared in accordance with generally accepted accounting principles (GAAP). Company and Industry Overview Baxter is a global leader in providing critical therapies for life-threatening conditions and operates in three segments, which are described in Note 13. The company's products and services in bioscience, medication delivery and renal therapy are used by health-care providers and their patients in more than 100 countries. Baxter manufactures and markets products and services used to treat patients with hemophilia, immune deficiencies, infectious diseases, cancer, kidney disease, trauma and other disorders. The company generates close to 50 percent of its revenues outside the United States. While health-care cost containment continues to be a focus around the world, with the aging population and the availability of new and better medical treatments, demand for health-care products and services continues to be strong worldwide, particularly in developing markets. The company's strategies emphasize global expansion and technological innovation to advance medical care worldwide. The company's primary markets are highly competitive and subject to substantial regulation. There has been consolidation in the company's customer base and by its competitors, which has resulted in pricing and market share pressures. The company has experienced increases in its labor and material costs, which are partly influenced by general inflationary trends. Competitive market conditions have minimized inflation's impact on the selling prices of the company's products and services. Management expects these trends to continue. The company will continue to manage these issues by capitalizing on its market-leading positions, developing innovative products and services, investing in human resources, upgrading and expanding facilities, leveraging its cost structure, making acquisitions, and entering into alliances and joint venture arrangements. 28 management's discussion and analysis Results of Operations Net Sales
Percent increase --------------------- years ended December 31 (in millions) 2001 2000 1999 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ Medication Delivery $ 2,935 $ 2,719 $ 2,524 8% 8% BioScience 2,786 2,353 2,176 18% 8% Renal 1,942 1,824 1,680 6% 9% - ------------------------------------------------------------------------------------------------------------------------ Total net sales $ 7,663 $ 6,896 $ 6,380 11% 8% - ---------------------------------------------------------------========================================================= Percent increase --------------------- years ended December 31 (in millions) 2001 2000 1999 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ United States $ 3,887 $ 3,194 $ 2,921 22% 9% International 3,776 3,702 3,459 2% 7% - ------------------------------------------------------------------------------------------------------------------------ Total net sales $ 7,663 $ 6,896 $ 6,380 11% 8% - ---------------------------------------------------------------=========================================================
Excluding fluctuations in currency exchange rates, which impacted sales growth unfavorably for all three segments, total net sales growth was 15 percent in 2001 and 12 percent in 2000. The company's sales growth was unfavorably impacted by fluctuations in currency exchange rates in 2001 principally due to the weakening of the Euro and Japanese Yen relative to the United States Dollar. In 2000, the weakening of the Euro relative to the United States Dollar was partially offset by the strengthening of the Japanese Yen. Medication Delivery The Medication Delivery segment generated eight percent sales growth in both 2001 and 2000. Excluding the impact of fluctuations in currency exchange rates, sales growth was 11 percent in 2001 and 2000. Of the constant-currency sales growth, two points of growth in both 2001 and 2000 were generated by recent acquisitions, principally the October 2001 acquisition of a subsidiary of Degussa AG, ASTA Medica Onkologie GmbH & CoKG (ASTA), the August 2001 acquisition of Cook Pharmaceutical Solutions, formerly a unit of Cook Group Incorporated (Cook), the January 2000 acquisition of a domestic ambulatory and infusion pump business and the September 1999 acquisition of a nutrition and fluid therapy business in Europe. Refer to Note 3 for further information on the company's significant acquisitions. In 2001 and 2000, three points and four points of growth, respectively, were generated from the anesthesia business, with a portion of such growth driven by the segment's sales of Propofol, an intravenous drug used for the induction or maintenance of anesthesia in surgery, and as a sedative in monitored anesthesia care. Sales of the Colleague(R) electronic infusion pumps, and intravenous fluids and administration sets used with electronic infusion pumps, contributed two points of sales growth in both 2001 and 2000. The majority of the remaining sales growth in 2001 and 2000 was driven by sales of specialty products, particularly premixed drugs and nutrition products. Sales in the United States and Western Europe have been impacted by competitive pricing pressures and cost pressures from health-care providers. These factors are expected to continue to be more than offset by expansion of higher-margin specialty products outside the United States, as well as increased sales and a broadening of the portfolio of products and technologies for medication delivery as a result of internal development, new distribution and alliance agreements, and acquisitions. BioScience Sales in the BioScience segment increased 18 percent and eight percent in 2001 and 2000, respectively. Excluding the impact of fluctuations in currency exchange rates, sales growth was 22 percent in 2001 and 14 percent in 2000, with growth particularly strong in the domestic market in 2001 and outside the United States in 2000. Of the constant-currency growth rates, nine points and three points of growth in 2001 and 2000, respectively, were due to increased sales of recombinant products, particularly Recombinate Antihemophilic Factor (rAHF) (Recombinate), with such growth principally a result of increased capacity, improved pricing, as well as continued strong demand for this product. Sales of plasma-derived products increased the segment's growth rates by approximately 11 points and six points in 2001 and 2000, respectively, due principally to strong sales of plasma Factor VIII in 2001, the February 2001 acquisition of Sera-Tec Biologicals, L.P. (Sera-Tec), and improved product supply and strong growth of Gammagard(R) S/D IGIV in 2000. The transfusion therapy business also generated solid sales growth during 2001 and 2000, principally due to an increase in sales of products that provide for leukoreduction, which is the removal of white blood cells from blood products used for transfusion. Partially offsetting these increases in 2001 were reduced sales of vaccines, which were principally due to the company not receiving a license for its tick-borne encephalitis product in Germany, and a nonrecurring sale of a vaccine in 2000. The June management's discussion and analysis 29 2000 acquisition of North American Vaccine, Inc. (NAV) contributed three points to the segment's sales growth rate in 2000. The effects of regulatory, supply, competitive and other pressures on the BioScience segment are expected to continue to be more than offset by the effects of global expansion, technological advancement and innovation, increases in manufacturing capacity, and strategic alliances, joint ventures and acquisitions. Renal The Renal segment generated sales growth of six percent and nine percent in 2001 and 2000, respectively. Excluding the impact of fluctuations in currency exchange rates, sales growth was 13 percent in 2001 and 11 percent in 2000. Strong growth was generated by the segment's Renal Therapy Services business, which operates dialysis clinics in partnership with local physicians in international markets, and the Renal Management Strategies business, which is a renal-disease management organization, with revenues from these businesses increasing $110 million in 2001 and $60 million in 2000. Sales related to the March 2000 acquisition of Althin Medical A.B. (Althin), a manufacturer of hemodialysis products, contributed four points to the segment's growth rate in 2000. The remaining sales growth in the Renal segment was driven principally by continued penetration of products for peritoneal dialysis. The penetration continues to be strongest in emerging markets such as Latin America and Asia, where many people with end-stage renal disease are currently under-treated. Sales in certain geographic markets continue to be affected by strong pricing pressures and the impact of market consolidation. These issues are expected to continue to be more than offset by increased penetration of peritoneal dialysis, growth in sales of hemodialysis products, product innovation, continued expansion into developing markets, and additional acquisitions and alliances. The October 2001 acquisition of the assets and rights to technology relating to a proprietary recombinant erythropoietin drug for the treatment of anemia is also expected to contribute to the segment's future sales growth. Gross Margin and Expense Ratios
years ended December 31 (as a percent of sales) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Gross margin 44.8% 44.4% 44.1% Marketing and administrative expenses 19.2% 19.7% 20.5% - ---------------------------------------------------------------------------------=======================================
The improvement in the gross margin in both 2001 and 2000 was partly due to changes in the products and services mix, as well as fluctuations in currency exchange rates along with the effects of related hedging activities. The improved sales mix in 2001 was principally due to significantly higher sales of Recombinate in the BioScience segment. The improved sales mix in 2000 was principally due to significantly higher sales of Recombinate and vaccines in the BioScience segment. The reduction in the expense ratios in both 2001 and 2000 was primarily due to the company's aggressive management of expenses and leveraging of recent acquisitions. Partially offsetting these cost reductions were the effects of the company's significant investments to continue to grow its businesses, including the costs to attract and retain a highly talented workforce. The gross margin and expense ratios also benefited from the company's pension plan asset returns. In addition, various recently implemented strategic sourcing initiatives have resulted in significant efficiencies and cost savings to the company, which has contributed to improved gross margin and expense ratios, and has allowed management to redeploy valuable resources within the company. Management expects the gross margin to continue to increase in 2002 as a result of continued sales growth of higher-margin products. Management expects to reduce the expense ratio in 2002 as it continues to make strategic investments while leveraging and closely managing costs. Research and Development
Percent increase --------------------- years ended December 31 (in millions) 2001 2000 1999 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ Research and development expenses $ 427 $ 379 $ 332 13% 14% as a percent of sales 6% 5% 5% - ---------------------------------------------------------------=========================================================
Research and development (R&D) expenses above exclude IPR&D charges, which principally consisted of the $250 million charge relating to the acquisition of ASTA in 2001 and the $250 million IPR&D charge relating to the acquisition of NAV in 2000. Refer to Note 3 for a discussion of significant acquisitions, along with related IPR&D charges. R&D expenses increased in all three segments in both 2001 and 2000. The overall increase was primarily due to spending in the BioScience segment, principally relating to the development of a next-generation recombinant clotting factor for hemophilia, next-generation oxygen-therapeutics program, initiatives in the wound management and plasma-based products areas, and, in 2000, research and development expenses added as a result of the acquisition of NAV. The status of development, stage of completion, nature and timing of remaining efforts for completion, risks and uncertainties, and other key factors vary by R&D project. In many cases, substantial further R&D, preclinical testing and clinical trials will be required to determine the technical feasibility and commercial viability of 30 management's discussion and analysis the projects. At December 31, 2001, the company had approximately 50 significant R&D projects in its pipeline, with the projects in various stages of development, from the development or preclinical stage through the final regulatory review stage. Management's growth strategy is to continue to make significant investments in R&D initiatives across the three segments. Special Charge - A, AF and AX Series Dialyzers As further discussed in Note 4, the company recorded a $189 million pretax charge ($156 million on an after-tax basis) related to the decision to initiate a global recall and permanently cease manufacturing its Renal segment's A, AF and AX series dialyzers. Testing led the company to conclude that a processing fluid used during the manufacturing of a limited number of dialyzers produced in the company's Ronneby, Sweden facility may have played a role in patient deaths reported in Croatia and other countries. Included in the charge are writedowns of two facilities and related equipment, and certain goodwill and other intangible assets due to impairment. The charge also includes employee-related and other cash costs. Management believes the established reserve for this exit program is adequate to complete the actions contemplated by the program. Total cash expenditures, which are estimated to be $50 million on an after-tax basis, will be funded with cash generated from the company's operations. The operating results relating to the A, AF and AX series dialyzers were not significant. Goodwill Amortization Goodwill amortization increased in 2001 principally due to the acquisitions of Sera-Tec in February 2001 and NAV in June 2000. Goodwill amortization increased in 2000 principally due to the acquisition of NAV. Goodwill amortization on a net-of-tax basis was $41 million, $28 million and $17 million in 2001, 2000 and 1999, respectively, or $0.07, $0.05 and $0.03 per diluted common share, respectively. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," goodwill relating to acquisitions completed after June 30, 2001 is not being amortized. Effective January 1, 2002 all goodwill will no longer be amortized but will be subject to periodic impairment reviews. Management expects to significantly increase R&D spending in 2002, offsetting the reduced expense due to the elimination of goodwill amortization. Other Income and Expense Net interest expense declined in 2001 principally due to the May 2001 issuance of convertible debt, which bears a lower interest rate than the debt balances repaid with the proceeds from the issuance. Net interest expense declined in 2000 due principally to the impact of a greater mix of foreign currency denominated debt, which bears a lower average interest rate, and to lower average debt levels, partially offset by the impact of increased interest rates in the United States and Europe. As further discussed in Note 10, other income in 2001 included a pretax gain of $105 million from the disposal of a non-strategic common stock investment. This gain was substantially offset by impairment charges for other assets and investments whose decline in value was deemed to be other than temporary. Other income in 2000 consisted principally of net gains relating to foreign currency hedging instruments, partially offset by losses relating to the early termination of debt. Other income and expense in 2001, 2000 and 1999 also included gains and losses on disposals of non-strategic investments and fluctuations in currency exchange rates. Pretax Income Refer to Note 13 for a summary of financial results by segment. Certain items are maintained at the company's corporate headquarters and are not allocated to the segments. They primarily include the majority of the hedging activities, certain foreign currency fluctuations, net interest expense, income and expense related to certain non-strategic investments, corporate headquarters costs, and certain nonrecurring gains and losses. The following is a summary of significant factors that impacted the segments' financial results. Medication Delivery Growth in pretax income of 11 percent and one percent in 2001 and 2000, respectively, was primarily a result of solid sales growth, the close management of costs, and the leveraging of expenses in conjunction with recent acquisitions, partially offset by the unfavorable impact of fluctuations in currency exchange rates in both periods, increased pump service costs in 2000 and the termination of certain non-core distribution agreements in 2000. BioScience The four percent and 23 percent growth in pretax income in 2001 and 2000, respectively, was primarily the result of an improved gross margin due to strong sales growth, a favorable product mix and manufacturing efficiencies, and the leveraging and close management of marketing and administrative expenses, partially offset by the unfavorable impact of fluctuations in currency exchange rates, significantly increased R&D expenditures, and, in 2001, the effect of the loss of a vaccine license. The impact of eased supply constraints and manufacturing capacity expansions for Recombinate also contributed to the growth in pretax income in 2000. management's discussion and analysis 31 Renal Pretax income decreased five percent in 2001 and three percent in 2000. The decline in pretax income was principally due to unfavorable fluctuations in currency exchange rates, an unfavorable change in the sales mix of products and services, and higher R&D expenses, partially offset by the effect of closely managing administrative and other costs. Income Taxes The effective tax rate relating to continuing operations per the consolidated statements of income was 31 percent, 22 percent and 26 percent in 2001, 2000 and 1999, respectively. Excluding special charges for IPR&D and acquisition-related costs in 2001 and 2000, and the charge in 2001 relating to the company's A, AF and AX series dialyzers, the effective income tax rate relating to continuing operations was 26 percent in each of 2001, 2000 and 1999. Management does not expect a significant change in the effective tax rate in 2002. Income from Continuing Operations Before Cumulative Effect of Accounting Changes Income from continuing operations before cumulative effect of accounting changes per the consolidated statements of income was $664 million, $738 million and $779 million in 2001, 2000 and 1999, respectively. Excluding special charges for IPR&D and acquisition-related costs in 2001 and 2000, and the charge in 2001 relating to the company's A, AF and AX series dialyzers, income from continuing operations before cumulative effect of accounting changes was $1,063 million, $915 million and $779 million in 2001, 2000 and 1999, respectively, and the growth rate was 16 percent and 17 percent in 2001 and 2000, respectively. Changes in Accounting Principles As further discussed in Note 1, the company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its amendments (SFAS No. 133) at the beginning of 2001. The new standard changed prior accounting rules and requires that all derivative instruments be carried on the balance sheet at fair value. In accordance with the transition provisions of SFAS No. 133, upon adoption the company recorded a cumulative effect after-tax reduction to earnings of $52 million and a cumulative effect after-tax increase to other comprehensive income of $8 million. At the beginning of 1999, the company recorded a $27 million after-tax charge for the cumulative effect of a change in accounting principle related to the adoption of AICPA Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." Critical Accounting Policies The company's results of operations and financial position are determined based on the application of the company's accounting policies, as discussed in the notes to the consolidated financial statements. Certain of the company's accounting policies represent a selection among acceptable alternatives under GAAP. Management has not determined how reported amounts would differ based on the application of different accounting policies. Management has also not determined the likelihood that materially different amounts could be reported under different conditions or using different assumptions. The recognition of revenue relating to sales of products and services rendered requires application of accounting policies for which GAAP provides various models, and for which management must use judgment to determine the most appropriate model to apply, given the particular facts and circumstances. In evaluating these transactions, management assesses all relevant GAAP and chooses the model that most accurately reflects the nature of the transactions. The application of accounting policies requires the use of judgment and estimates. As it relates to the company, estimates and forecasts are required to determine allowances for bad debts, reserves for excess and obsolete