Baxter International Annual Report 1999

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FY1999 Annual Report · Baxter International

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Baxter International 1999 Annual Report

Saving Lives Worldwide

Baxter’s vision is to be the global leader in providing critical therapies

for people with life-threatening conditions. We will achieve this vision

by reaching our goals of:

Best Team = Building the best global team in health care;

Best Partner = Creating sustainable win-win customer relationships;

Best Investment = Consistently delivering significant shareholder return.

The overall result is that Baxter will be recognized as one of the most

admired companies in the world.

COVER PHOTO These are just a few of the patients around the world whose lives

have been touched by Baxter. Every day, the company’s products and technologies

help thousands of people with kidney failure, hemophilia, infectious diseases, immune

deficiencies and other life-threatening conditions lead active and productive lives.

Contents

THE BUSINESSES OF BAXTER INTERNATIONAL

Baxter participates in three major businesses: I.V. Systems/Medical

Products, Blood Therapies and Renal. This profile provides an

overview of these businesses.

TO OUR SHAREHOLDERS

Baxter Chairman and Chief Executive Officer Harry M. Jansen Kraemer, Jr.,

discusses Baxter’s mission, its 1999 financial performance, goals for the

year 2000, and the company’s future direction.

A WORLD OF OPPORTUNITY

A growing and aging population, coupled with economic expansion in

developing markets, translates into a world of opportunity for Baxter.

WE’RE LIVING OUR MISSION

The 45,000 members of Baxter’s global team are living a common

mission — to provide critical therapies for people with life-threatening

conditions.

LEVERAGING OUR CORE CAPABILITIES

Baxter’s leadership positions are built on core capabilities that are

shared across the company’s three major businesses. These combined

strengths distinguish Baxter as a leader in the global marketplace.

WE’RE BUILDING FOR THE FUTURE

Baxter is pursuing new technologies in vaccines, recombinant proteins,

xenotransplantation, pathogen inactivation, hemoglobin therapeutics

and other emerging areas of science.

A LEADING CORPORATE CITIZEN

Baxter is committed to being a leading corporate citizen worldwide

through work/life initiatives, charitable giving and environmental

achievements.

The Businesses of

I.V. Systems / Medical Products
1999 Sales: $2.5 billion

GLOBAL STRATEGY In established markets, such as North America, Australia

and parts of Europe, Latin America and Asia, Baxter uses its recognized

leadership in IV therapy to introduce value-added products that increase

productivity and quality while reducing costs for hospitals and other

BUSINESS DESCRIPTION Baxter manufactures a range of products used

health-care providers. In new and developing markets, Baxter’s strategy

to deliver fluids and drugs to patients. These products provide fluid

is to establish a presence with selected products based on local market

replenishment, nutrition therapy, pain management, antibiotic therapy,

requirements and then broaden its offering as the market develops and

chemotherapy and other therapies. The company provides intravenous (IV)

market acceptance of Baxter’s technologies grows. Although the company

and irrigating solutions in flexible, plastic containers; premixed liquid and

has a strong manufacturing presence all over the world, it also continues

frozen drugs for IV delivery; IV access systems and tubing sets; electronic

to form joint ventures to market or manufacture its IV products in devel-

IV infusion pumps; solutions, containers and automated compounding

oping regions of Asia, Latin America and Eastern Europe. Because IV

systems for IV nutrition; IV anesthesia devices and inhalation agents; and

products are used in such a broad range of medical therapies, Baxter

ambulatory infusion systems. The company also provides custom IV

expects much of its future growth to come from the continuing economic

solution compounding services in a number of markets around the world.

expansion of developing regions as health-care standards improve.

Blood Therapies
1999 Sales: $2.2 billion

GLOBAL STRATEGY The company expects continued growth from its

Recombinate™ Antihemophilic Factor (recombinant), used to treat hemo-

philia A (the most common form of hemophilia, characterized by lack of

a clotting factor, Factor VIII), as more production capacity comes on line

BUSINESS DESCRIPTION Baxter produces therapeutic proteins from plasma

in Baxter’s recombinant facility in Thousand

and through recombinant methods to treat hemophilia, immune deficiencies

Oaks, California, in 2000. For Baxter’s

and other blood-related disorders. These include coagulation factors, immune

blood-collection products, increased

globulins, albumin, wound-management products and vaccines. Baxter

automation and the incorporation of

also manufactures blood-collection containers and automated blood-cell

leukoreduction technologies (to eliminate

separation and collection systems. These products are used by hospitals,

unwanted white cells from collected blood

blood banks and plasma-collection centers to collect and process blood

components) is expected to continue to

components for therapeutic use, or for processing into therapeutic products,

drive growth. Technologies to automate the

such as albumin. Therapeutic blood components are used to treat patients

collection of red cells and inactivate viral pathogens in collected blood

undergoing surgery, cancer therapy and other critical therapies.

components will provide opportunities for longer-term growth.

Renal
1999 Sales: $1.7 billion

GLOBAL STRATEGY There are approximately one million known dialysis

patients in the world. Many more people with kidney disease currently

go undiagnosed or untreated, particularly in developing countries.

Because PD can offer a lower-cost alternative to HD, which requires an

BUSINESS DESCRIPTION Baxter provides a range of renal dialysis products

infrastructure of clinics, one of Baxter’s strategies is to increase the

and services to support people with kidney failure. The company is the

use of PD in developing countries where people desperately need some

world’s leading manufacturer of products for peritoneal dialysis (PD), a

form of dialysis treatment. Baxter also seeks to expand PD penetration

home dialysis therapy. These products include PD solutions, container

in developed countries, where the lifestyle advantages offered by the

systems, and automated machines that cleanse patients’ blood overnight

therapy make it an attractive alternative to in-center care for certain

while they sleep. Baxter also manufactures dialyzers and instrumentation

patients. Baxter will continue to invest in both PD and HD and in its RTS

for hemodialysis (HD). Baxter’s Renal Therapy Services (RTS) operates

business in order to improve patient outcomes and provide a full spectrum

dialysis clinics in 12 countries outside the United States, while Renal

of quality, cost-effective dialysis products and services that best meet

Management Strategies Inc. (RMS) partners with U.S. nephrologists to

the needs of patients, physicians and payers.

provide a kidney-disease management program to health-care payers.

Baxter International

PRODUCT DEVELOPMENT Two years ago, Baxter introduced the Colleague®

ACQUISITIONS AND ALLIANCES Baxter’s 1998 acquisition of Bieffe Medital

single-channel volumetric infusion pump, and in 1999 launched a triple-

S.p.A. brought low-volume, low-cost manufacturing technology to Baxter

channel version, allowing clinicians to administer up to three IV

for IV and dialysis solutions. Also in 1998, Baxter acquired Ohmeda

solutions at a time to a patient from a single pump. Also in 1999,

Pharmaceutical Products, establishing Baxter as a provider of

Baxter launched a German-language version of the Colleague,

anesthesia and anesthesia-related therapies and delivery devices

and in 2000, will introduce Colleague in additional languages. In

in the United States. In 1999, Baxter reclaimed the distribution

addition, last year Baxter launched a new electronic ambulatory

rights for its inhalation agents in Canada and Western Europe

infusion pump for pain management and a new multichamber

from Pharmacia & Upjohn, Inc., and also acquired its IV business

bag for IV nutrition. In 2000, the company plans to release a

in Germany. Baxter also began distributing Gensia Sicor’s

new automated compounding system for use by hospital phar-

generic propofol anesthetic. Late in 1999, Baxter announced

macies to custom-mix patient-specific IV nutrition solutions.

the acquisition of several outpatient infusion pumps and related

Baxter also continues to look at advancing technologies in the

medical systems from Sabratek Corporation. Baxter also

“needleless” IV access area, and at expanding its industry-leading line

continues to expand its alliances with pharmaceutical companies

of premixed drugs.

to premix and package their drugs in Baxter IV solution containers.