inventory, litigation reserves and related insurance recoveries, deferred tax asset valuation reserves, employee benefit-related liabilities, product warranty liabilities, any impairments of assets, allocations of purchase prices related to acquisitions (including IPR&D), and anticipated transactions to be hedged. These matters that are subject to judgments and estimation are inherently uncertain, and different amounts could be reported using different assumptions and estimates. Management uses its best estimates and judgments in determining the appropriate amount to reflect in the financial statements, using historical experience and all available information. The company also uses outside experts where appropriate. The company applies estimation methodologies consistently from year to year. 32 management's discussion and analysis Liquidity and Capital Resources Cash flows from continuing operations per the consolidated statements of cash flows decreased in 2001 and increased in 2000. In 2001, higher earnings (before non-cash items) were offset by higher net cash outflows relating to accounts receivable, inventories, litigation and other items. In 2000, the increase compared to the prior year was due to higher earnings (before non-cash items) and lower net cash outflows relating to accounts receivable, litigation and other items. As further discussed in Note 6, cash flows benefited from the sales of certain accounts receivable in each year. Cash flows from discontinued operation decreased in 2001 and 2000 due to the spin-off of Edwards on March 31, 2000. Cash flows from investing activities decreased in both 2001 and 2000. Capital expenditures (including additions to the pool of equipment placed with or leased to customers) increased 21 percent and three percent in 2001 and 2000, respectively, as the company increased its investments in various capital projects across the three segments. The growth in capital expenditures principally reflected increases in manufacturing capacity in the BioScience segment, as the company is in the process of increasing manufacturing capacity for vaccines, and plasma-based and recombinant products. Capital expenditures are made at a sufficient level to support the strategic and operating needs of the businesses. With the various growth opportunities in the businesses, management expects to further increase these activities and invest over $850 million in capital expenditures in 2002. Net cash outflows relating to acquisitions increased in both 2001 and 2000. In 2001, net cash outflows relating to acquisitions included $455 million related to the acquisition of ASTA and $111 million related to the acquisition of Cook. Also included in the 2001 total was $40 million related to the Renal segment's acquisitions of dialysis centers in international markets, and $38 million related to the Renal segment's acquisition of the assets and rights to technology relating to a proprietary recombinant erythropoietin drug for the treatment of anemia. The remainder of the outflows relating to acquisitions in 2001 consisted of individually insignificant acquisitions. As further discussed in Note 3, the purchase price of Sera-Tec and a portion of the purchase price of Cook was paid with Baxter common stock. In 2000, net cash outflows relating to acquisitions included $55 million related to the acquisition of Althin and $63 million related to the acquisition of NAV. A portion of the purchase price for both of these acquisitions was paid in company common stock. Approximately $131 million of the total outflows in 2000 related to several acquisitions and investments in the Medication Delivery segment, principally the acquisition of a domestic ambulatory and infusion pump business and a contingent purchase price payment associated with the 1998 acquisition of a domestic manufacturer of inhalants and drugs used for general and local anesthesia. Approximately $15 million related to the acquisition of dialysis centers in international markets, and the remainder of the outflows relating to acquisitions in 2000 consisted of individually insignificant acquisitions. In 1999, net cash outflows relating to acquisitions included $36 million for a contingent purchase price payment pertaining to the 1997 acquisition of Immuno International AG, $22 million related to acquisitions of dialysis centers in international markets and $88 million related to the acquisition of a nutrition and fluid therapy business in Europe. In 2001, the company generated $44 million of cash relating to the sale and leaseback of certain assets. The cash flows relating to divestitures and other asset dispositions in 2000 principally related to the spin-off of Edwards on March 31, 2000. In 1999, the company generated $30 million of cash relating to a prior year divestiture in the BioScience segment and $42 million of cash relating to the sale and leaseback of certain assets. Cash flows from financing activities increased in both 2001 and 2000. As further discussed in Note 5, in order to balance its capital structure and reduce net interest expense, in May 2001 the company issued $800 million of callable convertible debentures. The proceeds of the debt were used to refinance certain of the company's short-term debt. The debentures allow the holders to require the company to repurchase the debt at the end of the first year and in the fifth, tenth and fifteenth years. The company also issued other debt during 2001 principally to fund its investing activities. In order to better match the currency denomination of its assets and liabilities, the company rebalanced certain of its debt during 2000, acquiring $878 million of its U.S. Dollar denominated debt securities and increasing its non-U.S. Dollar denominated debt. The company's net-debt-to-capital ratio was 35.9 percent and 40.1 percent at December 31, 2001 and 2000, respectively. 6 management's discussion and analysis 33 Common stock dividends increased in 2001 and decreased in 2000. Effective at the beginning of 2000, the company changed from a quarterly to an annual dividend payout schedule, resulting in lower cash dividends paid during 2000. Aside from this change, the dividends increased in both 2001 and 2000 due to a higher number of shares outstanding. In November 2001, the board of directors declared an annual dividend on the company's common stock of $0.582 per share. The dividend, which was payable on January 7, 2002 to stockholders of record as of December 14, 2001, is a continuation of the current annual rate. As further discussed in Note 8, cash flows in 1999 included $198 million in cash inflows relating to the Shared Investment Plan. Cash received for stock issued under employee benefit plans decreased in 2001 and increased in 2000. A portion of the increase in 2000 was due to required exercises of stock options by employees transferring to Edwards as a result of the March 31, 2000 spin-off of that business. Aside from these exercises in 2000 relating to Edwards, stock issued under employee benefit plans increased in 2001 principally due to a higher average stock option exercise price. In order to rebalance the company's capital structure following the acquisition of ASTA, the company issued 9.7 million common shares for $500 million in December 2001. As authorized by the board of directors, the company repurchases its stock to optimize its capital structure depending upon its operational cash flows, net debt level and current market conditions. In November 1995, the company's board of directors authorized the repurchase of up to $500 million of common stock over a period of several years, all of which was repurchased by early 2000. In November 1999, the board of directors authorized the repurchase of another $500 million over a period of several years, all of which was repurchased by December 31, 2001. In July 2001, the board of directors authorized the repurchase of an additional $500 million from time to time, of which $76 million has been repurchased as of December 31, 2001. Stock repurchases totaled $288 million, $375 million and $184 million, in 2001, 2000 and 1999, respectively. On February 27, 2001, Baxter's board of directors approved a two-for-one stock split of the company's common shares. This approval was subject to shareholder approval of an increase in the number of authorized shares of common stock, which was received on May 1, 2001. On May 30, 2001, shareholders of record on May 9, 2001 received one additional share of Baxter common stock for each share held on May 9, 2001. All share and per share data in this report has been adjusted and restated to reflect the split. 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. Management uses an internal performance measure called operational cash flow that evaluates each operating business and geographic region on all aspects of cash flow under its direct control. Operational cash flow, as defined, reflects all litigation payments and related insurance recoveries except for those payments and recoveries relating to mammary implants, which the company never manufactured or sold. The company expects to generate in excess of $500 million in operational cash flow in 2002. The following table reconciles cash flows from continuing operations, as determined by GAAP, to operational cash flow, which is not a measure defined by GAAP.
Brackets denote cash outflows years ended December 31 (in millions) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Cash flows from continuing operations per the company's consolidated statements of $ 1,149 $ 1,233 $ 977 cash flows Capital expenditures (787) (648) (631) Net interest, after tax 54 51 52 Other 87 (48) 190 - ------------------------------------------------------------------------------------------------------------------------ Operational cash flow from continuing operations $ 503 $ 588 $ 588 - -------------------------------------------------------------------------------------===================================
34 management's discussion and analysis Refer to Note 5 for further discussion of the company's long-term debt, credit facilities, financial guarantees, and lease and other commitments. As of December 31, 2001, the company can issue up to $550 million in aggregate principal amount of additional senior unsecured debt securities under effective registration statements filed with the Securities and Exchange Commission. The company's debt ratings on senior debt are A3 by Moody's, A by Standard & Poor's and A by Fitch. The company's debt ratings on short-term debt are P2 by Moody's, A1 by Standard & Poor's and F1 by Fitch. The company intends to fund its short-term and long-term obligations as they mature through cash flows from operations, by issuing additional debt, by entering into other financing arrangements or by issuing common stock. The company believes it has lines of credit adequate to support ongoing operational 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 ability to generate cash flows from operations, issue additional debt, enter into other financing arrangements, or raise additional long-term capital on acceptable terms could be adversely affected in the event there is a material decline in the demand for the company's products, deterioration in the company's key financial ratios or credit ratings, or other significantly unfavorable change in conditions. With respect to the company's credit arrangements and debt outstanding at December 31, 2001, while a deterioration in the company's credit rating could unfavorably impact the financing costs associated with the credit arrangements, such a downgrade would not affect the company's ability to draw on the credit arrangements, and would not result in an acceleration of the scheduled maturities of the company's outstanding debt. The company periodically enters into off-balance sheet financing arrangements where economical and consistent with the company's business strategy. At December 31, 2001 the company has entered or is committed to enter into operating lease agreements, two of which are with special purpose entities, relating to facilities and equipment used in the operations of the company and its affiliates. The majority of these arrangements were entered into during 2001. Under each lease, the company has the right to renegotiate renewal terms, exercise a purchase option with respect to the leased property or arrange for the sale of the leased property. In the event the leased property is sold on behalf of the lessor and the sales proceeds are less than the lessor's investment in the property, the company is responsible for the shortfall, up to an aggregate maximum recourse amount under all of the leases of $159 million. At December 31, 2001, management believes the fair values of the leased properties are equal to or in excess of the lessors' investments in the leased properties. Refer to Note 5 for further information regarding these leases. As further discussed in Note 6, the company has also entered into certain arrangements whereby it securitizes, on a continuous basis, an undivided interest in certain pools of trade accounts receivable (including lease receivables). The portfolio of receivables sold totaled $683 million at December 31, 2001. The company and Nexell Therapeutics Inc. (Nexell) entered into agreements whereby Baxter issued put rights in connection with a $63 million private placement by Nexell of preferred stock. Baxter owns a minority equity interest in Nexell and has other business relationships with Nexell. The put rights, which are included in current liabilities at estimated fair value in the amount of $57 million at December 31, 2001, were issued in conjunction with Nexell's repayment of amounts owed to Baxter. Refer to Note 5 for further discussion of these agreements as well as the company's other commitments. Euro Conversion On January 1, 1999, certain member countries of the European Union established fixed conversion rates between their existing currencies and the new common currency, the Euro. The transition period for the introduction of the Euro ended January 1, 2002. Issues that faced the company as a result of the introduction of the Euro included converting information technology systems, reassessing currency risk, negotiating and amending certain agreements and contracts, processing tax and accounting records and reassessing pricing and competition. While the company will continue to evaluate the impact of the Euro, management does not currently expect the conversion to the Euro to have a material impact on the company's financial position, cash flows or results of operations. Financial Instrument Market Risk The company operates on a global basis and is exposed to the risk that its earnings, cash flows and stockholders' equity could be adversely impacted by fluctuations in currency exchange rates, interest rates and the market price of the company's common stock. The company's hedging policy attempts to manage these risks to an acceptable level based on management's judgment of the appropriate trade-off between risk, opportunity and costs. Refer to Note 6 for further information regarding the company's financial instruments and hedging strategies. management's discussion and analysis 35 Currency Risk The company is primarily exposed to currency exchange-rate risk with respect to firm commitments, forecasted transactions and net assets denominated in Japanese Yen, Euro, British Pound and Swiss Franc. The company manages its foreign currency exposures on a consolidated basis, which allows the company to net exposures and take advantage of any natural offsets. In addition, the company utilizes derivative and nonderivative financial instruments to further reduce the net exposure to currency fluctuations. Gains and losses on the hedging instruments are intended to offset losses and gains on the hedged transactions with the goal of reducing the earnings and stockholders' equity volatility resulting from fluctuations in currency exchange rates. The company principally uses option and forward contracts to hedge the risk to earnings associated with fluctuations in currency exchange rates relating to the company's firm commitments and forecasted transactions expected to be denominated in foreign currencies. The company enters into foreign currency forward and cross-currency swap agreements to hedge certain receivables, payables and debt denominated in foreign currencies. The company also periodically hedges certain of its net investments in international affiliates using a combination of debt denominated in foreign currencies and cross-currency swap agreements. Certain other firm commitments and forecasted transactions are also periodically hedged with option and forward contracts. In adopting SFAS No. 133, management reassessed its hedging strategies, and, in some cases, increased the company's use of derivative instruments or changed the type of derivative instruments used to manage currency exchange-rate risk, in part because the new accounting standard allows for increased opportunities and different approaches for managing the volatility in earnings and stockholders' equity resulting from fluctuations in currency exchange rates. As part of its risk-management program, the company performs sensitivity analyses to assess potential changes in the fair value of its derivative instruments relating to hypothetical movements in currency exchange rates. A sensitivity analysis of changes in the fair value of foreign exchange option and forward contracts outstanding at December 31, 2001 indicated that, if the U.S. Dollar uniformly fluctuated unfavorably by 10 percent against all currencies, the fair value of those contracts, while still positive, would decrease by $157 million. A similar analysis performed with respect to option and forward contracts outstanding at December 31, 2000 indicated that the fair value of such contracts would decrease by $20 million. The amount for 2001 is greater than that for 2000 principally due to a significant increase in the notional amounts of the option and forward contracts outstanding at December 31, 2001 as compared to the prior year. With respect to the company's cross-currency swap agreements, if the U.S. Dollar uniformly weakened by 10 percent, the fair value of the contracts would decrease by $72 million and $83 million as of December 31, 2001 and 2000, respectively. These sensitivity analyses disregard the possibility that currency exchange rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency. The analyses also disregard the offsetting change in value of the underlying hedged transactions and balances. Interest Rate Risk The company is also exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in interest rates. The company's policy is to manage interest costs using a mix of fixed and floating rate debt that management believes is appropriate. To manage this mix in a cost efficient manner, the company periodically enters into interest rate swaps, in which the company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. The company also uses forward-starting interest rate swaps to hedge the risk to earnings associated with fluctuations in interest rates relating to anticipated issuances of debt. As part of its risk-management program, the company performs sensitivity analyses to assess potential gains and losses in earnings relating to hypothetical movements in interest rates. A 31 basis-point increase in interest rates (approximately 10 percent of the company's weighted-average interest rate during 2001) affecting the company's financial instruments, including debt obligations and related derivatives, and investments, would have an immaterial effect on the company's 2001 and 2000 earnings and on the fair value of the company's fixed-rate financial instruments as of the end of such fiscal years. As discussed in Note 6, the fair values of the company's long-term litigation liabilities and related insurance receivables were computed by discounting the expected cash flows based on currently available information. A 10 percent movement in the assumed discount rate would have an immaterial effect on the fair values of those assets and liabilities. 36 management's discussion and analysis Other Risks As further discussed in Note 6, in order to partially offset the potentially dilutive effect of employee stock options, the company periodically enters into forward agreements with independent third parties related to the company's common stock. In accordance with GAAP, these contracts are not carried on the balance sheet at fair value, but are recorded upon maturity, or at an earlier termination date, and are classified within stockholders' equity. If the company's stock price were to decline 10 percent, the positive fair value of these contracts of $167 million would be reduced to a positive fair value of $2 million. Performing a similar analysis as of December 31, 2000 with respect to the portfolio outstanding at that date, a 10 percent decline in the company's stock price would reduce the positive fair value of the forward agreements of $171 million to $108 million. With respect to the company's investments in affiliates, management believes any reasonably possible near-term losses in earnings, cash flows and fair values would not be material to the company's consolidated financial position. Legal Proceedings See Note 12 for a discussion of the company's legal contingencies and related insurance coverage. Upon resolution of any of these uncertainties, the company may incur charges in excess of presently established reserves. While such a future charge could have a material adverse effect on the company's net income or cash flows in the period in which it is recorded or paid, based on the advice of counsel, management believes that any outcome of these actions, individually or in the aggregate, will not have a material adverse effect on the company's consolidated financial position. Based on the company's assessment of the costs associated with its environmental responsibilities, including recurring administrative costs, capital expenditures and other compliance costs, such costs have not had, and in management's opinion, will not have in the foreseeable future, a material effect on the company's financial position, results of operations, cash flows or competitive position. New Accounting and Disclosure Standards SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" were issued in July 2001. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. With the adoption of SFAS No. 142 in its entirety on January 1, 2002, all of the company's goodwill will no longer be amortized, but will be subject to periodic impairment reviews, beginning on the date of adoption. Goodwill amortization on an after-tax basis was approximately $41 million in 2001. In accordance with the transition provisions of SFAS No. 142, goodwill associated with acquisitions completed after June 30, 2001 is not being amortized. In performing the periodic impairment reviews, potential impairment is to be identified by comparing the fair value of a reporting unit with its carrying amount, and if the fair value is less than the carrying amount, an impairment loss is recorded as the excess of the carrying amount of the goodwill over its implied value. While the company is still in the process of analyzing SFAS No. 142, it is management's preliminary assessment that a goodwill impairment charge will not be recorded as of the date of adoption. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," was issued in August 2001. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and establishes a single accounting model for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and certain provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The company will adopt the standard at the beginning of 2002, and does not expect that the new standard will have a material impact on the company's consolidated financial statements. management's responsibilities for financial reporting and 37 report of independent accountants Management's Responsibilities for Financial Reporting The accompanying financial statements and other financial data have been prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with accounting principles generally accepted in the United States of America and include amounts that are based upon management's best estimates and judgments. Management is responsible for establishing and maintaining a system of internal controls over financial reporting and safeguarding assets against unauthorized acquisition, use or disposition. This system is designed to provide reasonable assurance as to the integrity and reliability of financial reporting and safeguarding of assets. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal controls, and that the cost of such systems should not exceed the benefits to be derived from them. Management believes that the foundation of an appropriate system of internal controls is a strong ethical company culture and climate. The Corporate Responsibility Office, which reports to the Public Policy Committee of the board of directors, is responsible for developing and communicating appropriate business practices, policies and initiatives; maintaining independent channels of communication for providing guidance and reporting potential business practice violations; and monitoring compliance with the company's business practices, including annual compliance certifications by senior managers worldwide. Additionally, a professional staff of corporate auditors reviews the design and function of the system of internal controls and the accounting policies and procedures supporting this system and compliance with them. The results of these reviews are reported at least annually to the Public Policy and/or Audit Committees of the board of directors. PricewaterhouseCoopers LLP performs audits, in accordance with auditing standards generally accepted in the United States of America, 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 comprised 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. PricewaterhouseCoopers LLP and the corporate auditors meet regularly with, and have access to, this committee, with and without management present, to discuss the results of the audit work. /s/ Harry M. Jansen Kraemer, Jr. Harry M. Jansen Kraemer, Jr. Chairman and Chief Executive Officer /s/ Brian P. Anderson Brian P. Anderson Senior Vice President and Chief Financial Officer Report of Independent Accountants To the Board of Directors and Stockholders of Baxter International Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, cash flows and stockholders' equity and comprehensive income present fairly, in all material respects, the financial position of Baxter International Inc. (the company) and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America, 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 our opinion. As discussed in Note 1 to the consolidated financial statements, effective January 1, 2001, the company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Chicago, Illinois February 14, 2002 38 consolidated balance sheets as of December 31 (in millions, except share information) 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------- Current Assets Cash and equivalents $ 582 $ 579 Accounts receivable 1,493 1,387 Notes and other current receivables 129 155 Inventories 1,341 1,159 Short-term deferred income taxes 82 159 Prepaid expenses 350 212 ------------------------------------------------------------------------------------- Total current assets 3,977 3,651 - ----------------------------------------------------------------------------------------------------------------------------- Property, Plant and Equipment, Net 3,306 2,807 - ----------------------------------------------------------------------------------------------------------------------------- Other Assets Goodwill and other intangible assets 1,698 1,239 Insurance receivables 93 160 Other 1,269 876 ------------------------------------------------------------------------------------- Total other assets 3,060 2,275 ------------------------------------------------------------------------------------- Total assets $ 10,343 $ 8,733 - -------------------------------------------------------------------------------------------------------- ==================== Current Liabilities Short-term debt $ 149 $ 576 Current maturities of long-term debt and lease obligations 52 58 Accounts payable and accrued liabilities 2,432 1,990 Income taxes payable 661 748 ------------------------------------------------------------------------------------- Total current liabilities 3,294 3,372 - ----------------------------------------------------------------------------------------------------------------------------- Long-Term Debt and Lease Obligations 2,486 1,726 - ----------------------------------------------------------------------------------------------------------------------------- Long-Term Deferred Income Taxes 218 160 - ----------------------------------------------------------------------------------------------------------------------------- Long-Term Litigation Liabilities 140 184 - ----------------------------------------------------------------------------------------------------------------------------- Other Long-Term Liabilities 448 632 - ----------------------------------------------------------------------------------------------------------------------------- Commitments and Contingencies - ----------------------------------------------------------------------------------------------------------------------------- Stockholders' Equity Common stock, $1 par value, authorized 1,000,000,000 shares in 2001 and 700,000,000 in 2000, issued 608,817,449 shares in 2001 and 596,266,502 shares in 2000 609 298 Common stock in treasury, at cost, 9,924,459 shares in 2001 and 9,906,124 shares in 2000 (328) (349) Additional contributed capital 2,815 2,506 Retained earnings 1,093 853 Accumulated other comprehensive loss (432) (649) ------------------------------------------------------------------------------------- Total stockholders' equity 3,757 2,659 ------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 10,343 $ 8,733 - -------------------------------------------------------------------------------------------------------- ====================
The accompanying notes are an integral part of these consolidated financial statements. consolidated statements of income 39
years ended December 31 (in millions, except per share data) 2001 2000 1999 - --------------------------------------------------------------------------------------------------------- Operations Net sales $7,663 $6,896 $ 6,380 Costs and expenses Cost of goods sold 4,227 3,833 3,568 Marketing and administrative expenses 1,469 1,356 1,311 Research and development expenses 427 379 332 In-process research and development and acquisition-related costs 280 286 -- Special charge - A, AF and AX series dialyzers 189 -- -- Goodwill amortization 47 31 19 Interest expense, net 69 85 87 Other (income) expense (9) (20) 11 --------------------------------------------------------------------------- Total costs and expenses 6,699 5,950 5,328 --------------------------------------------------------------------------- Income from continuing operations before income taxes and cumulative effect of accounting change 964 946 1,052 Income tax expense 300 208 273 --------------------------------------------------------------------------- Income from continuing operations before cumulative effect of accounting change 664 738 779 Discontinued operation -- 2 45 --------------------------------------------------------------------------- Income before cumulative effect of accounting change 664 740 824 Cumulative effect of accounting change, net of income tax benefit of $32 in 2001 and $7 in 1999 (52) -- (27) --------------------------------------------------------------------------- Net income $ 612 $ 740 $ 797 - ---------------------------------------------------------------------------------======================== Per Share Data Earnings per basic common share Continuing operations $ 1.13 $ 1.26 $ 1.34 Discontinued operation -- -- 0.08 Cumulative effect of accounting change (0.09) -- (0.05) --------------------------------------------------------------------------- Net income $ 1.04 $ 1.26 $ 1.37 ---------------------------------------------------======================== Earnings per diluted common share Continuing operations $ 1.09 $ 1.24 $ 1.32 Discontinued operation -- -- 0.08 Cumulative effect of accounting change (0.09) -- (0.05) --------------------------------------------------------------------------- Net income $ 1.00 $ 1.24 $ 1.35 ---------------------------------------------------======================== Weighted average number of common shares outstanding Basic 590 585 579 Diluted 609 597 590 - ---------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 40 consolidated statements of cash flows
years ended December 31 (in millions) (brackets denote cash outflows) 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- Cash Flows from Operations Income from continuing operations before cumulative effect of accounting change $ 664 $ 738 $ 779 Adjustments Depreciation and amortization 441 405 372 Deferred income taxes 116 (170) 92 Loss (gain) on asset dispositions and impairments (20) 6 13 In-process research and development and acquisition-related costs 280 286 -- Special charge - A, AF and AX series dialyzers 189 -- -- Other 5 26 20 Changes in balance sheet items Accounts receivable (138) 54 (103) Inventories (178) (114) 17 Accounts payable and accrued liabilities (76) 60 30 Net litigation payable and other (134) (58) (243) --------------------------------------------------------------------------------- Cash flows from continuing operations 1,149 1,233 977 --------------------------------------------------------------------------------- Cash flows from discontinued operation -- (19) 106 --------------------------------------------------------------------------------- Cash flows from operations 1,149 1,214 1,083 - ----------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Capital expenditures (669) (547) (529) Additions to the pool of equipment placed with or leased to customers (118) (101) (102) Acquisitions (net of cash received) and investments in affiliates (840) (345) (179) Divestitures and other asset dispositions 35 (60) 75 --------------------------------------------------------------------------------- Cash flows from investing activities (1,592) (1,053) (735) - ----------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Issuances of debt obligations 2,108 1,180 764 Redemption of debt obligations (946) (1,953) (481) Increase (decrease) in debt with maturities of three months or less, net (756) 879 (552) Common stock cash dividends (341) (84) (338) Stock issued under Shared Investment Plan -- -- 198 Stock issued under employee benefit plans 192 233 148 Other issuance of stock 500 -- -- Purchases of treasury stock (288) (375) (184) --------------------------------------------------------------------------------- Cash flows from financing activities 469 (120) (445) - ----------------------------------------------------------------------------------------------------------------------- Effect of Foreign Exchange Rate Changes on Cash and Equivalents (23) (68) (6) - ----------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Equivalents 3 (27) (103) - ----------------------------------------------------------------------------------------------------------------------- Cash and Equivalents at Beginning of Year 579 606 709 - ----------------------------------------------------------------------------------------------------------------------- Cash and Equivalents at End of Year $ 582 $ 579 $ 606 - --------------------------------------------------------------------------------------------=========================== Supplemental information Interest paid, net of portion capitalized $ 109 $ 110 $ 150 Income taxes paid $ 243 $ 279 $ 197 - -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. consolidated statements of stockholders' equity 41 and comprehensive income
as of or for the years ended December 31 (in millions) 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock Beginning of year $ 298 $ 294 $ 291 Common stock issued 13 4 -- Two-for-one stock split 298 -- -- Stock issued under Shared Investment Plan -- -- 3 ------------------------------------------------------------------------------------------- End of year 609 298 294 - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock in Treasury Beginning of year (349) (269) (210) Common stock issued 63 39 -- Purchases of common stock (288) (375) (184) Common stock issued under employee benefit plans 246 256 125 ------------------------------------------------------------------------------------------- End of year (328) (349) (269) - ----------------------------------------------------------------------------------------------------------------------------------- Additional Contributed Capital Beginning of year 2,506 2,282 2,064 Common stock issued 661 247 -- Two-for-one stock split (298) -- -- Stock issued under Shared Investment Plan -- -- 195 Common stock issued under employee benefit plans (54) (23) 23 ------------------------------------------------------------------------------------------- End of year 2,815 2,506 2,282 - ----------------------------------------------------------------------------------------------------------------------------------- Retained Earnings Beginning of year 853 1,415 990 Net income 612 740 797 Elimination of reporting lag for international operations (23) -- (34) Common stock cash dividends (349) (341) (338) Distribution of Edwards Lifesciences Corporation common stock to stockholders -- (961) -- ------------------------------------------------------------------------------------------- End of year 1,093 853 1,415 - ----------------------------------------------------------------------------------------------------------------------------------- Accumulated Other Comprehensive Loss Beginning of year (649) (374) (296) Other comprehensive income (loss) 217 (275) (78) ------------------------------------------------------------------------------------------- End of year (432) (649) (374) ------------------------------------------------------------------------------------------- Total stockholders' equity $ 3,757 $ 2,659 $ 3,348 - --------------------------------------------------------------------------------------------------================================= Comprehensive Income Net income $ 612 $ 740 $ 797 Cumulative effect of accounting change, net of tax expense of $5 in 2001 8 -- -- Currency translation adjustments, net of tax expense of $58 in 2001, $82 in 2000 and $87 in 1999 155 (297) (80) Unrealized net gain on hedging activities, net of tax expense of $45 in 2001 74 -- -- Unrealized net gain (loss) on marketable equity securities, net of tax expense (benefit) of $(14) in 2001, $15 in 2000 and $1 in 1999 (20) 22 2 ------------------------------------------------------------------------------------------- Other comprehensive income (loss) 217 (275) (78) Elimination of reporting lag for international operations, net of tax benefit of $8 in 2001 and $22 in 1999 (23) -- (34) ------------------------------------------------------------------------------------------- Total comprehensive income $ 806 $ 465 $ 685 - --------------------------------------------------------------------------------------------------=================================
The accompanying notes are an integral part of these consolidated financial statements. 42 notes to consolidated financial statements Note 1 / Summary of Significant Accounting Policies - -------------------------------------------------------------------------------- The Company and Financial Statement Presentation Baxter International Inc. (Baxter or the company) is a global medical products and services company that provides critical therapies for people with life-threatening conditions. The company's products and services are described in Note 13. The preparation of the financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Basis of Consolidation The accompanying consolidated financial statements include the accounts of Baxter and its majority-owned subsidiaries. Historically, certain operations outside the United States were included in the consolidated financial statements on the basis of fiscal years ending November 30. In conjunction with the implementation of new financial systems, this one-month lag was eliminated as of the beginning of fiscal 1999 for certain countries and as of the beginning of fiscal 2001 for the remaining countries. The December 2000 and 1998 net losses for these entities of $23 million and $34 million, respectively, were recorded directly to retained earnings. Foreign Currency Translation The results of operations for non-U.S. subsidiaries, other than those located in highly inflationary countries, are translated into U.S. Dollars using the average exchange rates during the year, while assets and liabilities are translated using period-end rates. Resulting translation adjustments are recorded as currency translation adjustments (CTA) within other comprehensive income (OCI). Where foreign affiliates operate in highly inflationary economies, non-monetary amounts are remeasured at historical exchange rates while monetary assets and liabilities are remeasured at the current rate with the related adjustments reflected in the consolidated statements of income. Revenue Recognition The company's policy is to recognize revenues from product sales and services when earned, as defined by GAAP, and in accordance with SEC Staff Accounting Bulletin No. 101 (SAB 101). Specifically, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred (or services have been rendered), the price is fixed or determinable, and collectibility is reasonably assured. For product sales, revenue is not recognized until title and risk of loss have transferred to the customer. The company enters into certain arrangements in which it commits to provide multiple elements to its customers. Revenue is deferred unless the criteria outlined in SAB 101 for separate recognition of the individual elements are met. If the criteria are met, total revenue for the arrangement is allocated among the elements based on the fair value of the individual elements, with the fair values determined based on objective evidence (generally based on sales of the individual element to other third parties). Provisions for discounts, rebates to customers, and returns are provided for at the time the related sales are recorded, and are reflected as a reduction of sales. Warranty Expense The company provides for the estimated costs that may be incurred under its warranty programs at the time revenue is recognized. Research and Development Research and development costs are expensed when incurred. Inventories as of December 31 (in millions) 2001 2000 - ------------------------------------------------------------------------------- Raw materials $ 353 $ 261 Work in