PRODUCT DEVELOPMENT In the first quarter of 1999, Baxter launched

ACQUISITIONS AND ALLIANCES Baxter’s 1997 acquisition of Immuno AG

a recombinant Factor IX product in Europe. It is the only recombinant

greatly expanded the company’s portfolio of plasma-derived therapeutic

product available to treat patients with a less common form of hemophilia,

proteins. It also added significant new wound-management products,

hemophilia B. Baxter also continues to pursue a protein-free manufacturing

like Tisseel® fibrin sealant, and vaccines to Baxter’s product offering, while

process for recombinant blood-clotting factors. Other products in devel-

strengthening Baxter’s market presence and research-and-development

opment include a next-generation fibrin sealant and vaccines for Lyme

capabilities in Europe. In 1998, Baxter acquired Somatogen, Inc., a bio-

disease and influenza. In blood processing, Baxter and its development

pharmaceutical company engaged in recombinant hemoglobin technology.

partner, Cerus Corporation, are in clinical trials with pathogen-inactivation

Recombinant hemoglobin solutions are designed to replicate the function

technologies for platelets, plasma and red cells. Baxter also is developing

of the hemoglobin molecule in carrying oxygen to vital organs in cases of

technology for the automated collection of red cells. In addition, the

severe blood loss. In November 1999, Baxter announced plans to acquire

company is developing a recombinant solution to replicate the function

North American Vaccine, Inc., further broadening its position in the vaccines

of the hemoglobin molecule in carrying oxygen to vital organs in cases

market. Also, Baxter’s alliance with Cerus Corporation in the development

of severe blood loss.

of technologies to inactivate viral pathogens in collected blood components

represents a significant area of potential future growth.

PRODUCT DEVELOPMENT In 1999, Baxter introduced a new generation of

ACQUISITIONS AND ALLIANCES In late 1999, Baxter announced that it was

HomeChoice® technology: the HomeChoice® PRO with PD-Link.™ In addi-

acquiring Althin Medical AB, a Swedish manufacturer of hemodialysis

tion to providing overnight dialysis, the device improves patient monitoring by

instruments and dialyzers. Also in 1999, Baxter entered into a joint venture

allowing physicians to electronically access therapy data directly from the

with Gambro AB of Sweden to create Tandem Healthcare LLC. Tandem

machine. Baxter also continues to develop new PD solutions to manage

manufactures dialyzers — the filters through which blood is

specific patient conditions. These include Nutrineal™ solution,

which provides extra nutrition to patients, and Extraneal™

solution, which draws excess fluid from the bloodstream.

For HD patients, Baxter has received approval from the

U.S. Food and Drug Administration for its new Meridian™

circulated to cleanse it during hemodialysis — for

both Baxter and Gambro in Baxter’s Mountain

Home, Arkansas, plant. The company’s RTS business

continues to acquire dialysis clinics in Asia, Europe

and Latin America, where it operates the clinics

hemodialysis instrument. The company also is investing in

in partnership with local physicians. RTS entered the

xenotransplantation — animal-to-human transplants. Baxter’s

year 2000 with more than 160 clinics in Argentina, Brazil, China,

Nextran unit is working to develop genetically modified pig organs that

Colombia, France, Indonesia, Korea, Malaysia, Singapore, Spain, Taiwan

someday could be transplanted safely into humans. This research

and the United Kingdom.

extends beyond kidneys to livers, hearts and other organs.

To Our Shareholders

W elcome! It is my

our shareholders,

an update on your

pleasure to give you,

company. I say your company because,

Having just completed my first year

“I want to thank and commend you and

as Baxter’s chief executive officer, and

all of the wonderful people at Baxter

now in my first year as chairman of the

for their wonderful work in helping

company’s board of directors, I’m excited

extend the life of my wife. Five years

to share with you Baxter’s mission, our

ago, we learned my wife had to have

as one of Baxter’s shareholders (like

1999 financial performance, and where

dialysis and it seemed like the end. We

many Baxter team members around the

we are headed as a company. In addition,

selected peritoneal dialysis with your

world who own Baxter common shares),

I will set specific commitments for the

HomeChoice® cycler. It became our

you own the company. It is incumbent

year 2000 against which you can track

lifeline. We lived at home normally and

on our management team to make sure

our progress. I also will comment on how

traveled across the country in our travel

that each of you understands what we’re

we intend to build for Baxter’s future.

trailer with the cycler and supplies for

trying to accomplish as a company,

four years. They were good times. She

and why we believe it will lead to higher

BAXTER’S MISSION

died a few weeks ago and I want you to

returns for you.

I believe we are truly privileged to be

know how great your people are whom

part of the global health-care industry.

I’ve had dealings with…”

Virtually everything we do plays an

important role in helping to save lives

He went on to single out the Baxter

around the world. I receive many

team members who delivered their

touching letters from patients and

supplies, helped with arrangements for

physicians during the year. These

their trips, and lent other support

individuals articulate far better than

throughout the course of the therapy.

I the significant difference that Baxter’s

What makes me feel very proud is that

45,000 team members make each

Baxter makes similar contributions to

and every day. An example is a letter

the lives of thousands of people around

Harry M. Jansen Kraemer, Jr.

Chairman and Chief Executive Officer

we received from Alvin Ornstein of

the world every day.

Honeoye Falls, New York:

As will be discussed in the section of

this report beginning on page 10, our

8.0

6.0

4.0

2.0

900

600

300

800

600

400

200

Net Sales1
(in billions of dollars)

Net Income2
(in millions of dollars)

Operational Cash Flow 3
(in millions of dollars)

Compound Five-Year

Annual Shareholder Return

(percentage including

reinvested dividends)

global team is living a common mission:

Grow net earnings in the low double

publicly traded company. The new

providing critical therapies for people

digits. In 1999, excluding special

company, which will be named Edwards

with life-threatening conditions. As

charges, we achieved growth in net

Lifesciences Corporation, is now

William Graham, chairman emeritus of

earnings of 15 percent and diluted

expected to begin trading as an inde-

Baxter’s board of directors, has stated

earnings per share were $2.86, an

pendent company by the end of the

often during the past 50 years: “It’s

increase of 13 percent.

first quarter, 2000. I am very confident

great to do well by doing good.”

that Edwards Lifesciences will be a

Generate $500 million in operational

leader in the cardiovascular market

BAXTER’S 1999 FINANCIAL PERFORMANCE

cash flow, after investing approximately

going forward.

I firmly believe that Baxter’s credibility

$1 billion in capital expenditures and

with shareholders is dependent on

research and development. Clearly, a

Baxter’s compound five-year annual

setting clear, specific financial commit-

key driver of Baxter’s financial strength

return for the period 1994 –1999 is

ments and consistently achieving each

and future stock price is the consistent

23 percent, versus 26 percent for the

and every one of them. Your Baxter

generation of operational cash flow.

S&P Medical Index. However, despite

team did that once again in 1999.

In 1999, I’m proud to report that after

achieving all of our commitments for

Our 1999 commitments and results,

investing a total of $1.1 billion in capital

1999, Baxter’s total return to shareholders

including the CardioVascular business,

expenditures and research and devel-

for the year was approximately zero

are summarized below.

opment, we generated $719 million in

percent. This return exceeded our peer

Increase net sales approximately

we have even more aggressive goals

percentage points (zero percent versus

10 percent. In 1999 we achieved growth

in place for the year 2000.

a negative seven percent for the S&P

operational cash flow. As you will see,

group, the S&P Medical Index, by seven

in net sales of 10 percent. Of particular

Medical Index).

note was the 17 percent growth in

In addition to achieving these three

our Blood Therapies business. On a

financial goals, we announced in July

WHERE WE’RE HEADED

geographical basis, Japan grew

1999 our plans to spin off Baxter’s

The key to Baxter achieving its vision is

almost 20 percent.