process 244 174 Finished products 744 724 - ------------------------------------------------------------------------------- Total inventories $ 1,341 $ 1,159 - ---------------------------------------------------------====================== Inventories are stated at the lower of cost (first-in, first-out method) or market value. Market value for raw materials is based on replacement costs and, for other inventory classifications, on net realizable value. Reserves for excess and obsolete inventory were $125 million and $110 million at December 31, 2001 and 2000, respectively. Property, Plant and Equipment as of December 31 (in millions) 2001 2000 - ------------------------------------------------------------------------------- Land $ 115 $ 113 Buildings and leasehold improvements 1,111 967 Machinery and equipment 3,214 2,822 Equipment with customers 538 484 Construction in progress 754 592 - ------------------------------------------------------------------------------- Total property, plant and equipment, at cost 5,732 4,978 Accumulated depreciation and amortization (2,426) (2,171) - ------------------------------------------------------------------------------- Property, plant and equipment, net $ 3,306 $ 2,807 - ---------------------------------------------------------====================== Depreciation and amortization are calculated on the straight-line method over the estimated useful lives of the related assets, which range from 20 to 50 years for buildings and improvements and from three to 15 years for machinery and equipment. Leasehold improvements are amortized over the life of the related facility lease or the asset, whichever is shorter. Straight-line and accelerated methods of depreciation are used for income tax purposes. Accumulated amortization for assets under capital lease was $17 million and $11 million at December 31, 2001 and 2000, respectively. Depreciation expense was $334 million, $308 million and $290 million in 2001, 2000 and 1999, respectively. Repairs and maintenance expense was $142 million, $105 million and $97 million in 2001, 2000 and 1999, respectively. Acquisitions Acquisitions are accounted for under the purchase method. The company applied the provisions of Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," in accounting notes to consolidated financial statements 43 for acquisitions completed after June 30, 2001. Pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill related to acquisitions completed after June 30, 2001 is not being amortized. See further discussion of these new standards below. Results of operations of acquired companies are included in the company's results of operations as of the respective acquisition dates. The purchase price of each acquisition is allocated to the net assets acquired based on estimates of their fair values at the date of the acquisition. The excess of the purchase price over the fair values of the tangible assets and identifiable intangible assets acquired and liabilities assumed is allocated to goodwill. The allocation of purchase price in certain cases may be subject to revision based on the final determination of fair values. A portion of the purchase price for certain acquisitions is allocated to in-process research and development (IPR&D) which, under GAAP, is immediately expensed. IPR&D Amounts allocated to IPR&D are determined on the basis of independent valuations using the income approach, which measures the value of an asset by the present value of its future economic benefits. Estimated cash flows are discounted to their present values at rates of return that reflect the risks associated with the particular projects. The status of development, stage of completion, assumptions, nature and timing of remaining efforts for completion, risks and uncertainties, and other key factors may vary by individual project. The valuations incorporate the stage of completion for each individual project. Projected revenue and cost assumptions are determined considering the company's historical experience and industry trends and averages. No value is assigned to any IPR&D project unless it is probable of being further developed. Goodwill and Other Intangible Assets as of December 31 (in millions) 2001 2000 - ------------------------------------------------------------------------------- Goodwill $ 1,598 $ 1,094 Accumulated amortization (185) (138) - ------------------------------------------------------------------------------- Net goodwill 1,413 956 - ------------------------------------------------------------------------------- Other intangible assets 809 701 Accumulated amortization (524) (418) - ------------------------------------------------------------------------------- Net other intangible assets 285 283 - ------------------------------------------------------------------------------- Goodwill and other intangible assets $ 1,698 $ 1,239 - ----------------------------------------------------------===================== Intangible assets are amortized on a straight-line basis. Goodwill is amortized over estimated useful lives ranging from 15 to 40 years, and other intangible assets, consisting of purchased patents, trademarks and other identified rights, are amortized over their estimated useful lives, generally ranging from three to 25 years. Pursuant to SFAS No. 142, and as further discussed below, effective at the beginning of 2002 goodwill will no longer be amortized but will be subject to periodic impairment reviews. Prior to the adoption of SFAS No. 142, the company's policy has been to review the carrying amounts of goodwill and other long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such events or circumstances might include a significant decline in market share, a significant decline in profits, rapid changes in technology, significant litigation or other items. In evaluating the recoverability of these assets, management's policy has been to compare the carrying amounts of such assets with the estimated undiscounted future operating cash flows. In the event impairment exists, an impairment charge would be determined by comparing the carrying amounts of the asset to the applicable estimated future cash flows, discounted at a risk-adjusted interest rate. In addition, the remaining amortization period for the impaired asset would be reassessed and revised if necessary. Refer to Note 4 regarding an asset impairment charge recorded in 2001 relating to the decision to cease manufacturing the Renal segment's A, AF and AX series dialyzers. Earnings Per Share (EPS) The numerator for both basic and diluted EPS is net earnings available to common shareholders. The denominator for basic EPS is the weighted-average number of common shares outstanding during the period. The following is a reconciliation of the shares (denominator) of the basic and diluted per-share computations. years ended December 31 (in million of shares) 2001 2000 1999 - ------------------------------------------------------------------------------- Basic 590 585 579 Effect of dilutive securities Employee stock options 18 11 9 Employee stock purchase plans and equity forward agreements 1 1 2 - ------------------------------------------------------------------------------- Diluted 609 597 590 - -------------------------------------------------------======================== Refer to Note 8 for further information regarding the company's stock compensation plans. Comprehensive Income Comprehensive income encompasses all changes in stockholders' equity other than those arising from stockholders, and generally consists of net income, currency translation adjustments, unrealized gains and losses on certain hedging activities and unrealized gains and losses on unrestricted available-for-sale marketable equity securities. The components of accumulated other comprehensive income (loss) were as follows. as of December 31 (in millions) 2001 2000 - ------------------------------------------------------------------------------- Currency translation adjustments $ (519) $ (674) Hedging activities 82 -- Marketable equity securities 5 25 - ------------------------------------------------------------------------------- Total accumulated other comprehensive loss $ (432) $ (649) - ----------------------------------------------------------===================== 44 notes to consolidated financial statements Derivatives and Hedging Activities All derivatives are recognized on the consolidated balance sheet at fair value. When the company enters into a derivative contract, it designates and documents the derivative as (1) a hedge of a forecasted transaction, including a hedge of a foreign currency denominated transaction (a cash flow hedge); (2) a hedge of the fair value of a recognized asset or liability (a fair value hedge); (3) a hedge of a net investment in a foreign operation; or (4) an instrument that is not formally designated as a hedge. The company also uses and designates certain nonderivative financial instruments as hedges of net investments in foreign operations. In certain circumstances, while a derivative may be used to economically hedge a transaction, asset or liability, the company may not formally designate it as a fair value, cash flow or net investment hedge. The company does not hold any instruments for trading purposes. Changes in the fair value of a derivative that is highly effective and is designated and qualifies as a cash flow hedge are recorded in OCI, with such changes in fair value reclassified to earnings when the hedged transaction affects earnings. Such hedges are principally classified in cost of sales, and they primarily relate to intercompany sales denominated in foreign currencies. Changes in the fair value of a derivative that is highly effective and is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability, which are attributable to the hedged risk, are recorded directly to net interest expense, as they hedge the interest rate risk associated with certain of the company's fixed-rate debt. Changes in the fair value of a derivative or nonderivative instrument that is highly effective and is designated and qualifies as a hedge of a net investment in a foreign operation are recorded in the CTA account within OCI, with any hedge ineffectiveness recorded in net interest expense. Changes in the fair value of undesignated instruments are reported directly to other income or expense or net interest expense, depending on the classification of the hedged item. Instruments that are indexed to and potentially settled in the company's common stock are accounted for in accordance with Emerging Issues Task Force Nos. 00-7 and 00-19. If it is determined that a derivative or nonderivative hedging instrument ceases to be highly effective as a hedge, the company discontinues hedge accounting prospectively. Gains or losses relating to terminations of effective cash flow hedges are deferred and recognized consistent with the income or loss recognition of the underlying hedged items. If the company removes the designation for cash flow hedges because the hedged forecasted transactions are no longer probable of occurring, any gains or losses relating to such dedesignated hedges are reclassified from accumulated OCI to earnings, and are principally classified in cost of sales. Derivatives are classified in other assets or other liabilities, as applicable, and are generally classified as short-term or long-term based on the scheduled maturity of the instrument. Derivatives are generally classified in the consolidated statement of cash flows in the same category as the cash flows of the hedged items. Cash and Equivalents Cash and equivalents include cash, certificates of deposit and marketable securities with an original maturity of three months or less. Shipping and Handling Costs Shipping and handling costs are classified in either cost of goods sold or marketing and administrative expenses based on their nature. Approximately $218 million, $200 million and $200 million of shipping and handling costs were classified in marketing and administrative expenses in 2001, 2000 and 1999, respectively. Income Taxes Deferred taxes are recognized for the future tax effects of temporary differences between the financial and income tax reporting based upon enacted tax laws and rates. Deferred tax assets are reduced by a valuation allowance unless it is more likely than not that such assets will be realized. Stock Compensation Plans The company applies Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock compensation plans. Reclassifications Certain reclassifications have been made to conform the 2000 and 1999 financial statements and notes to the 2001 presentation. Changes in Accounting Principles Effective at the beginning of 2001, the company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its amendments (SFAS No. 133). In accordance with the transition provisions of SFAS No. 133, upon adoption the company recorded a cumulative effect after-tax reduction to earnings of $52 million and a cumulative effect after-tax increase to OCI of $8 million. Effective at the beginning of 1999, the company adopted AICPA Statement of Position 98-5, "Reporting on the Costs of Start-up Activities," and, upon adoption, recorded a cumulative effect after-tax reduction to earnings of $27 million. Recently Issued Accounting Pronouncements SFAS No. 141 and SFAS No. 142 were issued in July 2001. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. The amortization provisions of SFAS No. 142, including nonamortization of goodwill, apply to goodwill and intangible assets acquired after June 30, 2001. With the adoption of SFAS No. 142 in its entirety on notes to consolidated financial statements 45 January 1, 2002, all of the company's goodwill will no longer be amortized, but will be subject to periodic impairment reviews, beginning on the date of adoption. In performing the review, potential impairment is to be identified by comparing the fair value of a reporting unit with its carrying amount, and if the fair value is less than the carrying amount, an impairment loss is recorded as the excess of the carrying amount of the goodwill over its implied value. The implied fair value is determined by allocating the fair value of the entire unit to all of its assets and liabilities, with any excess of fair value over the amount allocated representing the implied fair value of that unit's goodwill. Goodwill amortization on an after-tax basis was $41 million in 2001. While the company is still in the process of analyzing SFAS No. 142, it is management's preliminary assessment that a goodwill impairment charge will not be recorded as of the date of adoption. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," was issued in August 2001. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and establishes a single accounting model for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and certain provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The company will adopt the standard at the beginning of 2002, and does not expect that the new standard will have a material impact on the company's consolidated financial statements. Note 2/ Discontinued Operation - -------------------------------------------------------------------------------- On March 31, 2000, Baxter stockholders of record on March 29, 2000 received all of the outstanding stock of Edwards Lifesciences Corporation (Edwards), the company's cardiovascular business, in a tax-free spin-off. The company's consolidated financial statements and related notes have been adjusted and restated to reflect the financial position, results of operations and cash flows of Edwards as a discontinued operation. Through the issuance of new third-party debt, $502 million of Baxter's debt was indirectly assumed by Edwards upon spin-off. The distribution of Edwards stock totaled $961 million, and was charged directly to retained earnings. In 2000 and 1999, the company recorded income from the discontinued operation of $14 million and $64 million, respectively, which was net of income tax expense of $5 million and $19 million, respectively. In addition, in 2000 and 1999 the company recorded $12 million (including tax of $6 million) and $19 million, respectively, of net costs directly associated with effecting the business distribution. The impact of these costs on diluted earnings per share was $.02 in 2000 and $.03 in 1999. Net sales of the discontinued operation were $906 million in 1999 and $252 million for the three-month period ended March 31, 2000. The cardiovascular business in Japan was not transferred to Edwards at the time of distribution due to Japanese regulatory requirements and business culture considerations. The business is operated pursuant to a contractual joint venture under which a Japanese subsidiary of Baxter retains ownership of the business assets, but a subsidiary of Edwards holds a 90 percent profit interest. Edwards has an option to purchase the Japanese assets, which option may be exercised during the period of June 2002 through March 2005. The exercise price of the option is approximately 26.4 billion Japanese Yen, of which Edwards would obtain approximately 23.2 billion Japanese Yen upon termination of the joint venture for the return of its fair value in the joint venture at inception. Included in current liabilities at December 31, 2001 was $181 million relating to this contractual joint venture, which was established in connection with the accounting for the spin-off of Edwards. Note 3/ Acquisitions - -------------------------------------------------------------------------------- Significant Acquisitions The following is a summary of the company's significant acquisitions during the three years ended December 31, 2001, along with the allocation of the purchase price to intangible assets. Intangible assets Acquisition Purchase --------------------------- (in millions) date price IPR&D Goodwill Other - --------------------------------------------------------------------------- ASTA October 2001 $ 455 $ 250 $ 120 $ 53 Cook August 2001 220 -- 137 10 Sera-Tec February 2001 127 -- 152 -- NAV June 2000 328 250 245 10 - --------------------------------------------------------------------------- As discussed in Note 1, goodwill associated with acquisitions completed after June 30, 2001 is not being amortized, and amortization of all goodwill will cease effective January 1, 2002. The company acquired a subsidiary of Degussa AG, ASTA Medica Onkologie GmbH & CoKG (ASTA), which develops, produces and markets oncology products worldwide. This acquisition will provide the company with a stronger presence in the oncology market as well as a significant drug development pipeline. In addition to the intangible assets above, $22 million of accounts receivable, $25 million of inventories, $42 million of property, plant and equipment, and $4 million of other assets were acquired, and $61 million of liabilities were assumed. The results of operations and assets and liabilities, including goodwill, of ASTA are included in the Medication Delivery segment. A substantial portion of the goodwill is expected to be 46 notes to consolidated financial statements deductible for tax purposes. The other intangible assets consist of developed technology and are being amortized on a straight-line basis over an estimated useful life of 15 years. The acquisition of Cook Pharmaceutical Solutions, formerly a unit of Cook Group Incorporated (Cook), which provides contract filling of syringes and vials, supports the company's strategic initiative to become a full-line provider of drug delivery solutions. The purchase price was paid in approximately 2.1 million shares of Baxter common stock and $111 million in cash. In addition to the intangible assets noted above, $69 million of property, plant and equipment, and $4 million of other assets were acquired. The results of operations and assets and liabilities, including goodwill, of Cook are included in the Medication Delivery segment. The goodwill is expected to be fully deductible for tax purposes. The other intangible assets consist of customer relationships and are being amortized on a straight-line basis over an estimated useful life of ten years. Sera-Tec Biologicals, L.P. (Sera-Tec) owned and operated 80 plasma centers in 28 states, and a central testing laboratory, and is included in the company's BioScience segment. The purchase price of Sera-Tec was paid in approximately 2.8 million shares of Baxter common stock. Goodwill has been amortized on a straight-line basis over 40 years. North American Vaccine, Inc. (NAV) was engaged in the research, development, production and sales of vaccines for the prevention of human infectious diseases, and is included in the BioScience segment. The purchase price of NAV was principally paid in approximately 3.8 million shares of Baxter common stock, and goodwill has been amortized on a straight-line basis over 40 years. The $280 million charge for IPR&D and acquisition-related costs recorded in 2001 consisted principally of the $250 million IPR&D charge relating to ASTA, an $18 million IPR&D charge relating to an acquisition in the Renal segment, and acquisition-related costs associated with several acquisitions in the three segments. The $286 million charge for IPR&D and acquisition-related costs recorded in 2000 consisted principally of the $250 million IPR&D charge relating to NAV, a total of $15 million in IPR&D charges pertaining to three other acquisitions, as well as $21 million of acquisition costs related to an acquisition in the Medication Delivery segment. IPR&D The IPR&D charge associated with the acquisition of ASTA pertains to oncology therapeutics projects. Material net cash inflows were forecasted in the valuation to commence between 2004 and 2009. Discount rates used in the valuations of the projects, which included tubulin inhibitor, mafosfamide, glufosfamide and other oncology-related projects, ranged from 20 percent to 30 percent. Assumed additional research and development (R&D) expenditures prior to the dates of product introductions totaled over $100 million. The percentage completion rate for significant projects ranged in the valuation from approximately 40 percent to 90 percent, with the weighted-average completion rate approximately 50 percent. Subsequent to the October 2001 acquisition date, the projects have been proceeding in accordance with the original projections. Approximately $3 million of R&D costs were expensed in 2001 subsequent to the acquisition date relating to these projects. The IPR&D charge associated with the acquisition of NAV pertains to vaccines projects. Material net cash inflows were forecasted in the valuation to commence between 2002 and 2005. A discount rate of 20 percent was used for all projects, which include Streptococcal B, Pneumococcal, Meningococcal B/C/Y and other vaccines. Assumed additional R&D expenditures prior to the dates of product introductions totaled approximately $85 million. The percentage completion rate for significant projects ranged in the valuation from 65 percent to over 90 percent, with the weighted-average completion rate approximately 70 percent. Subsequent to the June 2000 acquisition date, the projects have been proceeding in accordance with the original projections. Approximately $14 million and $8 million of R&D costs were expensed in 2001 and 2000, subsequent to the acquisition date, respectively, relating to these projects. With respect to ASTA and NAV IPR&D, the products currently under development are at various stages of development, and substantial further research and development, preclinical testing and clinical trials will be required to determine their technical feasibility and commercial viability. There can be no assurance such efforts will be successful. Delays in the development, introduction or marketing of the products under development could result either in such products being marketed at a time when their cost and performance characteristics would not be competitive in the marketplace or in a shortening of their commercial lives. If the products are not completed on time, the expected return on the company's investments could be significantly and unfavorably impacted. Pro Forma Information The following unaudited pro forma information presents a summary of the company's consolidated results of operations as if significant acquisitions during 2001 and 2000 had taken place as of the beginning of the current and preceding fiscal year, giving effect to purchase accounting adjustments. No adjustments were made for the charges for IPR&D and acquisition-related costs. years ended December 31 (in millions, except per share data) 2001 2000 - --------------------------------------------------------------------- Net sales $ 7,865 $ 7,367 Income from continuing operations before cumulative effect of accounting change $ 663 $ 703 Net income $ 611 $ 705 Net income per diluted common share $ 1.00 $ 1.16 - ---------------------------------------------------================== notes to consolidated financial statements 47 These pro forma results of operations have been presented for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred on the date indicated, or which may result in the future. The pro forma earnings above relating to acquisitions completed after June 30, 2001 do not include amortization of goodwill. Acquisition Reserves Based on plans formulated at acquisition date, as part of the allocation of purchase price, reserves have been established for certain acquisitions. The reserves were established principally for employee-related costs associated with headcount reductions at the acquired companies, and contract termination and other costs related primarily to the exiting of activities and termination of distribution, lease and other contracts of the acquired companies that existed prior to the acquisition date that either continued with no economic benefit or required payment of a cancellation penalty. Actions executed to date and anticipated in the future with respect to these acquisitions are substantially consistent with the original plans. Management believes remaining reserves, which are not material, are adequate to complete the actions contemplated by the plans. Note 4 / Special Charge - A, AF and AX Series Dialyzers - -------------------------------------------------------------------------------- Following reports in October 2001 of patient deaths in Croatia, Baxter initiated a global recall of its A, AF and AX series Renal segment dialyzers. A panel of dialysis experts was established to investigate the circumstances surrounding reports of deaths in Croatia and other countries. In addition, the company has been conducting its own investigations into these reports and has been fully cooperating with the United States Food and Drug Administration and other health authorities around the world. Testing has led the company to conclude that a processing fluid used during the manufacturing of a limited number of dialyzers produced in the company's Ronneby, Sweden facility may have played a role in the deaths. Baxter has decided to permanently cease manufacturing the A, AF and AX series dialyzers. The fluid is not used in the manufacturing process for other dialyzers that Baxter manufactures or distributes. The company has ceased production of the discontinued dialyzers and is in the process of closing its Ronneby facility. The Miami Lakes, Florida facility, that provided materials used in the discontinued dialyzers, has also been closed. Refer to Note 12 for a discussion of legal proceedings relating to this matter. The company recorded a pretax charge in the fourth quarter of 2001 of $189 million ($156 million on an after-tax basis) to cover the costs of discontinuing this product line and other related costs. The non-cash costs principally include $21 million to write off inventory, $15 million to write down property, plant and equipment, and $80 million to write down goodwill and other intangible assets due to impairment. The cash costs include $12 million for severance costs resulting from the elimination of approximately 360 positions, the majority of which were located in the manufacturing facilities. Substantially all of these positions have been eliminated as of December 31, 2001. The cash costs also include $61 million for other related expenses, including costs associated with the recall, litigation and a long-term lease. Approximately $13 million of the cash costs have been paid as of December 31, 2001. The revenues and profits relating to these products were not material to the consolidated financial statements. Note 5 / Long-Term Debt and Commitments - ------------------------------------------------------------------------- Effective as of December 31 (in millions) interest rate 2001 2000 - ------------------------------------------------------------------------- Commercial paper 4.3% $ 230 $ 800 Short-term notes 0.4% 273 513 8.125% notes due 2001 7.0% -- 40 7.625% notes due 2002 7.5% 47 46 Variable rate loan due 2004 3.9% 209 -- 5.75% notes due 2006 4.9% 594 -- 7.125% notes due 2007 7.1% 55 55 7.25% notes due 2008 7.3% 29 29 9.5% notes due 2008 9.4% 76 75 1.25% convertible debentures due 2021 1.4% 800 -- 6.625% debentures due 2028 6.5% 152 147 Other 73 79 - ------------------------------------------------------------------------- Total debt and lease obligations 2,538 1,784 Current portion (52) (58) - ------------------------------------------------------------------------- Long-term portion $2,486 $ 1,726 - -------------------------------------------------------================== In order to balance its capital structure and reduce net interest expense, in May 2001 the company issued $800 million of convertible debentures. The debentures bear an initial 1.25 percent coupon, mature in 20 years, are callable on or after June 5, 2006 at a price equal to 100 percent of the principal amount plus accrued interest up to the redemption date, allow the holders to require the company to repurchase the debt at the end of the first year and in the fifth, tenth and fifteenth years, at a price equal to 100 percent of the principal amount plus accrued interest up to the repurchase date, and are convertible into Baxter common stock at a conversion price of $65.18 per share if the closing price of Baxter common stock exceeds $71.70 for a specified period of time. The initial interest rate will be reset on specified future dates, subject to a maximum of 2.9 percent. The proceeds from the convertible debt issuance were used to refinance certain of the company's short-term debt. The company also issued other debt during 2001, principally to fund its investing activities. In order to better match the currency denomination of its assets and liabilities, the company rebalanced certain of its debt during 2000. The company acquired approximately $878 million of its U.S. Dollar denominated debt securities during 2000 and increased its Japanese Yen and Euro denominated debt. The net costs associated with the early termination of the U.S. Dollar denominated debt were recorded in other expense as they were not material. 48 notes to consolidated financial statements The company leases certain facilities and equipment under capital and operating leases expiring at various dates. The leases generally provide for the company to pay taxes, maintenance, insurance and certain other operating costs of the leased property. Most of the operating leases contain renewal options. Rent expense under operating leases was $108 million, $99 million and $91 million in 2001, 2000 and 1999, respectively. Future Minimum Lease Payments and Debt Maturities Aggregate debt maturities Operating and capital as of and for the years ended December 31 (in millions) leases leases - ------------------------------------------------------------------------------ 2002 $ 83 $ 52 2003 64 1,338/1/ 2004 46 212 2005 38 2 2006 30 589 Thereafter 78 355 - ----------------------------------------------------------------------------- Total obligations and commitments $ 339 2,548 - ----------------------------------------------------------------------------- Amounts representing interest, discounts, premiums and deferred financing costs (10) - ----------------------------------------------------------------------------- Total long-term debt and present value of lease obligations $ 2,538 - ---------------------------------------------------------------------======== /1/Includes approximately $1,303 million of commercial paper, short-term notes and convertible debt supported by long-term credit facilities with funding expiration dates in 2003. The company maintains two revolving credit facilities, which total $1.5 billion, and have funding expiration dates through November 2003. The facilities enable the company to borrow funds in U.S. Dollars, Euros or Swiss Francs on an unsecured basis at variable interest rates and contain various covenants, including a maximum debt-to-capital ratio and a minimum interest coverage ratio. There were no borrowings outstanding under these facilities at December 31, 2001 or 2000. Baxter also maintains or guarantees other short-term credit arrangements, which totaled $337 million at December 31, 2001. Approximately $146 million and $61 million of borrowings were outstanding under these facilities at December 31, 2001 and 2000, respectively. Commercial paper, short-term notes and convertible debt, together totaling $1.3 billion at both December 31, 2001 and 2000, have been classified with long-term debt as they are supported by long-term credit facilities, which management intends to continue to refinance. The company periodically enters into off-balance sheet financing arrangements where economical and consistent with the company's business strategy. At December 31, 2001 the company has entered or is committed to enter into operating lease agreements, two of which are with special purpose entities, relating to facilities and equipment used in the operations of the company and its affiliates. The majority of these arrangements were entered into during 2001. The maximum amount committed by the lessors at December 31, 2001 under these transactions was approximately $188 million. Of this total, the amount funded was $98 million at December 31, 2001. The leases generally have an initial term of five years, with renewal options. Rent obligations will commence for certain of the leases at future dates, between January 2002 and December 2003. The minimum lease payments, which are included in the table above, are determined based on the expected funded amounts and will fluctuate based on actual interest rates. The company expects to receive $39 million of minimum lease payments from a sublease executed with a third party in which the company holds a minority equity interest. These sublease receipts, which are included in the table above, are currently estimated to be $3 million in 2003, $13 million in 2004, $12 million in 2005 and $11 million in 2006. With respect to its leases, the company has the right to renegotiate renewal terms, exercise a purchase option with respect to the leased property or arrange for the sale of the leased property. Under each lease, in the event the property is sold on behalf of the lessor and the sales proceeds are less than the lessor's investment in the property, the company is responsible for the shortfall, up to an aggregate maximum recourse amount under all of the leases of $159 million. The potential recourse amounts are not included in the minimum lease payments above as management believes the fair values of the properties equal or exceed the lessors' investments in the leased properties at December 31, 2001. The company is required to maintain compliance with covenants under certain of the leases, including a minimum interest coverage ratio. The company was in compliance with all covenants at December 31, 2001. The company and Nexell Therapeutics Inc. (Nexell), an affiliate, have entered into an agreement whereby Baxter agreed to issue put rights in connection with a $63 million private placement by Nexell of preferred stock. The put rights and related agreement are recorded in current liabilities at estimated fair value, and totaled $57 million at December 31, 2001. The put rights were issued in conjunction with Nexell's repayment of amounts owed to the company. The preferred stock is convertible at the option of the holders into common stock of Nexell at $11 per share at any time until November 2006. The put rights provide the holders of the preferred stock with the ability to cause Baxter to purchase the preferred stock from November 2002 until November 2004. The purchase price to be paid by Baxter would reflect a per annum compounded return to the holders of the preferred stock of 5.91 percent, with a downward adjustment relating to dividends paid by Nexell on the preferred stock. The company and Nexell entered into a separate related agreement whereby the conversion price of the preferred stock will be adjusted downward in accordance with the notes to consolidated financial statements 49 terms of the agreement in the event that the put rights are exercised by the holders. The fair value of the put rights was initially recorded in conjunction with the adoption of SFAS No. 133, as part of the cumulative effect of an accounting change. Subsequent changes in the fair value of the put rights and related agreement are recorded directly to other income or expense. As further discussed in Note 8, the company has guaranteed repayment of the outstanding Shared Investment Plan participant loans, in the amount of $191 million at December 31, 2001. In the normal course of business, Baxter enters into certain joint development and commercialization arrangements with third parties, often affiliates of the company. The arrangements are varied but generally provide that Baxter will receive certain rights to manufacture, market or distribute a specified technology or product under development by the third party. At December 31, 2001, future funding commitments under these arrangements totaled approximately $100 million, and the majority of them were contingent upon the third parties' achievement of contractually specified milestones. Note 6 / Financial Instruments and Risk Management - -------------------------------------------------------------------------------- Receivables In the normal course of business, the company provides credit to customers in the health-care industry, performs credit evaluations of these customers and maintains reserves for potential credit losses which, when realized, have been within the range of management's allowance for doubtful accounts. The allowance for doubtful accounts was $57 million and $43 million at December 31, 2001 and 2000, respectively. As part of a financing program, the company had commitments to extend credit, the majority of which was to an affiliate, of $68 million, of which $30 million was drawn and outstanding at December 31, 2001. The company has entered into agreements with financial institutions whereby it securitizes, on a continuous basis, an undivided interest in certain pools of trade accounts receivable (including lease receivables). Pursuant to the majority of these agreements, the company irrevocably sells the eligible accounts receivable to bankruptcy-remote third parties formed for the purpose of buying and selling these receivables, which then sell participating interests in the receivables to financial institutions. These transactions are accounted for as sales of accounts receivable. Under the terms of the arrangements, the company continues to service the receivables and retains a subordinated residual interest in the receivables. No servicing asset or liability has been recorded as the company's compensation for servicing the assets is just adequate to cover the cost of its servicing responsibilities. The carrying value of the residual interest is considered to approximate fair value. The net gains or losses recognized upon sale of the receivables, which are included in other income or expense, and the fees and costs associated with the securitization arrangements, which are included in net interest expense, are not material to the consolidated financial statements. Certain of the costs of the securitization arrangements vary with the company's credit rating. One of the arrangements requires that the company post cash collateral in the event of a specified change in credit rating. The potential cash collateral, which was not required as of December 31, 2001, totals less than $20 million. In 2001, 2000 and 1999 the company generated net operating cash inflows of $118 million, $195 million and $65 million, respectively, relating to such sales. In 2001, proceeds from new sales totaled $2.3 billion and cash collections totaled $2.2 billion. In 2000, proceeds from new sales totaled $1.5 billion and cash collections totaled $1.3 billion. The portfolio of accounts receivable that the company services, adjusted for changes in currency exchange rates from the original date of sale, totaled $683 million and $590 million at December 31, 2001 and 2000, respectively. Other Concentrations of Risk The company invests the majority of its excess cash in certificates of deposit or money market accounts and, where appropriate, diversifies the concentration of cash among different financial institutions. With respect to financial instruments, where appropriate, the company has diversified its selection of counterparties, and has arranged collateralization and master-netting agreements to minimize the risk of loss. Foreign Currency and Interest Rate Risk Management The company operates on a global basis and is exposed to the risk that its earnings, cash flows and stockholders' equity could be adversely impacted by fluctuations in currency exchange rates and interest rates. The company's hedging policy attempts to manage these risks to an acceptable level based on management's judgment of the appropriate trade-off between risk, opportunity and costs. The company is primarily exposed to currency exchange-rate risk with respect to firm commitments, forecasted transactions and net assets denominated in Japanese Yen, Euro, British Pound and Swiss Franc. The company manages its foreign currency exposures on a consolidated basis, which allows the company to net exposures and take advantage of any natural offsets. In addition, the company utilizes derivative and nonderivative financial instruments to further reduce the net exposure to currency fluctuations. Gains and losses on the hedging instruments are intended to offset losses and gains on the hedged transactions with the goal of reducing the earnings and stockholders' equity volatility resulting from fluctuations in currency exchange rates. 