CardioVascular business as a separate

for all Baxter team members to live our

“We must build a culture of speed and clarity in everything we do.”

“Using E-business to

Shared Values of respect, responsiveness

a culture of speed and clarity in

requirements and continue to develop

and results. I believe that by truly

everything we do.

innovative products and services to

respecting everyone on the team, bringing

meet their needs. We are making

out the best in one another, and con-

I believe a key ingredient to becoming

progress and are always striving to

stantly improving our responsiveness to

the Best Team is for each of us to bring

make improvements.

customers and patients, we will consis-

our “whole person” to work every day.

tently generate significant results. Our

That whole person includes our job,

Best Investment = Consistently delivering

Shared Values are the foundation of

our family, our health, our religious

significant shareholder return. I believe

everything we do. As a result, we are

convictions and our social interactions.

there are several key drivers of share-

well positioned to focus on our three

That’s what makes each of us unique

holder return. It is crucial to have a

key goals: building the Best Team,

and adds life and vitality to the Baxter

strong team and be patient- and

being the Best Partner and generating

family. By creating a balance in our work

customer-focused, but we must also be

the Best Investment for our shareholders.

and family life and creating a flexible

innovative. We will do this by delivering

work environment for all Baxter team

new products and services through

Best Team = Building the best global

members, I believe we’re doing what

internal development, acquisitions and

team in health care. This may seem easy

is socially responsible and creating a

alliances, which will generate profitable

or obvious, but it’s not. Our objectives

significant competitive advantage for

growth in sales and earnings, leading to

are to share ideas and resources across

Baxter as a preferred place to work.

long-term growth in operational cash flow.

Baxter worldwide and ensure clear,

frequent, two-way communication.

Best Partner = Creating sustainable

As a result of achieving our goals of

The goal is not for individuals on the

win-win customer relationships. In a

Best Team, Best Partner and Best

team to be right, but rather, to make

large company, it is important to keep

Investment, Baxter will be recognized

sure we do the right thing consistently

in mind that the reason we’ve built

as one of the most admired companies

for patients, customers, shareholders

a strong team is to serve patients and

in the world.

and all members of the Baxter team.

customers. We must remain extremely

We must attract, develop and retain the

focused and align our priorities with the

Given the high projected growth and

best people and create an environment

requirements of patients and customers.

increased need for health care around

that inspires, motivates and rewards

We need to consistently evaluate and

the world, the key disease states

teams and individuals. We must build

meet agreed-upon patient and customer

on which we focus, and our core

enhance our competitive position is one of my top priorities.”

capabilities, I believe we have a host

the speed and efficiency with which

across the company, and 4) new product

of future opportunities. Each of these

we deal with customers, suppliers and

development and our plans for the future.

topics is discussed in more detail in

other Baxter team members in our day-

the body of this report.

to-day operations. Using E-business to

It’s important to me that you, our

enhance our competitive position is

shareholders, understand where we’re

COMMITMENTS FOR THE YEAR 2000

one of my top priorities. I will keep you

headed. I would appreciate hearing from

Our specific commitments for the year

apprised of our progress in this area.

you with any questions or comments.

2000, excluding Edwards Lifesciences,

Feel free to reach me via e-mail at

are as follows:

LOOKING TO THE FUTURE

onebaxter@baxter.com and I’ll make sure

As you know, in December 1999, Vern

that we get back to you very quickly.

Increase net sales approximately

Loucks retired as Baxter’s chairman of

10 percent.

the board, having served in that capacity

Thanks for your attention. Here’s wishing

for 15 years, and having served Baxter

you, your families and friends a fantastic

Grow net earnings in the mid-teens.

for a total of 34 years. I have always

year 2000!

considered him an excellent mentor,

Generate a minimum of $500 million in

advisor and friend, and I wish him well

On behalf of the entire Baxter team,

operational cash flow after investing more

in his future endeavors. In addition,

than $1 billion in capital expenditures

I want to thank Mike Mussallem for his

Sincerely,

and research and development.

many contributions to Baxter and wish

We are working aggressively to

chairman and chief executive officer.

him success as Edwards Lifesciences’

incorporate E-business applications into

Harry M. Jansen Kraemer, Jr.

all aspects of our business. We are

SUMMARY

Chairman and Chief Executive Officer

expanding our web sites to link us more

I believe Baxter is uniquely positioned

closely with patients, physicians and

for the future. As you read this report,

1. Includes the CardioVascular business.

points of care. We are using the Internet

I hope you will gain an understanding

2. Net income excludes special charges for spin-off

to facilitate collaboration with research

of: 1) Baxter’s growth opportunities;

costs, the cumulative effect of an accounting change,

in-process research and development, net litigation,

and exit and other reorganization costs, as applicable

partners in product development. We

2) the company’s mission; 3) our core

in each year.

are using E-business tools to increase

capabilities and how we leverage them

3. See definition on page 27.

A World Of

LIVING LONGER LIVES People are living longer all over the world. The year 2000

marks the first time in history that people over age 60 will outnumber those age 14

and younger in industrialized countries. The population of Third World countries is

aging at an even greater rate. As people age, the severity of illness becomes more

acute, creating a greater need for health-care resources.

Opportunity
H ealth care is one of the fastest-growing industries in the world. This growth

population. On October 12, 1999, the world population exceeded six billion

is being fueled by a combination of factors, including a growing and aging

and it is projected to double to 12 billion before the end of the 21st century. The greatest

population growth is in developing countries — places like China, India and Latin

America . As the economic expansion continues in these countries, their spending on

health care will increase. In addition, the world population is aging. Globally, the average

life span has jumped from 49.5 years in 1972 to more than 63 years today. As people

get older, they usually require more health care. As these trends continue, the demand

for the products, services and therapies that Baxter provides will increase. With Baxter’s

significant global presence, the company is well positioned to meet the needs of

patients in high-growth markets worldwide. n

WORLD POPULATION 1950 —2050

HEALTH-CARE EXPENDITURES PER CAPITA

THE AGING POPULATION

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The world’s population continues to grow steadily.
It exceeded 6 billion during 1999 and is expected
to reach 9 billion by the year 2050. (Source:
United Nations world population estimates)

As the economy of a country grows, its heath-
care spending increases, making developing
countries Baxter’s fastest-growing markets.
(Source: Baxter estimates)

In the United States, the number of people age 65
and older will more than double, reaching nearly
80 million, by the year 2050. Similar trends exist
worldwide. (Source: U.S. Bureau of the Census)

We’re Living

SURGICAL INTERVENTION During a surgical procedure, most patients will likely

receive a product that is made by Baxter. Whether it be an intravenous (IV) solution

delivered by a Baxter IV pump, a blood transfusion from a Baxter blood bag, an

anesthetic agent for general anesthesia, fibrin sealant to promote blood clotting and

help seal wounds in surgery, or even pain management following surgery, Baxter

provides a range of products to meet the needs of surgical patients.

Our Mission

A s we enter the 21st century, the growing, aging population is creating

frequently and grow more acute with age. Baxter manufactures and

unprecedented, explosive growth in medical conditions that occur more

markets products and services that are used to treat patients with many of these

conditions, including cancer, trauma, hemophilia, immune deficiencies, infectious

diseases, kidney disease and other disorders. The company also manufactures

products that are used in the treatment of patients undergoing most

surgical procedures. All of these conditions can cause severe

physical, emotional and financial burdens to patients and

their families. Baxter’s role is to help alleviate these burdens

by developing innovative technologies that improve the

patient’s quality of life and medical outcome, and lower the

overall cost of patient care. The majority of Baxter’s businesses

are pioneers in their fields, with more than 70 percent of sales

coming from products with leading market positions. Driving this leadership are

talented, dedicated Baxter team members around the world, all living a common

mission — to provide critical therapies for people with life-threatening conditions. n

Cancer Cancer kills millions of people a year of all ages. More than half of

all malignant cancers disable patients during their most productive years.

For patients undergoing high-dose chemotherapy, Baxter manufactures

automated blood-component collection systems that harvest “stem cells”

from patients’ blood for reinfusion to rebuild their immune systems. These

systems also collect other blood components, such as platelets, that are

used in cancer therapy. Baxter also provides intravenous (IV) immune globulins

to bolster weakened immune systems, and a range of medication-delivery

products, including nutrition products and portable infusion pumps that deliver pain medication or

chemotherapy drugs to patients.

Trauma Injury or trauma is the leading cause of death for people under age 44. Many trauma victims

receive Baxter products — IV solutions, plasma-volume expanders, blood-transfusion products, and

other products for fluid replenishment and blood-volume stabilization.

In addition, the company is developing a genetically engineered

hemoglobin solution to replicate the function of the hemoglobin molecule

in carrying oxygen to vital organs in emergency situations and other

settings. While still in development, the product has the potential to

change the way emergency medicine is practiced. Unlike blood, it would not have to be typed and cross-

matched before it is administered, and its availability would not be dependent on the blood supply.

Blood Disorders Hemophilia is one of a number of inherited bleeding disorders characterized by an

abnormality in the blood’s ability to clot. There is no cure, but many people with hemophilia can lead productive

lives with regular infusions of clotting factor. Baxter is a leading

manufacturer of both genetically engineered and plasma-based

clotting factor for people with hemophilia worldwide. Since 1995,

global demand for recombinant Factor VIII—the clotting factor absent

from the blood of most hemophilia patients — has nearly doubled.

The company also manufactures other therapeutic blood proteins

for people with immune deficiencies and other blood-related disorders.

Infectious Diseases Infectious diseases continue to cause illness and death around the world.

While some infectious diseases have been conquered in some geographies through modern advances in

antibiotics and vaccines, new diseases are constantly emerging. Lyme

disease, AIDS and new strains of influenza are all diseases that have

emerged within the last 20 years. Baxter manufactures the leading

vaccine for tick-borne encephalitis (TBE), a potentially fatal disease

common in portions of Europe and Asia. The company recently intro-

duced its next-generation TBE vaccine, called Ticovac.™ Baxter also is developing vaccines for influenza

and Lyme disease.

Surgical Intervention Baxter products are used in a variety of surgical applications. Most people

undergoing surgery require IV access for solutions and medications. Precise infusion requires sophisticated

electronic infusion pumps to regulate flow. Baxter provides a broad range of

anesthetic agents and delivery devices for general anesthesia. The company

manufactures fibrin sealant to facilitate blood clotting and wound healing in surgery.

Baxter blood-collection and storage containers are used by blood banks to

provide blood to hospitals and surgery centers for transfusions. The company

also manufactures ambulatory IV infusion pumps used for patient-controlled

pain management following surgery.

Kidney Disease Kidney disease continues to be a growing cause of illness and death around the

world. Patients with end-stage renal disease (ESRD), or kidney failure, require dialysis or a kidney transplant

to cleanse their blood of toxins, waste and excess water normally

removed by healthy kidneys. Baxter was a pioneer in dialysis and

remains the world’s leading provider of products for dialysis. Therapy

options include peritoneal dialysis, a home-based therapy that can

offer significant lifestyle benefits to patients, and hemodialysis, normally

provided at specialized dialysis centers. In some geographies outside

the United States, Baxter operates dialysis clinics in partnership with local physicians to provide cost-effective

renal therapy. In the United States, Baxter offers renal disease-management programs to health-care payers.

Leveraging Our

MANUFACTURING EXCELLENCE Baxter has extended its expertise in plastics

extrusion and automated sterile-filling of intravenous and peritoneal-dialysis solutions

to production facilities worldwide. In recent years, Baxter has opened or expanded

manufacturing plants in China, Latin America and other developing regions of the

world to cost-effectively serve the health-care needs of a growing global marketplace.

Core Capabilities
B axter is well positioned to serve the health-care needs of people around

the world because of its unique blend of capabilities and technological

leadership. The company’s leadership positions are unmatched in the

health-care industry, and are built on several core strengths shared by Baxter’s

three major businesses: technological expertise, manufacturing and quality excel-

lence, and global presence. The company is a leading developer of products and

technologies that collect, separate and store blood, as well as therapeutic proteins

derived from blood. Baxter continues to build on its expertise in plastic-container

technologies, sterile-fluid technologies, and plasma-based and

recombinant manufacturing technologies. The company’s global

manufacturing network is a key competitive advantage, allowing

Baxter to provide cost-effective, high-quality health-care products

to patients worldwide. Baxter plants share expertise in plastics extrusion, heat-sealing

and filling, sterilization and many other processes. The company also allies with

leading scientific and technical experts outside the company to complement its

internal capabilities. Baxter will continue to leverage these core strengths to bring

quality products and services to more and more patients around the world. n

We’re Building

RECOMBINANT TECHNOLOGY Baxter is expanding its expertise in recombinant

technology, which holds the key to the future for many medical therapies. Baxter’s

production facility in Thousand Oaks, California, continues to bring new manufacturing

capacity on line, greatly increasing the company’s ability to manufacture new

recombinant proteins.

For The Future
T he new millennium will bring medical breakthroughs that will extend the average
T he new millennium will bring with it medical breakthroughs that will extend the

life span and make significant inroads in the treatment and prevention of disease.

Baxter is involved in a number of these activities. For example:

diseases that today are inevitable and incurable. For example:

average life span and make significant inroads in the treatment and prevention of

Baxter researchers are working to enhance the safety of the blood supply with technologies

to inactivate pathogens in collected blood components.

The company has development efforts underway in xenotransplantation —

genetically engineering animal organs for transplant into humans.

Baxter researchers are developing new recombinant proteins for

use in a number of clinical therapies.

The company is developing new and improved vaccines for the

prevention of a variety of infectious diseases.

The company is advancing its efforts to develop a genetically engineered

hemoglobin therapeutic that can replicate the function of the hemoglobin molecule in

carrying oxygen to vital organs in cases of severe blood loss.

The combination of these technologies with the global trends of a growing and aging

population should generate growth for Baxter in the years ahead. By remaining true to our

mission of providing critical therapies for people with life-threatening conditions, Baxter will

continue to positively impact human lives around the world. n

A Leading

HELPING THOSE IN NEED In 1999, The Baxter Allegiance Foundation donated

money to the American Refugee Committee to provide medical care to Kosovo

refugees. The grant was one of the largest received and was used to support six

mobile medical units in Macedonia, where more than 120,000 refugees were

living after being driven from their homes in Kosovo. The grant provided basic

necessities, including vaccinations against measles and polio, for the refugees,

the majority of whom were women and children.

Corporate Citizen
B axter is committed to being a leading corporate citizen through its work/life

pride in promoting work and life balance for all employees, and its commit-

initiatives, charitable giving and environmental achievements. Baxter takes

ment to work/life initiatives is a key competitive advantage. In 1999, Baxter won the

Catalyst Award for its record in advancing women into leadership positions and its

work/life programs. Since 1996, the number of women at the vice-president level at

Baxter has increased nearly 30 percent, and the percentage of employees

in the United States using alternate work arrangements has doubled to

approximately 14 percent. The Baxter Allegiance Foundation helped

increase access to health care in the United States and 13 other

countries in 1999. Foundation grants totaling $5.5 million

improved access to care for children, the uninsured and the

elderly; helped prevent child abuse and neglect; promoted

health education; and expanded education opportunities for health-care providers.