50 notes to consolidated financial statements The company is also exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in interest rates. The company's policy is to manage interest costs using a mix of fixed and floating rate debt that management believes is appropriate. To manage this mix in a cost efficient manner, the company periodically enters into interest rate swaps, in which the company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. In adopting SFAS No. 133, management reassessed its hedging strategies, and, in some cases, increased the company's use of derivative instruments or changed the type of derivative instruments used to manage currency exchange-rate and interest-rate risk, in part because the new accounting standard allows for increased opportunities and different approaches for reducing earnings and stockholders' equity volatility resulting from fluctuations in currency exchange rates and interest rates. Cash Flow Hedges The company uses option and forward contracts to hedge the risk to earnings associated with fluctuations in currency exchange rates relating to the company's firm commitments and forecasted transactions expected to be denominated in foreign currencies. The company uses forward-starting interest rate swaps to hedge the risk to earnings associated with fluctuations in interest rates relating to anticipated issuances of debt. Certain other firm commitments and forecasted transactions are also periodically hedged with option and forward contracts. The following table summarizes activity (net-of-tax) in 2001 in accumulated other comprehensive income (loss) (AOCI) related to the company's cash flow hedges. year ended December 31 (in millions) 2001 - --------------------------------------------------------------- AOCI balance at beginning of year $ -- Cumulative effect of accounting change 8 Net gain in fair value of derivatives 126 Net gain reclassified to earnings (52) - --------------------------------------------------------------- AOCI balance at December 31, 2001 $ 82 - ----------------------------------------------------------===== The net amounts recorded during 2001 relating to hedge ineffectiveness and the component of the derivative instruments' gain or loss excluded from the assessment of hedge effectiveness were immaterial to the consolidated financial statements. During 2001, certain foreign currency hedges were discontinued principally due to a change in the company's anticipated net exposures. This was partially as a result of recent business acquisitions, whereby the company gained natural offsets to previously existing currency exposures. The net-of-tax gain reclassified to earnings relating to these discontinued hedges, which is included in the table above, was $21 million. As of December 31, 2001, $43 million of deferred net after-tax gains on derivative instruments accumulated in AOCI (at their fair values as of December 31, 2001) are expected to be reclassified to earnings during the next twelve months, coinciding with when the hedged items, which principally include intercompany sales and interest payments on third-party debt, are expected to impact earnings. The maximum term over which the company has hedged exposures to the variability of cash flows, excluding interest payments on third-party debt, is four years. Fair Value Hedges The company uses interest rate swaps to convert a portion of its fixed-rate debt into variable-rate debt. These instruments serve to hedge the fair value of the company's debt. No portion of the change in fair value of the company's fair value hedges was ineffective or excluded from the assessment of hedge effectiveness during 2001. Hedges of Net Investments in Foreign Operations The company periodically uses cross-currency interest rate swaps and foreign currency denominated debt to hedge its stockholders' equity balance from the effects of fluctuations in currency exchange rates. The company measures effectiveness on the swaps based upon changes in spot foreign exchange rates. Approximately $95 million of net after-tax gains related to the derivative and nonderivative instruments were included in the company's CTA account for the year ended December 31, 2001. Other Hedges The company uses forward contracts and cross-currency swap agreements to hedge earnings from the effects of fluctuations in currency exchange rates relating to certain of the company's intercompany and third-party receivables, payables and debt denominated in a foreign currency. These derivative instruments are not formally designated as hedges, and the change in fair value of the instruments, which substantially offsets the change in book value of the hedged items, is recorded directly to earnings. Other Risk Management Activities In order to partially offset the potentially dilutive effect of employee stock options, the company periodically enters into forward agreements with independent third parties related to the company's common stock. The forward agreements require the company to purchase its common stock from the counterparties on specified future dates and at specified prices. The company can, at its option, require settlement of the agreements with shares of its common stock or, in some cases, cash, in lieu of physical settlement. The company may, at its option, terminate and settle these agreements early at any time before maturity. In accordance with GAAP, these agreements are not recorded on the balance sheet, but are recorded upon maturity or at an earlier termination date, and are classified within stockholders' equity. The agreements include certain Baxter stock price thresholds, below which the notes to consolidated financial statements 51 agreements will automatically terminate. These thresholds are significantly below Baxter's stock price at both the various contract inception dates and as of December 31, 2001. If the thresholds were met in the future, the number of shares that could potentially be issued by the company under all of the agreements is subject to contractual maximums, and the maximum at December 31, 2001 is 184 million shares. At December 31, 2001, agreements related to 31 million shares mature in 2002 at exercise prices ranging from $33 to $55 per share, with a weighted-average exercise price of $49 per share. At December 31, 2000, forward agreements related to 12 million shares were outstanding. Put options for three million shares of common stock and call options for two million shares of common stock were outstanding at December 31, 2000, and matured in 2001. During 2001, certain of these agreements were terminated in conjunction with the company's repurchase of its common stock. Book Values and Fair Values of Financial Instruments Approximate Book values fair values ------------------------------- as of December 31 (in millions) 2001 2000 2001 2000 - ------------------------------------------------------------------------------ Assets Long-term insurance receivables $ 93 $ 160 $ 87 $ 145 Investments in affiliates 173 195 208 312 Foreign currency hedges 181 69 181 55 Equity forward agreements -- -- 167 171 Liabilities Short-term debt 149 576 149 576 Current maturities of long-term debt and lease obligations 52 58 52 58 Short-term borrowings classified as long term 1,303 1,313 1,303 1,313 Other long-term debt and lease obligations /1/ 1,183 413 968 429 Foreign currency hedges 19 4 19 4 Nexell put rights liability 57 -- 57 -- Long-term litigation liabilities 140 184 131 170 - ------------------------------------------------------------------------------ /1/ Includes interest rate hedges with book values and fair values of $14 million in 2001 and net investment hedges with book values and fair values of $55 million and $69 million, respectively, in 2000. The company's investments in affiliates are classified as available-for-sale. The fair values of certain of these investments are not readily determinable as the securities are not traded in a market. For those investments, fair value is assumed to approximate carrying value. With respect to the company's unrestricted available-for-sale marketable securities, the total net unrealized gain at December 31, 2001 consists of gross unrealized gains of $9 million net of gross unrealized losses of $1 million, and the total at December 31, 2000 consists of gross unrealized gains of $50 million net of gross unrealized losses of $9 million. Although the company's litigation remains unresolved by final orders or settlement agreements in some cases, 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. The approximate fair values of other assets and liabilities are based on quoted market prices, where available. The carrying values of other financial instruments approximate their fair values due to the short-term maturities of these assets and liabilities. Note 7 / Accounts Payable and Accrued Liabilities - -------------------------------------------------------------------------------- as of December 31 (in millions) 2001 2000 - -------------------------------------------------------------------------------- Accounts payable, principally trade $ 708 $ 659 Employee compensation and withholdings 233 238 Litigation 110 177 Pension and other deferred benefits 49 17 Property, payroll and other taxes 99 77 Common stock dividends payable 349 341 Nexell put rights 57 -- Edwards joint venture liability 181 -- Other 646 481 - ------------------------------------------------------------------------------ Accounts payable and accrued liabilities $ 2,432 $ 1,990 - ------------------------------------------------------------================== Refer to Note 2 for further information regarding the Edwards joint venture liability. Note 8 / Common and Preferred Stock - ------------------------------------------------------------------------------- Stock Split On February 27, 2001, Baxter's board of directors approved a two-for-one stock split of the company's common shares. This approval was subject to shareholder approval of an increase in the number of authorized shares of common stock, which was received on May 1, 2001. On May 30, 2001, shareholders of record on May 9, 2001 received one additional share of Baxter common stock for each share held on May 9, 2001. All share and per share data, and option and per option data, in the consolidated financial statements and notes have been adjusted and restated to reflect the stock split. Stock Compensation Plans Baxter has several stock-based compensation plans, which are described below. Fixed Stock Option Plans - ------------------------ Stock options have been granted at various dates. All grants have a 10-year initial term and have an exercise price at least equal to 100 percent of market value on the date of grant. Vesting terms vary, with the majority of outstanding options vesting 100 percent in three years. 52 notes to consolidated financial statements Stock Options Outstanding - ------------------------- The following is a summary of stock options outstanding at December 31, 2001. (option shares in thousands) Options outstanding Options exercisable ------------------- ------------------- Weighted- average Weighted- Weighted- Range of remaining average average exercise contractual exercise exercise prices Outstanding life (years) price Exercisable price - -------------------------------------------------------------------------------- $10-24 10,476 4.4 $ 20.11 10,476 $ 20.11 25-29 9,851 7.3 27.39 4,953 28.04 30-39 8,558 7.2 32.29 575 35.18 40-44 13,246 8.8 41.27 3,880 41.34 45-47 16,175 9.2 45.42 -- -- 48-50 7,400 9.9 49.47 -- -- ------------------------------------------------------------------------------- $10-50 65,706 7.9 $ 36.59 19,884 $ 26.66 ================================================================================ As of December 31, 2000 and 1999, there were 14,651,000 and 17,510,000 options exercisable, respectively, at weighted-average exercise prices of $20.33 and $20.53, respectively. Stock Option Activity - --------------------- Weighted- average exercise (option shares in thousands) Shares price - --------------------------------------------------------------------------- Options outstanding at December 31, 1998 32,746 $ 23.19 Granted 10,026 33.36 Exercised (3,915) 19.59 Forfeited (1,239) 28.37 - --------------------------------------------------------------------------- Options outstanding at December 31, 1999 37,618 26.10 Granted 19,040 37.66 Exercised (5,706) 19.73 Forfeited (3,842) 28.91 Equitable adjustment 1,892 -- - --------------------------------------------------------------------------- Options outstanding at December 31, 2000 49,002 30.11 Granted 23,862 46.54 Exercised (5,225) 21.65 Forfeited (1,933) 35.56 - --------------------------------------------------------------------------- Options outstanding at December 31, 2001 65,706 $ 36.59 - ------------------------------------------------------===================== Included in the tables above are certain premium-priced options. During 1998, 941,000 premium-priced stock options were granted with a weighted-average exercise price of $37 and a weighted-average fair value of approximately $6 per option. During 1996, five million premium-stock options were granted with an exercise price of $24 and a weighted-average fair value of approximately $6 per option. All of such options granted in 1998 and 2.2 million of such options granted in 1996 are outstanding at December 31, 2001. Employee Stock Purchase Plans - ----------------------------- The company has employee stock purchase plans whereby it is authorized to issue up to a total of 20 million shares of common stock to its employees, nearly all of whom are eligible to participate. As of December 31, 2001, 11 million of the total authorized shares have been issued. The purchase price is the lower of 85 percent of the closing market price on the date of subscription or 85 percent of the closing market price on the purchase dates, as defined by the plans. The total subscription amount for each participant cannot exceed 25 percent of current annual pay. Under the plans, the company sold 1,423,806, 2,774,044 and 1,555,236 shares to employees in 2001, 2000 and 1999, respectively. Equitable Adjustments - --------------------- Outstanding options and employee stock subscriptions were modified as a result of the spin-off of Edwards in March 2000. Equitable adjustments were made to the number of shares and exercise price for each option and employee stock subscription outstanding. Employees of Edwards were required to exercise any vested options within 90 days from the date of spin-off, which occurred on March 31, 2000. All unvested options were canceled 90 days after the date of spin-off. Restricted Stock and Performance-Share Plans - -------------------------------------------- The management long-term incentive plan has historically included both stock options and restricted stock. Effective in 2001, the restricted stock component of the long-term incentive plan was eliminated and the plan consists solely of fixed stock options, the terms and conditions of which are similar to the company's other stock option plans. The number of stock options granted pursuant to the revised plan is based on the participant's stock option target, the participant's individual performance, as well as the performance of Baxter common stock relative to a comparator index. The company also has other incentive compensation plans whereby grants of restricted stock and performance shares are made to key employees. Effective in 2001, the restricted stock component of the non-employee director compensation plan was eliminated and the plan now consists solely of stock options. During 2001, 2000 and 1999, 12,000, 499,000 and 1,085,000 shares, respectively, of restricted stock and performance shares were granted at weighted-average grant-date fair values of $49.39, $32.88 and $32.00 per share, respectively. At December 31, 2001, 76,000 shares of stock were subject to restrictions, the majority of which lapse in 2002. The majority of the restricted stock granted in 2000 was forfeited pursuant to the long-term incentive plan transition discussed above. notes to consolidated financial statements 53 Stock Compensation Expense - -------------------------- The compensation expense recognized in continuing operations for performance-based, restricted and other stock plans was $5 million, $23 million and $26 million in 2001, 2000 and 1999, respectively. As discussed above, the company terminated certain of these plans in 2001. No compensation cost has been recognized for fixed stock option plans and stock purchase plans. Had compensation cost for all of the company's stock-based compensation plans been determined based on the fair value at the grant dates consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the company's income and related EPS would have been reduced to the pro forma amounts indicated below. years ended December 31 (in millions, except per share data) 2001 2000 1999 - --------------------------------------------------------------------------- Pro forma net income $ 448 $ 681 $ 746 Pro forma basic EPS $ .76 $ 1.16 $ 1.29 Pro forma diluted EPS $ .74 $ 1.14 $ 1.26 - --------------------------------------------------========================= Pro forma compensation expense for stock options and employee-stock subscriptions was calculated using the Black-Scholes model. The pro forma expense for stock option grants was calculated with the following weighted-average assumptions for grants in 2001, 2000 and 1999, respectively: dividend yield of 1%, 1.25% and 1.5%; expected life of six years for all periods; expected volatility of 36%, 31% and 29%; and risk-free interest rates of 4.9%, 6.1% and 5.4%. The weighted-average fair value of options granted during the year were $18.21, $13.75 and $11.30 in 2001, 2000 and 1999, respectively. The pro forma expense for employee stock purchase subscriptions was estimated with the following weighted-average assumptions for 2001, 2000 and 1999, respectively: dividend yield of 1%, 1.4% and 1.5%; expected term of one year for all periods; expected volatility of 43% in 2001 and 33% in 2000 and 1999, and risk-free interest rates of 4.1%, 6.2% and 5.4%. The weighted-average fair value of those purchase rights granted in 2001, 2000 and 1999 was $18.56, $11.49 and $10.04, respectively. Shared Investment Plan In order to further align management and shareholder interests, in 1999 the company sold approximately 6.1 million shares of the company's common stock to 142 of Baxter's senior managers for $198 million in cash. The participants used five-year full-recourse market-rate personal bank loans to purchase the stock at the May 3, 1999 closing price (adjusted for the stock split) of $31.81. The plan includes certain risk-sharing provisions whereby, after May 3, 2002, the company shares 50 percent in any loss incurred by the participants. Any such loss reimbursements would represent taxable income to the participants. As further discussed in Note 5, Baxter has guaranteed repayment to the banks in the event of default by a participant in the plan. Stock Repurchase Programs As authorized by the board of directors, the company repurchases it stock to optimize its capital structure depending upon its operational cash flows, net debt level and current market conditions. In November 1995, the company's board of directors authorized the repurchase of up to $500 million of common stock over a period of several years, all of which was repurchased by early 2000. In November 1999, the board of directors authorized the repurchase of another $500 million over a period of several years, all of which was repurchased by December 31, 2001. In July 2001, the board of directors authorized the repurchase of an additional $500 million from time to time, of which $76 million has been repurchased as of December 31, 2001. Issuance of Stock In order to rebalance the company's capital structure following the acquisition of ASTA in October 2001, the company issued 9.7 million common shares for $500 million in December 2001. Other The board of directors is authorized to issue 100 million shares of no par value preferred stock in series with varying terms as it determines. In March 1999, common stockholders received a dividend of one preferred stock purchase right (collectively, the Rights) for each share of common stock. As a result of the two-for-one split of the company's common stock in May 2001, each outstanding share of common stock is now accompanied by one-half of one Right. The Rights may become exercisable at a specified time after (1) a person or group acquires 15 percent or more of the company's common stock or (2) a tender or exchange offer for 15 percent or more of the company's common stock is made. Once exercisable, the holder of each Right is entitled to purchase, upon payment of the exercise price, shares of the company's common stock having a market value equal to two times the exercise price of the Rights. The Rights have a current exercise price of $275. The Rights expire on March 23, 2009, unless earlier redeemed by the company under certain circumstances at a price of $0.01 per Right. Note 9 / Retirement and Other Benefit Programs - -------------------------------------------------------------------------------- The company sponsors several qualified and nonqualified pension plans for its employees. The company also sponsors certain unfunded contributory health-care and life insurance benefits for substantially all domestic retired employees. 54 notes to consolidated financial statements Reconciliation of Plans' Benefit Obligations, Assets and Funded Status