The foundation also provided grants to aid victims of global disasters, while Baxter

provided product donations and other relief aid. Many Baxter employees donated

their time to charitable organizations and participated in fund-raising activities in

their communities. In addition, Baxter facilities made progress in meeting aggressive

environmental goals in waste reduction, recycling and emissions, while also developing

a range of employee health and safety programs. n

Financial Information

Management’s Discussion & Analysis

Management’s Responsibilities for Financial Reporting

Report of Independent Accountants

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Cash Flows

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

Notes to Consolidated Financial Statements

Directors and Executive Officers

Company Information

Management’s Discussion and Analysis

T his discussion and analysis presents the factors that had a material effect on Baxter International Inc.’s (Baxter or the company)

cash flows and results of operations during the three years ended December 31, 1999, and the company’s financial position at that date.

This discussion and analysis should be read in conjunction with the Consolidated Financial Statements of the company and related notes.

KEY FINANCIAL OBJECTIVES AND RESULTS

In last year’s Annual Report, management outlined its key financial objectives for 1999. The objectives, which are summarized below, were

established based on total company results prior to the July 1999 announcement of the plan to spin off the CardioVascular business in a

distribution to stockholders. Baxter’s consolidated financial statements have been restated to reflect the financial position, results of operations

and cash flows of the CardioVascular business as a discontinued operation. However, the objectives and results presented below reflect the

combined results for both continuing and discontinued operations.

1999 OBJECTIVES

RESULTS

• Increase net sales approximately 10 percent.

• Net sales increased 10 percent in 1999.

• Grow net earnings in the low double digits.

• Excluding the cumulative effect of a change in accounting

principle, and special charges, net income increased

15 percent in 1999.

• Generate at least $500 million in operational

• The company generated operational cash flow of

cash flow, after investing approximately

$719 million during 1999. The total of capital expenditures

$1 billion in capital improvements and research

and research and development expenses was

and development.

approximately $1.1 billion.

COMPANY AND INDUSTRY OVERVIEW

Baxter is a global leader in critical therapies for patients with life-threatening conditions. The company operates in three segments, which are

described in Note 13 to the Consolidated Financial Statements.

The company generates more than 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.

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 new products and services, investing in capital and human

resources to upgrade and expand facilities, leveraging its cost structure, making acquisitions, and entering into alliances and joint venture

arrangements.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

Management’s Discussion and Analysis

RESULTS OF CONTINUING OPERATIONS

NET SALES TRENDS

years ended December 31 ( in millions)

I.V. Systems/Medical Products

Blood Therapies

Renal

Total net sales

years ended December 31 ( in millions)

United States

International

Total net sales

1999

$2,524

2,176

1,680

$6,380

1999

$2,921

3,459

$6,380

1998

$2,314

1,862

1,530

$5,706

1998

$2,609

3,097

$5,706

1997

$2,110

1,765

1,384

$5,259

1997

$2,371

2,888

$5,259

Percent increase

1999

1998

17%

10%

12%

10%

11%

Percent increase

1999

1998

12%

10%

Excluding the effect of changes in currency exchange rates, international sales growth would have been 12 percent in 1998.

I.V. Systems /Medical Products

Sales growth of nine percent in 1999 and 10 percent in 1998 in the I.V. Systems/Medical Products segment was significantly driven by increased

sales from a multiyear agreement with Premier, Inc., a major U.S. customer, as well as strong sales of the Colleague® single-channel and triple-

channel volumetric pumps, and related products, particularly in the domestic market. Sales of products and services used in anesthesiology also

contributed significantly to 1999 growth and enhanced 1998 growth as well. In April 1998, the company acquired the Pharmaceutical Products

Division of The BOC Group’s Ohmeda health-care business (Ohmeda), a domestic manufacturer of inhalants and drugs used for general and local

anesthesia, which contributed over three points and five points to the segment’s 1999 and 1998 sales growth, respectively. During 1999, the

segment entered into an exclusive agreement to sell the first generic formulation of Propofol approved by the United States Food and Drug

Administration (FDA). Sales from this new agreement contributed over two points to the segment’s 1999 sales growth. Also contributing

approximately three points to 1998 sales growth was the acquisition of Bieffe Medital S.p.A. (Bieffe), a European manufacturer of dialysis and

intravenous solutions and containers. Refer to Note 3 to the Consolidated Financial Statements for further information regarding the company’s

significant acquisitions. Partially offsetting these increases in 1998 were decreased sales of over $75 million due to the termination of a European

distribution agreement with Allegiance Corporation, which was spun off from the company in 1996, the termination of a joint venture in Asia and

other divestitures. In addition, currency exchange rate fluctuations reduced the segment’s sales growth by approximately two points in 1998. Sales

in the United States and Western Europe have been impacted by competitive pricing pressures and cost pressures from health-care providers in

all periods. These factors were more than offset by increased penetration and new product introductions in Latin America and other emerging

markets, as well as increased sales due to new agreements, new products and acquisitions. Management expects these trends to continue.

Blood Therapies

Sales in the Blood Therapies segment increased 17 percent and five percent in 1999 and 1998, respectively. Fluctuations in currency exchange

rates unfavorably impacted the segment’s sales growth in 1998, reducing the percentage growth by approximately two points. As a result of the

company’s increase in manufacturing capacity for Recombinate™ Antihemophilic Factor (recombinant) in 1998 and the strong demand for this

product, sales of Recombinate generated significant worldwide growth in both 1999 and 1998, particularly in the United States. Recombinate

contributed approximately eight points and four points, respectively, of the segment’s total percentage sales growth. While strong sales growth for

this product is expected to continue as the company is providing for increased manufacturing capacity by the end of 2000, the growth rate is

expected to be less than in 1999. U.S. sales growth in 1998 of plasma-based products was unfavorably affected by regulatory and production

issues impacting the supply of factor concentrates in the entire industry. These supply constraints eased in late 1998, and sales of plasma-based

products were strong in 1999, especially in the United States, contributing approximately six points of growth. Sales grew approximately three

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

percent in the automated and manual blood-collection businesses in 1999 and declined approximately five percent in 1998. The increase in 1999

was principally due to an increase in sales of products which provide for leukoreduction, which is the removal of white blood cells from blood

products used for transfusion. Sales growth in these businesses has also been negatively affected by regulatory and production issues in the

plasma-fractionation industry. The effect of these supply issues, as well as competitive pricing pressures, was partially offset by continued

penetration of basic blood-collection products into developing markets. The effects of regulatory, supply, competitive and other pressures on the

Blood Therapies 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. In November 1999, the company entered

into a definitive agreement to acquire North American Vaccine, Inc., a developer of vaccines for the prevention of infectious diseases, as further

discussed in Note 3 to the Consolidated Financial Statements.

Renal

The Renal segment generated sales growth of 10 percent and 11 percent in 1999 and 1998, respectively. Significant growth was generated from

the Renal Therapy Services business, which operates dialysis clinics in partnership with local physicians and hospitals in international markets.

Significant growth was also generated from the Renal Management Services business, a renal-disease management organization which creates

partnerships with nephrologists to lead renal-care networks throughout the United States. Revenues generated from these services businesses

increased over $80 million in both 1999 and 1998. Sales growth was also strong in the base peritoneal and hemodialysis businesses, driven in

part by continued penetration of products used for peritoneal dialysis. Emerging markets in the Latin American and Asian regions continue to

generate the strongest growth. Fluctuations in currency exchange rates favorably impacted sales growth in 1999 by approximately two points and

unfavorably impacted sales growth in 1998 by approximately three points. The acquisition of Bieffe in the beginning of 1998 contributed to the

1998 sales growth rate, adding approximately three points to the total segment sales growth rate for the year. Sales in certain geographic markets

continue to be affected by strong pricing pressures and the effects of market consolidation. These issues are expected to continue to be more

than offset by increased penetration of peritoneal dialysis, growth in the sales of hemodialysis products, the development of new businesses and

technologies, and alliances and acquisitions. In December 1999, the company entered into a definitive agreement to acquire Althin Medical AB, a

manufacturer of hemodialysis products, as further discussed in Note 3 to the Consolidated Financial Statements.

GROSS MARGIN AND EXPENSE RATIOS

years ended December 31 (as a percent of sales)

Gross margin

Marketing and administrative expenses

1999

44.1%

20.5%

1998

44.9%

21.2%

1997

45.3%

21.8%

The gross margin decreased in 1999 and 1998 due principally to a less favorable products and services mix. In 1998 and early 1999, the gross

margin was also impacted by the recognition of unfavorable manufacturing variances. These variances related to increased investments and

reduced production in 1998 in the Blood Therapies segment in response to heightened FDA regulatory activity with respect to safety and quality

systems. Changes in currency exchange rates also unfavorably impacted the gross margin in 1998.

Marketing and administrative expenses decreased as a percent of sales in both 1999 and 1998 as the company has more than offset the

incremental costs of expanding into developing markets and new business initiatives with a continued focus on cost control across all businesses.

In addition, the company has realized benefits from the integration of the acquisitions of Bieffe, Ohmeda, Immuno International AG (Immuno) and

other recent acquisitions. Management expects to further leverage costs in 2000.

RESEARCH AND DEVELOPMENT

years ended December 31 ( in millions)

Research and development expenses

as a percent of sales

1999

$332

1998

$323

1997

$339

Percent increase (decrease)

1999

1998

(5%)

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

Management’s Discussion and Analysis

Research and development (R&D) expenses above exclude the in-process R&D (IPR&D) charges relating to the acquisitions of Somatogen, Inc.

in 1998 and Immuno in 1997, both of which are included in the Blood Therapies segment and are further discussed in Note 3 to the Consolidated

Financial Statements. R&D expenses increased in 1999 primarily due to increased spending in the Blood Therapies segment, principally relating

to the next-generation recombinant product. The decrease in 1998 was principally due to the September 1998 decision to end the clinical

development of the company’s first-generation oxygen-carrying therapeutic program called HemAssist® (DCLHb). Excluding R&D expenses

relating to the terminated HemAssist (DCLHb) program, R&D expenses decreased four percent in 1998. The decrease in 1998 is also partially due

to a rationalization of R&D spending in the Blood Therapies segment as a result of the acquisition of Immuno in the beginning of 1997. Management

expects the growth rate in R&D expenses will increase in the future as the company focuses on the next-generation oxygen-therapeutics

program and the next-generation recombinant product within its Blood Therapies segment, as well as on other R&D initiatives across the three

segments. With respect to the pending acquisition of North American Vaccine, Inc., it is expected that a substantial portion of the purchase price

will be allocated to IPR&D and immediately expensed.

EXIT AND OTHER REORGANIZATION COSTS

Refer to Note 4 to the Consolidated Financial Statements for a discussion of charges recorded in 1998 and 1995 for exit and other reorganization

costs. The company recorded a $122 million charge in 1998 that related principally to the decision to end the clinical development of HemAssist

(DCLHb), as discussed above, exit certain non-strategic investments, primarily in Asia, and reorganize certain other activities.

The 1998 program is substantially complete as originally planned. The expected benefits of the program have been achieved. Management

believes remaining reserves for exit and other reorganization programs are adequate to complete the actions contemplated by the program.

Future cash expenditures will be funded with cash generated from operations. Management anticipates savings from the programs will be partially

invested in R&D, new business initiatives, and expansion into growing international markets. The 1995 program is complete. Management’s

objectives for the plan were met for the originally estimated cost. This program, which eliminated excess capacity and reduced manufacturing

costs, will help mitigate future exposure to gross margin erosion from pricing pressures, primarily in the United States.

Acquisition Reserves

Based on plans formulated at acquisition date, reserves have been established for certain acquisitions as part of the allocation of purchase price.

The reserves principally consisted of employee severance costs associated with headcount reductions at the acquired companies, and the costs

of exiting activities and terminating distribution, lease and other contracts of the acquired companies that existed prior to the respective dates of

acquisition and either continued with no economic benefit or required payment of a cancellation penalty. Refer to Note 3 for further information.

Actions executed to date and anticipated in the future are substantially consistent with the original plans. Management believes remaining reserves

are adequate to complete the actions contemplated by the plans.

NET LITIGATION CHARGE

As further discussed in Note 12 to the Consolidated Financial Statements, the company recorded a $178 million net litigation charge in 1998

relating to mammary implants, plasma-based therapies (relating to the Blood Therapies segment) and other litigation.

OTHER INCOME AND EXPENSE

Net interest expense declined in 1999 and 1998 due principally to the impact of a greater mix of foreign currency denominated debt, which bears

a lower average interest rate and, in 1999, to slightly lower average debt levels. In 1998, the impact of a favorable currency denomination mix of

debt was partially offset by higher average debt levels due primarily to acquisitions.

Goodwill amortization did not change significantly from 1998 to 1999 and increased from 1997 to 1998 primarily as a result of the acquisition of Bieffe.

Other expense in 1999 principally related to losses on disposals of nonstrategic investments and fluctuations in currency exchange rates. Included

in other income in 1998 was a pretax gain of $20 million relating to the disposal of a nonstrategic investment in the I.V. Systems/Medical Products

segment. Included in other income in 1997 was a pretax gain of $17 million relating to the disposal of a nonstrategic investment in the Blood

Therapies segment. Other income in 1997 also included a pretax gain of $32 million relating to the divestiture by the Blood Therapies segment of

certain assets of its Immunotherapy division, as further discussed in Note 3 to the Consolidated Financial Statements.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

PRETAX INCOME

Refer to Note 13 to the Consolidated Financial Statements for a summary of financial results by segment.

I.V. Systems/Medical Products

Pretax income increased eight percent in 1999 due principally to strong sales, particularly of the Colleague single-channel and triple-channel

volumetric pumps and anesthesia products. In addition, the gross margin improved, particularly in the United States, due to a more favorable

sales mix and manufacturing efficiencies. Pretax income increased 18 percent in 1998 due principally to acquisitions, introduction of the Colleague

single-channel pump in late 1997 and the triple-channel pump in 1998 and an improved gross margin due to a more favorable sales mix and

leveraging of costs, partially offset by the effects of unfavorable currency fluctuations.

Blood Therapies

Pretax income increased eight percent in both 1999 and 1998. As discussed above, increased regulatory activity in the factor concentrates

industry in 1998 unfavorably impacted the sales growth and gross profit margin in this segment. Partially offsetting the impact of this activity were

decreased R&D spending and other synergies as management integrated recent acquisitions. Pretax profits increased in late 1998 and 1999 as

supply constraints in the plasma-based products industry eased, as production of Recombinate increased as a result of the company’s

manufacturing capacity expansion, and as profits increased in the blood-collection businesses. Partially offsetting growth in 1998 was reduced

profitability in the blood-collection businesses due primarily to a less favorable mix of sales, pricing pressures due to competition, and the above-

mentioned regulatory activity, which has affected certain of the segment’s customers.

Renal

Pretax income grew 43 percent in 1999 and declined 26 percent in 1998. The decline in 1998 was principally due to significant unfavorable

currency exchange rate fluctuations, primarily with respect to the Japanese Yen. The increase in 1999 was principally due to the strengthening of

the Japanese Yen. Segment results do not include income or expense relating to the company’s hedging activities. Excluding the effects of

currency, growth was driven by the base peritoneal dialysis and hemodialysis businesses and manufacturing efficiencies, partially offset by the

effect of a less favorable sales mix and investments in the business.