Pension benefits Other benefits ---------------------------------------------- as of and for the years ended December 31 (in millions) 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------- Benefit Obligations Beginning of year $ 1,555 $ 1,344 $ 219 $ 175 Service cost 40 41 3 3 Interest cost 115 113 16 14 Participant contributions 3 2 3 3 Actuarial loss 55 147 74 35 Acquisitions (divestitures), net -- (10) -- -- Curtailments and settlements -- (10) -- -- Benefit payments (79) (78) (11) (11) Currency exchange-rate changes and other 3 6 -- -- - --------------------------------------------------------------------------------------------------- End of year 1,692 1,555 304 219 - --------------------------------------------------------------------------------------------------- Fair Value of Plan Assets Beginning of year 1,807 1,724 -- -- Actual return on plan assets (351) 173 -- -- Employer contributions 147 19 8 8 Participant contributions 3 2 3 3 Acquisitions (divestitures), net -- (8) -- -- Curtailments and settlements -- (11) -- -- Benefit payments (79) (78) (11) (11) Currency exchange-rate changes and other 3 (14) -- -- - --------------------------------------------------------------------------------------------------- End of year 1,530 1,807 -- -- - --------------------------------------------------------------------------------------------------- Funded Status Funded status at December 31 (162) 252 (304) (219) Unrecognized transition obligation 2 4 -- -- Unrecognized net (gains) losses 338 (252) 26 (56) - --------------------------------------------------------------------------------------------------- Net amount recognized $ 178 $ 4 $ (278) $ (275) - --------------------------------------------------------------------------------------------------- Prepaid benefit cost $ 320 $ 143 $ -- $ -- Accrued benefit liability (142) (139) (278) (275) - --------------------------------------------------------------------------------------------------- Net amount recognized $ 178 $ 4 $ (278) $ (275) - -----------------------------------------------------==============================================
Assets held by the trusts of the plans consist primarily of equity securities. The accumulated benefit obligation is in excess of plan assets for certain of the company's pension plans. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for these plans was $262 million, $230 million and $83 million, respectively, at December 31, 2001, and $159 million, $142 million and $17 million, respectively, at December 31, 2000. Net Periodic Benefit (Income) Cost
years ended December 31 (in millions) 2001 2000 1999 - --------------------------------------------------------------------------------------- Pension Benefits Service cost $ 40 $ 41 $ 48 Interest cost 115 113 102 Expected return on plan assets (177) (158) (133) Amortization of prior service cost -- -- 1 Amortization of net (gain) loss (5) (1) -- Amortization of transition obligation 3 5 6 - --------------------------------------------------------------------------------------- Net periodic pension benefit (income) cost $ (24) $ -- $ 24 - -----------------------------------------------------================================== Other Benefits Service cost $ 3 $ 3 $ 3 Interest cost 16 14 12 Recognized actuarial gain (4) (7) (7) - --------------------------------------------------------------------------------------- Net periodic other benefit cost $ 15 $ 10 $ 8 - -----------------------------------------------------==================================
The net periodic benefit cost amounts principally pertain to continuing operations. Assumptions Used in Determining Benefit Obligations
Pension benefits Other benefits ----------------------------------------------- 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------- Discount rate U.S. and Puerto Rico plans 7.5% 7.8% 7.5% 7.8% International plans (average) 5.7% 5.8% n/a n/a Expected return on plan assets U.S. and Puerto Rico plans 11.0% 11.0% n/a n/a International plans (average) 7.8% 8.1% n/a n/a Rate of compensation increase U.S. and Puerto Rico plans 4.5% 4.5% n/a n/a International plans (average) 3.6% 4.0% n/a n/a Annual rate of increase in the per-capita cost n/a n/a 11.4% 7.5% Rate decreased to n/a n/a 5.0% 5.5% by the year ended n/a n/a 2007 2003 - -----------------------------------------------------===============================================
Effect of a One-Percent Change in Assumed Health-Care Cost Trend Rate
One percent One percent increase decrease ---------------------------------------------- (in millions) 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components $ 2 $ 3 $ 3 $ 2 Effect on postretirement benefit obligation $ 23 $ 29 $ 23 $ 24 - -----------------------------------------------------==============================================
notes to consolidated financial statements 55 With respect to the employees of Edwards, the company froze benefits at the date of spin-off under the U.S. defined benefit pension plan and under plans that provide retirees with health-care and life insurance benefits. The pension liabilities related to such employees' service prior to the spin-off date remain with Baxter. Included in net costs associated with effecting the business distribution in 1999 was a $5 million gain (net of tax of $4 million) relating to these benefit plan curtailments. Most U.S. employees are eligible to participate in a qualified defined contribution plan. Company matching contributions relating to continuing operations were $18 million, $15 million and $14 million in 2001, 2000 and 1999, respectively. Note 10 / Interest and Other (Income) Expense - -------------------------------------------------------------------------------- Interest Expense, Net
years ended December 31 (in millions) 2001 2000 1999 - --------------------------------------------------------------------------------------- Interest expense, net Interest costs $ 130 $ 146 $ 165 Interest costs capitalized (22) (15) (13) - --------------------------------------------------------------------------------------- Interest expense 108 131 152 Interest income (39) (39) (35) - --------------------------------------------------------------------------------------- Total interest expense, net $ 69 $ 92 $ 117 - --------------------------------------------------------------------------------------- Allocated to continuing operations $ 69 $ 85 $ 87 Allocated to discontinued operation $ -- $ 7 $ 30 - -----------------------------------------------------==================================
The allocation of interest to continuing and discontinued operations was based on relative net assets of these operations. Other (Income) Expense
years ended December 31 (in millions) 2001 2000 1999 - --------------------------------------------------------------------------------------- Equity in losses of affiliates and minority interests $ 18 $ 9 $ 5 Asset dispositions and impairments, net (20) 6 13 Foreign currency (12) (57) (8) Loss on early extinguishments of debt -- 15 -- Other 5 7 1 - --------------------------------------------------------------------------------------- Total other (income) expense $ (9) $ (20) $ 11 - -----------------------------------------------------==================================
Included in asset dispositions and impairments, net in 2001 was a gain of $105 million from the disposal of a non-strategic common stock investment by contribution to the company's pension trust. The cost basis used in the determination of the gain was specific identification. Substantially offsetting this gain in 2001 were charges for asset impairments, which primarily consisted of charges for investments whose decline in value was deemed to be other than temporary, with the investments written down to the market value as of the date the determination was made by management. As of December 31, 2001, the company does not hold any investments with significant unrealized losses. Included in foreign currency income in 2000 were gains of $66 million associated with the termination of cross-currency swap agreements. The contracts were terminated in conjunction with the company's rebalancing of its debt portfolio and in anticipation of the adoption of SFAS No. 133. Note 11 / Income Taxes - -------------------------------------------------------------------------------- Income Before Income Tax Expense by Category
years ended December 31 (in millions) 2001 2000 1999 - --------------------------------------------------------------------------------------- U.S. $ 321 $ 353 $ 330 International 643 593 722 - --------------------------------------------------------------------------------------- Income from continuing operations before income taxes and cumulative effect of accounting change $ 964 $ 946 $ 1,052 - -----------------------------------------------------==================================
Income Tax Expense
years ended December 31 (in millions) 2001 2000 1999 - --------------------------------------------------------------------------------------- Current U.S. Federal $ (19) $ 142 $ (13) State and local 76 47 38 International 127 189 156 - --------------------------------------------------------------------------------------- Current income tax expense 184 378 181 - --------------------------------------------------------------------------------------- Deferred U.S. Federal 72 (98) 69 State and local (18) (21) 14 International 62 (51) 9 - --------------------------------------------------------------------------------------- Deferred income tax expense (benefit) 116 (170) 92 - --------------------------------------------------------------------------------------- Income tax expense $ 300 $ 208 $ 273 - -----------------------------------------------------==================================
The income tax for continuing operations was calculated as if Baxter were a stand-alone entity (without income from the discontinued operation). Deferred Tax Assets and Liabilities
years ended December 31 (in millions) 2001 2000 1999 - --------------------------------------------------------------------------------------- Deferred tax assets Accrued expenses $ 257 $ 374 $ 389 Accrued postretirement benefits 101 102 102 Alternative minimum tax credit 139 146 162 Tax credits and net operating losses 102 92 100 Valuation allowances (58) (50) (43) - --------------------------------------------------------------------------------------- Total deferred tax assets 541 664 710 - -----------------------------------------------------================================== Deferred tax liabilities Asset basis differences 456 410 471 Subsidiaries' unremitted earnings 38 85 160 Other 57 38 35 - --------------------------------------------------------------------------------------- Total deferred tax liabilities 551 533 666 - --------------------------------------------------------------------------------------- Net deferred tax asset (liability) $ (10) $ 131 $ 44 - -----------------------------------------------------==================================
56 notes to consolidated financial statements Income Tax Expense Rate Reconciliation years ended December 31 (in millions) 2001 2000 1999 - ------------------------------------------------------------------------------ Income tax expense at statutory rate $337 $331 $368 Tax-exempt operations (157) (147) (134) State and local taxes 31 9 23 Foreign tax expense 42 31 18 Rate difference on acquired R&D 62 - - Other factors (15) (16) (2) - ------------------------------------------------------------------------------ Income tax expense $300 $208 $273 - ----------------------------------------------------------==================== The company has received a tax-exemption grant from Puerto Rico, which provides that its manufacturing operations will be partially exempt from local taxes until the year 2013. Appropriate taxes have been provided for these operations assuming repatriation of all available earnings. In addition, the company has other manufacturing operations outside the United States, which benefit from reductions in local tax rates under tax incentives that will continue at least until 2004. U.S. federal income taxes, net of available foreign tax credits, on unremitted earnings deemed permanently reinvested would be $569 million as of December 31, 2001. In connection with the spin-off of its cardiovascular business, Baxter obtained a ruling from the Internal Revenue Service to the effect that the distribution should qualify as a tax-free spin-off in the United States. In many countries throughout the world, Baxter has not sought similar rulings from the local tax authorities and has taken the position that the spin-off was a tax-free event to Baxter. In the event that one or more countries' taxing authorities successfully challenge this position, Baxter would be liable for any resulting liability. Baxter believes that it has established adequate reserves to cover the expected tax liabilities. There can be no assurance, however, that Baxter will not incur losses in excess of such reserves. U.S. federal income tax returns filed by Baxter International Inc. through December 31, 1994, have been examined and closed by the Internal Revenue Service. The company has ongoing audits in U.S. and international jurisdictions, including Belgium, Canada, France, Japan and Singapore. In the opinion of management, the company has made adequate provisions for tax expenses for all years subject to examination. Note 12 / Legal Proceedings and Contingencies - -------------------------------------------------------------------------------- Baxter International Inc. and certain of its subsidiaries are named as defendants in a number of lawsuits, claims and proceedings, including product liability claims involving products now or formerly manufactured or sold by the company or by companies that were acquired by the company. These cases and claims raise difficult and complex factual and legal issues and are subject to many uncertainties and complexities, including, but not limited to, the facts and circumstances of each particular case and claim, the jurisdiction in which each suit is brought, and differences in applicable law. Accordingly, in many cases, the company is not able to estimate the amount of its liabilities with respect to such matters. Upon resolution of any pending legal matters, Baxter 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 and net cash flows in the period in which it is recorded or paid, management believes that no such charge would have a material adverse effect on Baxter's consolidated financial position. Following is a summary of certain legal matters pending against the company. For a more extensive description of such matters and other lawsuits, claims and proceedings against the company, see Part I, Item 3 of Baxter's Form 10-K for the year ended December 31, 2001. Mammary Implant Litigation The company, together with certain of its subsidiaries, is a defendant in various courts in a number of lawsuits brought by individuals, all seeking damages for injuries of various types allegedly caused by silicone mammary implants formerly manufactured by the Heyer-Schulte division (Heyer-Schulte) of American Hospital Supply Corporation (AHSC). AHSC, which was acquired by the company in 1985, divested its Heyer-Schulte division in 1984. Settlement of a class action on behalf of all women with silicone mammary implants was approved by the U.S. District Court (U.S.D.C.) for the Northern District of Alabama in December 1995. The monetary provisions of the settlement provide compensation for all present and future plaintiffs and claimants through a series of specific funds and a disease-compensation program involving certain specified medical conditions. In addition to the class action, there are a number of individual suits currently pending against the company, primarily consisting of plaintiffs who have opted-out of the class action. Baxter believes that a substantial portion of its liability and defense costs for mammary implant litigation will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. Plasma-Based Therapies Litigation Baxter is a defendant in a number of claims and lawsuits brought by individuals who have hemophilia, all seeking damages for injuries allegedly caused by antihemophilic factor concentrates VIII or IX derived from human blood plasma (factor concentrates) processed by the company from the late 1970s to the mid-1980s. The typical case or claim alleges that the individual was infected with the HIV virus by factor concentrates, which contained the HIV virus. None of these cases involves factor concentrates currently processed by the company. notes to consolidated financial statements 57 In addition, Immuno International AG (Immuno), a company acquired by Baxter in 1997, has unsettled claims for damages for injuries allegedly caused by its plasma-based therapies. A portion of the liability and defense costs related to these claims will be covered by insurance, subject to exclusions, conditions, policy limits and other factors. Pursuant to the stock purchase agreement between the company and Immuno, as revised in April 1999 in consideration for payment by the company of 29 million Swiss Francs to Immuno as additional purchase price, 26 million Swiss Francs of the purchase price is being withheld to cover these contingent liabilities. Baxter is also a defendant in a number of claims and lawsuits, including one certified class action in the U.S.D.C. for the Central District of Cali-fornia, brought by individuals who infused the company's Gammagard(R) IVIG (intravenous immunoglobulin), all of whom are seeking damages for Hepatitis C infections allegedly caused by infusing Gammagard(R) IVIG. In September 2000, the U.S. D.C. for the Central District of California approved a settlement of the class action that would provide financial compensation for U.S. individuals who used Gammagard(R) IVIG between January 1993 and February 1994. Baxter believes that a substantial portion of the liability and defense costs related to its plasma-based therapies litigation will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. Other As of December 31, 2001, Baxter and certain of its subsidiaries were named as defendants in two civil lawsuits in the United States seeking damages on behalf of persons who allegedly died or were injured as a result of exposure to Baxter's A, AF and AX series dialyzers. Other lawsuits and claims may be filed in the United States and elsewhere. As of December 31, 2001, Baxter and certain of its subsidiaries were named as defendants, along with others, in lawsuits pending in U.S. federal courts on behalf of various classes of purchasers of Medicare and Medicaid eligible drugs alleged to have been injured as a result of pricing practices for such drugs, which are alleged to be artificially inflated. In addition, the Attorney General of Nevada filed a civil suit in January 2002 against a subsidiary of Baxter alleging that prices for Medicare and Medicaid eligible drugs were artificially inflated in violation of various state laws. Various state and federal agencies are conducting civil investigations into the marketing and pricing practices of Baxter and others with respect to Medicare and Medicaid reimbursement. Allegiance Corporation (Allegiance) was spun off from the company in a tax-free distribution to shareholders on September 30, 1996. As of September 30, 1996, Allegiance assumed the defense of litigation involving claims related to its businesses, including certain claims of alleged personal injuries as a result of exposure to natural rubber latex gloves. Although Allegiance has not been named in most of this litigation, it will be defending and indemnifying Baxter pursuant to certain contractual obligations for all expenses and potential liabilities associated with claims pertaining to latex gloves. In addition to the cases discussed above, Baxter is a defendant in a number of other claims, investigations and lawsuits, including certain environmental proceedings. Based on the advice of counsel, management does not believe that, individually or in the aggregate, these other claims, investigations and lawsuits will have a material adverse effect on the company's results of operations, cash flows or consolidated financial position. Note 13 / Segment Information - ------------------------------------------------------------------------------- Baxter operates in three segments, each of which is a strategic business that is managed separately because each business develops, manufactures and sells distinct products and services. The segments are as follows: Medication Delivery, medication delivery products and therapies, including intravenous infusion pumps and solutions, anesthesia-delivery devices and pharmaceutical agents, and oncology therapies; BioScience, biopharmaceutical and blood-collection, separation and storage products and technologies; and Renal, products and services to treat end-stage kidney disease. As discussed in Note 2, the company spun off Edwards on March 31, 2000. Financial information for Edwards, which is substantially the same as the former CardioVascular segment, is reflected in the consolidated financial statements as a discontinued operation. Management utilizes more than one measurement and multiple views of data to measure segment performance and to allocate resources to the segments. However, the dominant measurements are consistent with the company's consolidated financial statements and, accordingly, are reported on the same basis herein. Management evaluates the performance of its segments and allocates resources to them primarily based on pretax income along with cash flows and overall economic returns. Intersegment sales are generally accounted for at amounts comparable to sales to unaffiliated customers, and are eliminated in consolidation. The accounting policies of the segments are substantially the same as those described in the summary of significant accounting policies, as discussed in Note 1. Certain items are maintained at the company's corporate headquarters (Corporate) and are not allocated to the segments. They primarily include most of the company's debt and cash and equivalents and related net interest expense, corporate headquarters costs, certain non-strategic investments and nonrecurring gains and losses, deferred income taxes, certain foreign currency fluctuations, hedging activities, and certain litigation liabilities and related insurance receivables. With respect to depreciation and amortization, and expenditures for long-lived assets, the difference between the segment totals and the consolidated totals principally related to assets maintained at Corporate. 58 notes to consolidated financial statements Segment Information as of and for the years ended Medication December 31 (in millions) Delivery BioScience Renal Other Total - ---------------------------------------------------------------------------- 2001 Net sales $ 2,935 $ 2,786 $ 1,942 $ - $ 7,663 Depreciation and amortization 159 148 105 29 441 Pretax income 471 552 294 (353) 964 Assets 3,076 3,559 1,701 2,007 10,343 Expenditures for long-lived assets 221 282 129 155 787 - ---------------------------------------------------------------------------- 2000 Net sales $ 2,719 $ 2,353 $ 1,824 $ - $ 6,896 Depreciation and amortization 147 125 96 37 405 Pretax income 426 533 310 (323) 946 Assets 2,453 2,935 1,591 1,754 8,733 Expenditures for long-lived assets 185 248 126 89 648 - ---------------------------------------------------------------------------- 1999 Net sales $ 2,524 $ 2,176 $ 1,680 $ - $ 6,380 Depreciation and amortization 145 114 81 32 372 Pretax income 424 435 318 (125) 1,052 Assets 2,447 2,632 1,342 3,223 9,644 Expenditures for long-lived assets 175 235 125 96 631 - ----------------------------================================================ Pretax Income Reconciliation years ended December 31 (in millions) 2001 2000 1999 - ----------------------------------------------------------------------------- Total pretax income from segments $1,317 $ 1,269 $ 1,177 Unallocated amounts In-process research and development expense and acquisition-related costs (280) (286) - Special charge - A, AF and AX series dialyzers (189) - - Interest expense, net (69) (85) (87) Certain currency exchange-rate fluctuations and hedging activities 113 15 25 Asset dispositions and impairments, net 36 - - Other Corporate items 36 33 (63) - ----------------------------------------------------------------------------- Consolidated income from continuing operations before income taxes and cumulative effect of accounting change $ 964 $ 946 $ 1,052 - -----------------------------------------------------======================== Assets Reconciliation as of December 31 (in millions) 2001 2000 1999 - ----------------------------------------------------------------------------- Total segment assets $ 8,336 $ 6,979 $ 6,421 Unallocated assets Cash and equivalents 582 579 606 Deferred income taxes 227 308 417 Insurance receivables 165 277 417 Net assets of discontinued operation - - 1,231 Property and equipment, net 255 217 204 Other Corporate assets 778 373 348 - ----------------------------------------------------------------------------- Consolidated total assets $10,343 $ 8,733 $ 9,644 - ----------------------------------------------------========================= Geographic Information Net sales are based on product shipment destination and long-lived assets are based on physical location. as of and for the years ended December 31 (in millions) 2001 2000 1999 - ------------------------------------------------------------------------------- Net sales United States $3,887 $3,194 $2,921 Japan 427 485 482 Other countries 3,349 3,217 2,977 - ------------------------------------------------------------------------------- Consolidated net sales $7,663 $6,896 $6,380 - --------------------------------------------------------======================= Long-lived assets United States $1,769 $1,543 $1,361 Austria 344 294 344 Other countries 1,193 970 945 - ------------------------------------------------------------------------------- Consolidated long-lived assets $3,306 $2,807 $2,650 - --------------------------------------------------------======================= notes to consolidated financial statements 59
Note 14 / Quarterly Financial Results and Market for the Company's Stock (Unaudited) - ----------------------------------------------------------------------------------------------------------------------------- First Second Third Fourth Total years ended December 31 (in millions, except per share data) quarter quarter quarter quarter year - ----------------------------------------------------------------------------------------------------------------------------- 2001 Net sales $ 1,757 $ 1,870 $ 1,900 $ 2,136 $ 7,663 Gross profit 771 826 855 984 3,436 Income (loss) from continuing operations/1/ 214 253 272 (75) 664 Net income (loss)/1/ 162 253 272 (75) 612 Per common share Income from continuing operations/1/ Basic .36 .43 .46 (.13) 1.13 Diluted .35 .42 .45 (.13) 1.09 Net income/1/ Basic .27 .43 .46 (.13) 1.04 Diluted .27 .42 .45 (.13) 1.00 Dividends declared -- -- -- .582 .582 Market price High 47.60 54.00 55.05 55.50 55.50 Low 40.75 43.95 47.50 45.95 40.75 - ----------------------------------------------------------------------------------------------------------------------------- 2000 Net sales $ 1,583 $ 1,694 $ 1,687 $ 1,932 $ 6,896 Gross profit 687 747 762 867 3,063 Income from continuing operations/2/ 191 46 231 270 738 Net income/2/ 191 48 231 270 740 Per common share Income from continuing operations/2/ Basic .33 .08 .39 .46 1.26 Diluted .32 .08 .38 .45 1.24 Net income/2/ Basic .33 .08 .39 .46 1.26 Diluted .32 .08 .38 .45 1.24 Dividends declared -- -- -- .582 .582 Market price High 33.78 36.00 42.38 44.31 44.31 Low 25.91 28.22 34.75 37.88 25.91 - -----------------------------------------------------------------============================================================
/1/The second quarter of 2001 includes a pretax gain of $105 million from the disposal of a non-strategic investment, which was substantially offset by impairment charges for other assets and investments whose decline in value was deemed to be other than temporary. The fourth quarter of 2001 includes a $280 million pretax charge for in-process research and development and acquisition-related costs and a $189 million pretax special charge for the company's A, AF and AX series dialyzers. /2/The second quarter of 2000 includes a $286 million pretax charge for in-process research and development and acquisition-related costs. Baxter common stock is listed on the New York, Chicago, Pacific, London and SWX Swiss stock exchanges. The New York Stock Exchange is the principal market on which the company's common stock is traded. At January 31, 2002, there were approximately 60,400 holders of record of the company's common stock. 60 directors and executive officers Board of Directors Executive Officers Walter E. Boomer BAXTER INTERNATIONAL INC. BAXTER HEALTHCARE BAXTER WORLD TRADE President and CORPORATION CORPORATION Chief Executive Officer Brian P. Anderson/1,2/ Rogers Corporation Senior Vice President and David F. Drohan Eric A. Beard Chief Financial Officer Senior Vice President and Corporate Vice President and President - Medication Delivery President - Europe, Africa and Pei-yuan Chia Middle East Retired Vice Chairman Timothy B. Anderson/1,2/ J. Michael Gatling Citicorp and Citibank, N.A. Senior Vice President Corporate Vice President Carlos del Salto Corporate Strategy and Manufacturing Operations Senior Vice President John W. Colloton Development Intercontinental / Asia and Director Emeritus Alan L. Heller/2/ President - Latin America University of Iowa J. Robert Hurley Senior Vice President and Hospitals and Clinics Corporate Vice President President - Renal Thomas H. Glanzmann/1/ Integration Management Senior Vice President and Susan Crown David C. McKee/2/ President - BioScience Vice President Neville J. Jeharajah Corporate Vice President and Henry Crown and Company Corporate Vice President Deputy General Counsel Investor Relations and /1/Also an executive officer of Brian D. Finn Financial Planning Gregory P. Young Baxter Healthcare Corporation Partner Corporate Vice President and Clayton, Dubilier & Rice, Inc. Harry M. Jansen Kraemer, Jr./1,2/ President - Fenwal Chairman and /2/Also an executive officer of Gail D. Fosler Chief Executive Officer Baxter World Trade Senior Vice President and Corporation Chief Economist Karen J. May The Conference Board Corporate Vice President As of February 26, 2002 Human Resources Martha R. Ingram Chairman of the Board Steven J. Meyer/1,2/ Ingram Industries Inc. Treasurer Harry M. Jansen Kraemer, Jr. John L. Quick Chairman and Corporate Vice President Chief Executive Officer Quality/Regulatory Baxter International Inc. Jan Stern Reed/1,2/ Joseph B. Martin, M.D., Ph.D. Corporate Secretary and Dean of the Faculty of Medicine Associate General Counsel Harvard Medical School Norbert G. Riedel Thomas T. Stallkamp Corporate Vice President Vice Chairman and Chief Scientific Officer Chief Executive Officer MSX International Thomas J. Sabatino, Jr./1,2/ Senior Vice President and Monroe E. Trout, M.D. General Counsel Chairman of the Board Cytyc Corporation Michael J. Tucker Senior Vice President Fred L. Turner Human Resources, Senior Chairman Communications and Europe McDonald's Corporation HONORARY DIRECTOR William B. Graham Chairman Emeritus of the Board Baxter International Inc.
company information 61 Corporate Headquarters Information Resources Baxter International Inc. Internet One Baxter Parkway www.baxter.com Deerfield, IL 60015-4633 Please visit our Internet site for: Telephone: (847) 948-2000 . General company information Internet: www.baxter.com . Corporate news or earnings releases . Annual report . Form 10-K Stock Exchange Listings . Proxy statement . Sustainability report Ticker Symbols: BAX and BXL Baxter International Inc. common stock is listed on the New York, Stockholders may elect to view future proxy materials and Chicago, Pacific, London and SWX Swiss stock exchanges. The annual reports on-line via the Internet instead of receiving New York Stock Exchange is the principal market on which the them by mail. To sign up for this service, please go to company's common stock is traded. www.econsent.com/bax. When the next proxy materials and annual reports are available, you will be sent an e-mail message with a proxy control number and a link to the Annual Meeting website where you can cast your vote on-line. Once you provide your consent to receive electronic delivery of The 2002 Annual Meeting of Stockholders will be held on proxy materials via the Internet, your consent will Tuesday, May 7, at 10:30 a.m. at the Drury Lane Theatre in remain in effect until you revoke it. Oakbrook Terrace, Illinois. Stockholders also may access personal account information on-line via the Internet by visiting www.equiserve.com and Stock Transfer Agent selecting the "Account Access" menu. Correspondence concerning Baxter International Inc. stock holdings, Investor Relations lost or missing certificates or dividend checks, duplicate mailings or changes of address should be directed to: Securities analysts, investment professionals and investors seeking additional investor information should contact: Equiserve P.O. Box 2500 Baxter Investor Relations Jersey City, NJ 07303-2500 Telephone: (847) 948-4551 Telephone: (800) 446-2617 (201) 324-0498 Customer Inquiries / General Information Internet: www.equiserve.com Customers who would like general information about Baxter's products and services may call the Center for One Baxter Correspondence concerning Baxter International Inc. Contingent toll free in the United States at (800) 422-9837, or by Payment Rights related to the acquisition of Somatogen, Inc. should dialing (847) 948-4770. be directed to: Annual Report or Form 10-K U.S. Bank Trust National Association Telephone: (800) 934-6802 A copy of the company's Form 10-K for the year ended (651) 244-8677 December 31, 2001, may be obtained without charge by writing to Baxter International Inc., Investor Relations, One Baxter Parkway, DF2-2E, Deerfield, IL 60015. A copy of the Dividend Reinvestment company's Form 10-K and other filings with the U.S. Securities and Exchange Commission may be obtained from the The company offers an automatic dividend-reinvestment program Securities and Exchange Commission's website at www.sec.gov. to all holders of Baxter International Inc. common stock. A detailed brochure is available upon request from: (R) Baxter International Inc., 2002. All rights reserved. References in this report to Baxter are intended to refer Equiserve collectively to Baxter International Inc. and its U.S. and P.O. Box 2598 international subsidiaries. Jersey City, NJ 07303-2598 Telephone: (800) 446-2617 ALYX, Baxter, Ceprotin, Extraneal, Hemofil, HomeChoice (201) 324-0498 Pediatric, INTERCEPT, Nanoedge, NeisVac-C, Physioneal, Internet: www.equiserve.com Recombinate and Syntra are trademarks of Baxter International Inc. and its affiliates. NEUPREX is a trademark of XOMA Ltd. Helinx is a trademark of Cerus Corporation. Oxygent is a trademark of Alliance Pharmaceutical Corp.
62 five-year summary of selected financial data
as of or for the years ended December 31 2001/1/ 2000/2,3/ 1999 1998/4/ 1997/5/ - ------------------------------------------------------------------------------------------------------------------------------ Operating Results (in millions) Net sales $ 7,663 6,896 6,380 5,706 5,259 Income from continuing operations before cumulative effect of accounting change $ 664 738 779 275 371 Depreciation and amortization $ 441 405 372 344 318 Research and development expenses/6/ $ 427 379 332 323 339 - ------------------------------------------------------------------------------------------------------------------------------ Balance Sheet and Cash Flow Information (in millions) Capital expenditures $ 787 648 631 556 454 Total assets $ 10,343 8,733 9,644 9,873 8,511 Long-term debt and lease obligations $ 2,486 1,726 2,601 3,096 2,635 Cash flows from continuing operations $ 1,149 1,233 977 837 472 Cash flows from discontinued operation $ -- (19) 106 102 86 Cash flows from investing activities $ (1,592) (1,053) (735) (872) (1,083) Cash flows from financing activities $ 469 (120) (445) 173 265 - ------------------------------------------------------------------------------------------------------------------------------ Common Stock Information/7/ Average number of common shares outstanding (in millions)/8/ 590 585 579 567 555 Income from continuing operations per common share Basic $ 1.13 1.26 1.34 0.49 0.67 Diluted $ 1.09 1.24 1.32 0.48 0.66 Cash dividends declared per common share $ 0.582 0.582 0.582 0.582 0.569 Year-end market price per common share/9/ $ 53.63 44.16 31.41 32.16 25.22 - ------------------------------------------------------------------------------------------------------------------------------ Other Information Net-debt-to-capital ratio 35.9% 40.1% 40.2% 48.4% 46.9% "Operational cash flow" from continuing operations (in millions)/10/ $ 503 588 588 379 153 Total shareholder return/11/ 22.8% 48.1% (0.5%) 30.1% 25.9% Common stockholders of record at year-end 60,662 59,100 61,200 61,000 62,900 - -----------------------------------------------------------------------=======================================================
/1/ Income from continuing operations includes charges for in-process research and development and acquisition-related costs and the company's A, AF and AX series dialyzers of $280 million and $189 million, respectively. /2/ Income from continuing operations includes a charge for in-process research and development and acquisition-related costs of $286 million. /3/ Certain balance sheet and other data are affected by the spin-off of Edwards Lifesciences Corporation in 2000. /4/ Income from continuing operations includes charges for in-process research and development, net litigation, and exit and other reorganization costs of $116 million, $178 million and $122 million, respectively. /5/ Income from continuing operations includes a charge for in-process research and development of $220 million. /6/ Excludes charges for in-process research and development, as noted above. /7/ All share and per share data have been restated for the company's two-for-one stock split. /8/ Excludes common stock equivalents. /9/ Market prices are adjusted for the company's stock dividend and stock split. /10/The company's internal "operational cash flow" measurement is defined on page 33 and is not a measure defined by generally accepted accounting principles. /11/Represents the total of appreciation in market price plus cash dividends declared on common shares plus the effect of any stock dividends for the year. EX-21 9 dex21.txt SUBSIDIARIES OF BAXTER INTERNATIONAL EXHIBIT 21 - -------------------------------------------------------------------------------- Subsidiaries of the Company, as of January 31, 2002
% owned by Organized under immediate Subsidiary laws of parent - ----------------------------------------------------------------------------------------- Baxter International Inc...................................... Delaware Baxter Healthcare Corporation............................. Delaware 100 Community Bio-Resources, Inc.......................... Michigan 100 Sera-Tec Biologicals Limited Partnership.......... Pennsylvania 99(2) Nextran Inc........................................... Delaware 100 Baxter World Trade Corporation............................ Delaware 100 Baxter Services Corporation........................... Delaware 100(3) Baxter Healthcare Corporation of Puerto Rico...... Alaska 100 Baxter Sales and Distribution Corp................ Delaware 100 Baxter Biotech Holding AG............................. Switzerland 100 Baxter Healthcare Pte. Ltd........................ Singapore 100 Baxter World Trade S.A........................ Belgium 46.21(2) Baxter Healthcare S.A............................. Switzerland 100(1) Baxter World Trade S.A........................ Belgium 53.78(2) Baxter Trading GmbH........................... Switzerland 100 Baxter Trading GmbH....................... Austria 99.9(2) Baxter AG............................. Austria 100 Baxter Vaccine AG................. Austria 100 Baxter Biotech Technology S.a.r.l............. Switzerland 100(1) Baxter Corporation.................................... Canada 100 Baxter Export Corporation............................. Nevada 100 Baxter Deutschland Holding GmbH....................... Germany 100 Baxter Deutschland GmbH........................... Germany 100(2) Baxter Healthcare (Holdings) Limited.................. United Kingdom 99.99(2) Baxter Healthcare Limited......................... United Kingdom 99.99(2) Baxter Holdings Limited............................... Japan 100 Baxter Limited.................................... Japan 100 Baxter Representacoes Ltda............................ Brazil 100 Baxter Hospitalar Ltda............................ Brazil 99.99(2) Baxter S.A............................................ Belgium 98.43(2) Baxter Sweden AB.................................. Sweden 100 Althin Medical AB............................. Sweden 44(2) Baxter Dialysis Holding AB........................ Sweden 80(2) Althin Medical AB............................. Sweden 56(2) Baxter S.A.S...................................... France 51(2) Baxter Travenol S.A.S................................. France 99.98(2) Baxter S.A.S...................................... France 49(2) Baxter S.A. de C.V.................................... Mexico 99.9(2) Baxter Holding Mexico, S. de R.L. de C.V.............. Mexico 100 Laboratorios Baxter S.A............................... Colombia 100 Baxter S.p.A.......................................... Italy 99.98(2) Bieffe Medital S.p.A.............................. Italy 99.23 Baxter Biosciences AG................................. Switzerland 100
- -------------------------------------------------------------------------------- Subsidiaries omitted from this list, considered in aggregate as a single subsidiary, would not constitute a significant subsidiary. All subsidiaries set forth herein are reported in the Company's financial statements through consolidation or under the equity method of accounting. * * * * * (1) Including nominee shares. (2) Remaining shares owned by the Company, or other subsidiaries of the Company. (3) Of common stock, with preferred stock held by Baxter Healthcare Corporation. EX-23 10 dex23.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-82667, 2-86993, 2-97607, 33-8812, 33-8813, 33-15523, 33-15787, 33-28428, 33-33750, 33-54069, 333-43563, 333-47019, 333-71553, 333-80403, 333-88257, 333-48906 and 333-62820), on Form S-3 (Nos. 33-5044, 33-23450, 33-27505, 33-31388, 33-49820, 333-19025, 333-94889, 333-38564, 333-54014, 333-67772 and 333-82988) and on Form S-4 (Nos. 33-808, 33-15357, 33-53937, 333-21327, 333-47927 and 333-36670) of Baxter International Inc. of our report dated February 14, 2002 relating to the financial statements, which appear in the Annual Report to Stockholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated February 14, 2002 relating to the financial statement schedule, which appears in this Form 10-K. /S/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Chicago, Illinois March 12, 2002 1 -----END PRIVACY-ENHANCED MESSAGE-----