INCOME TAXES

Excluding the divestiture gains and the charges for IPR&D, net litigation and exit and other reorganization costs, and a related provision for U.S.

taxes on previously unremitted foreign earnings, the effective income tax rate for continuing operations before cumulative effect of accounting

change was approximately 26 percent, 24 percent and 24 percent in 1999, 1998 and 1997, respectively. The rate increase in 1999 was primarily

due to a larger portion of the company’s earnings generated in higher tax jurisdictions. Management does not expect a significant change in the

effective tax rate in 2000.

INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE

years ended December 31 ( in millions)

Income from continuing operations

before cumulative effect of

accounting change

1999

1998

1997

1999

1998

Percent increase (decrease)

$779

$275

$371

183%

(26%)

Excluding the divestiture gains and the charges for IPR&D, net litigation, and exit and other reorganization costs, as applicable in 1998 and 1997,

the 1999 and 1998 growth in income from continuing operations before cumulative effect of accounting change would have been 15 percent and

20 percent, respectively.

EARNINGS PER SHARE

Excluding the divestiture gains and the charges for IPR&D, net litigation, and exit and other reorganization costs, as applicable in 1998 and 1997,

earnings per diluted share in 1998 and 1997 would have been $2.34 and $1.99, respectively, and the 1999 and 1998 growth would have been

13 percent and 17 percent, respectively.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

Management’s Discussion and Analysis

DISCONTINUED OPERATION

Income from discontinued operation grew 60 percent, or approximately $24 million, in 1999 and, excluding a $132 million IPR&D charge relating

to the acquisition of Research Medical, Inc. in 1997, declined 34 percent in 1998. These results primarily reflect growth in the higher-margin tissue

heart valves and valve-repair product lines, partially offset by reduced profits in certain other product and service lines due to pricing, declines in

surgical procedures, and competitive pressures. Favorable currency exchange rate fluctuations and an improved mix of sales contributed to the

growth in pretax income in 1999. Unfavorable currency exchange rate fluctuations, costs relating to headcount reductions and a loss associated

with the impairment of a minority equity investment contributed to the decline in 1998. Partially offsetting these increased costs in 1998 were

insurance proceeds associated with hurricane damage at a manufacturing facility.

CHANGE IN ACCOUNTING PRINCIPLE

In the first quarter 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 (SOP) 98-5, “Reporting on the Costs of Start-up Activities.” Excluding the initial effect of

adopting this standard, the impact of the new SOP is not material.

LIQUIDITY AND CAPITAL RESOURCES

Cash flows from continuing operations as reported in the Consolidated Statements of Cash Flows increased during 1999 due principally to higher

earnings and a decrease in inventories, as the company focuses on growing the business while effectively managing inventory levels. These

increases were partially offset by higher net cash outflows relating to litigation (litigation payments net of insurance recoveries), and higher other

asset balances. In 1998, net cash inflows from continuing operations increased principally due to higher earnings before noncash charges, lower

net cash outflows relating to litigation (primarily due to higher insurance recoveries in 1998 relating to the company’s mammary implant and

plasma-based therapies litigation), a higher accounts payable and accrued liabilities balance, and a lower increase in inventories. Partially offsetting

these factors in 1999 and 1998 were increases in accounts receivable due to sales growth from acquisitions and sales in certain regions outside

the United States, which have longer collection periods. In addition, approximately $65 million and $150 million in proceeds were generated from

the sales of certain receivables in 1999 and 1998, respectively. Such receivables were sold to reduce the overall costs of financing the receivables.

Cash flows from discontinued operation relate to the company’s CardioVascular business. Cash flows were relatively unchanged from 1998 to

1999, with increased earnings and a lower accounts receivable balance partially offset by an increase in inventories and a decrease in liabilities.

Included in cash flows in 1998 were approximately $22 million in proceeds from the sales of certain receivables. Refer to Note 2 to the

Consolidated Financial Statements for further information regarding the discontinued operation.

Cash outflows relating to investing activities decreased in both 1999 and 1998. Capital expenditures (including additions to the pool of

equipment leased or rented to customers) increased 13 percent and 22 percent in 1999 and 1998, respectively, as the company increased its

investments in various capital projects across the three segments. Capital expenditures are made at a sufficient level to support the strategic and

operating needs of the businesses. Recent significant expenditures have included implementation of a new integrated operational system and

continuing expansion of facilities for the production of genetically engineered proteins. Management expects to invest approximately $700 million

in capital expenditures in 2000. Net cash outflows relating to acquisitions decreased in 1999 and 1998. In 1999, net cash outflows relating to

acquisitions included approximately $36 million for a contingent purchase price payment pertaining to the 1997 acquisition of Immuno.

Approximately $22 million of the 1999 total related to acquisitions of dialysis centers in international markets and approximately $88 million

related to the acquisition of a business in the I.V. Systems/Medical Products segment. In 1999, the company also generated approximately $42

million of cash relating to the sale and leaseback of certain assets and approximately $30 million relating to a prior year divestiture in the Blood

Therapies segment. In 1998, net cash outflows relating to acquisitions included approximately $142 million pertaining to the acquisition of Bieffe,

approximately $94 million related to the acquisition of Ohmeda, and the remainder primarily related to acquisitions of dialysis centers in

international markets. Approximately $498 million and $48 million of the net cash flows used for acquisitions in 1997 related to the acquisitions of

Immuno and Bieffe, respectively.

Cash flows from financing activities decreased during 1999 and 1998. Included in the total for 1999 was $198 million in cash inflows relating to the

Shared Investment Plan, which is discussed in Note 8 to the Consolidated Financial Statements. Cash received for stock issued under employee

benefit plans increased in 1999 and 1998. Offsetting these increased inflows were increased common stock cash dividends due to a higher

number of shares outstanding, $184 million in cash outflows in 1999 related to repurchases of Baxter common stock, as further discussed below,

and other factors.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

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 their 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 more than $500 million in operational cash flow from continuing operations in 2000.

The following table reconciles cash flows from continuing operations, as determined by generally accepted accounting principles (GAAP), to

operational cash flow, which is not a measure defined by GAAP:

Brackets denote cash outflows
years ended December 31 ( in millions)

Cash flows from continuing operations per the company’s

Consolidated Statements of Cash Flows

Capital expenditures

Net interest after tax

Other

Operational cash flow – continuing operations

Operational cash flow – discontinued operation

Total operational cash flow

1999

$977

(631)

190

588

131

$719

1998

$837

(556)

379

136

$515

1997

$472

(454)

153

121

$274

The company’s net-debt-to-capital ratio was 40.2 percent and 48.4 percent at December 31, 1999 and 1998, respectively. During 1998, a wholly-

owned subsidiary of the company entered into an $800 million revolving credit facility. Due to the subsidiary’s covenants under the facility, certain

assets are restricted to the parent company. Refer to Note 5 to the Consolidated Financial Statements for further information regarding the

company’s credit facilities, long-term debt and lease obligations, and related restrictions and covenants.

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 board of directors authorized the repurchase of up to $500 million over

a period of several years. This program is substantially complete as of December 31, 1999. In November 1999, the board of directors authorized

the repurchase of an additional $500 million over a period of several years. As the company’s net-debt-to-capital ratio is now in the targeted low

40 percent range, management has resumed its stock repurchase program, and expects to continue to repurchase common stock in 2000.

As of December 31, 1999, 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 Duff & Phelps. The company intends to fund its short-term and long-term obligations as they mature

by issuing additional debt or through cash flow from operations. The company believes it has lines of credit adequate to support ongoing

operational 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.

In December 1999, the Baxter board of directors declared a quarterly dividend on the company’s common stock of 29.10 cents per share

(annualized rate of $1.164 per share), which was paid in January 2000. This is expected to be the last cash dividend payable prior to the spin-off

of the CardioVascular business. Subsequent to the spin-off, Baxter expects to continue to pay a dividend at the current rate and will do so on an

annual basis, with the first annual dividend expected to be declared in December 2000 and paid in January 2001. The company presently

anticipates that the dividend payout ratio will decrease over time in order to optimize the company’s capital structure and become more consistent

with the payout ratios of peer companies.

EURO CONVERSION

On January 1, 1999, 11 of the 15 countries that are members of the European Union introduced a new currency called the “Euro.” The conversion rates

between the Euro and the participating nations’ currencies were fixed irrevocably as of January 1, 1999. Prior to full implementation of the new currency

on January 1, 2002, there is a transition period during which parties may use either the existing currencies or the Euro for financial transactions.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

Management’s Discussion and Analysis

Action plans are currently being implemented which are expected to result in compliance with all laws and regulations relating to the Euro

conversion. Management expects that the adaptation of its information technology and other systems to accommodate Euro-denominated

transactions as well as the requirements of the transition period will not have a material impact on the company’s results of operations. The

company is also addressing the impact of the Euro on currency exchange-rate risk, taxation, contracts, competition and pricing. While it is not

possible to accurately predict the impact the Euro will have on the company’s business or on the economy in general, management currently does

not anticipate that the Euro conversion will have a material adverse impact on the company’s results of operations or financial condition.

FINANCIAL INSTRUMENT MARKET RISK

The company’s business and financial results are affected by fluctuations in world financial markets, including 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. In hedging its currency and interest rate risks, the company utilizes primarily forward

contracts, options and swaps. The company does not hold financial instruments for trading or speculative purposes.

Currency Risk

The company is primarily exposed to currency exchange-rate risk with respect to its transactions and net assets denominated in Japanese Yen,

the Euro and Swiss Franc. Business activities in various currencies expose the company to the risk that the eventual net dollar cash inflows

resulting from transactions with foreign customers and suppliers denominated in foreign currencies may be adversely affected by changes in

currency exchange rates. The company manages these risks utilizing various types of foreign exchange contracts. The company also enters

into foreign exchange contracts to hedge anticipated, but not yet committed sales expected to be denominated in foreign currencies. In

addition, the company hedges certain of its net investments in international affiliates. Such contracts hedge the U.S. dollar value of foreign

currency denominated net assets from the effects of volatility in currency exchange rates by creating debt denominated in the respective

currencies of the underlying net assets. Any changes in the carrying value of these net investments that are a result of fluctuations in currency

exchange rates are offset by changes in the carrying value of the foreign currency denominated debt that are a result of the same fluctuations in

currency exchange rates.

As part of its risk-management process, the company uses a value-at-risk (VAR) model related to its foreign currency financial instruments to

measure a potential loss in earnings as a result of adverse movements in currency exchange rates. The company utilizes a Monte Carlo

simulation, with a 95 percent confidence level, using implied volatilities and correlations (as of the measurement date) to estimate this potential

loss. The company’s calculated VAR as of fiscal year-end 1999 and 1998, assuming a one-year holding period, is $72 million and $42 million,

respectively. These amounts exclude the potential effects of any changes in the value of the underlying transactions or balances. The VAR

increased in 1999 primarily due to a larger portfolio of instruments as a result of an increase in the amount of underlying transactions

denominated in foreign currencies and a lengthening of the future period hedged, higher implied volatilities with respect to the Japanese Yen and

the Euro, and a higher volume of sold call options. As part of the strategy to manage risk while minimizing hedging costs, the company utilizes

sold call options in conjunction with purchased put options to create collars. Actual future gains or losses may differ from these estimates based

upon actual fluctuations in market rates, operating exposures and the timing thereof, and changes in the company’s portfolio of derivatives

during the measured periods. In addition, the assumption within the value-at-risk model is that changes in currency exchange rates are adverse,

which may not be the case. Any loss incurred on the financial instruments is expected to be offset by the effects of currency movements on the

respective underlying hedged transactions and balances. However, since the company’s risk-management program does not require the

hedging of all exposures, there may be currency exchange-rate gains or losses in the future. The company’s actual experience in 1999

and 1998 was favorable as compared to the VAR calculated as of fiscal year-end 1998 and 1997, respectively.

Interest Rate Risk

As part of its risk-management program, the company performs sensitivity analyses to assess potential gains and losses in earnings and changes

in fair value relating to hypothetical movements in interest rates. A 45 basis-point increase in interest rates (approximately 10 percent of the

company’s weighted average interest rate) affecting the company’s financial instruments, including debt obligations and related derivatives, and

investments, would have an immaterial effect on the company’s 1999 and 1998 pretax earnings and on the fair value of the company’s fixed-rate

financial instruments as of the end of such fiscal years.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

As discussed in Note 6 to the Consolidated Financial Statements, 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.

Other Risks

With respect to the company’s unconsolidated investments, management believes any reasonably possible near-term losses in earnings, cash

flows and fair values would not be material.

YEAR 2000

The company implemented a comprehensive program to address Year 2000 issues and all necessary implementation efforts were completed as

of December 31, 1999. There have been no material Year 2000 issues associated with the company’s internal systems, customers, products and

services, or suppliers and other critical business partners. Management does not expect any material Year 2000 issues in the future. None of the

company’s systems were upgraded or replaced solely to address Year 2000 issues, although in some cases the timing of the system upgrades

and replacements was accelerated. The total cost of these system upgrades was approximately $150 million. No critical projects were deferred

due to the Year 2000 program. Incremental out-of-pocket costs of the Year 2000 program, which were required to be expensed as incurred, were

immaterial to the company’s financial results.

LEGAL PROCEEDINGS

See Note 12 to the Consolidated Financial Statements for a discussion of the company’s legal contingencies and related insurance coverage with

respect to cases and claims relating to the company’s plasma-based therapies and mammary implants, as well as other matters. 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.

FORWARD-LOOKING INFORMATION

The matters discussed in this section include forward-looking statements that involve risks and uncertainties, including, but not limited to,

currency exchange rates, technological advances in the medical field, unforeseen information technology issues related to the company or third

parties, 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, continued price

competition, product development risks, including technological difficulties, ability to enforce patents, unforeseen commercialization and regulatory

factors, and other risks more completely reflected in the company’s filings with the Securities and Exchange Commission. In particular, the

company, as well as other companies in its industry, has experienced increased regulatory activity by the U.S. Food and Drug Administration with

respect to its plasma-based biologicals and its complaint-handling systems. It is not possible to predict the extent to which the company or the

health-care industry might be adversely affected by these factors in the future.

NEW ACCOUNTING AND DISCLOSURE STANDARD

In June 1998, the FASB issued Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (Statement No. 133), which

was later amended by Statement No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB

Statement No. 133”. Statement No. 133, as amended, requires companies to record derivatives on the balance sheet date as assets or liabilities

measured at fair value. The accounting treatment of gains and losses resulting from changes in the value of derivatives depends on the use of the

derivative and whether it qualifies for hedge accounting. The company will adopt SFAS No. 133, as amended, as required no later than January 1,

2001, and is currently assessing the impact of adoption on its consolidated financial statements.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

Management’s Responsibilities for Financial Reporting

T he 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 and

include amounts that are based upon management’s best estimates and judgments.

Management is responsible for establishing and maintaining a system of internal control 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 asset safeguarding. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all

systems of internal control, and that the cost of such systems should not exceed the benefits to be derived from them.

Management believes that the foundation of an appropriate system of internal control 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 of the related

internal control system 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 generally accepted auditing standards, which include a review of the system

of internal controls and result in assurance that the financial statements are, in all material respects, fairly presented.

The board of directors, through its Audit Committee 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.

Harry M. Jansen Kraemer, Jr.

Brian P. Anderson

Chairman and Chief Executive Officer

Senior Vice President and Chief Financial Officer

Report of Independent Accountants

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, 1999 and 1998, and the results of their operations and their cash flows for each of the three

years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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 which

require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material

misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,

assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement

presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

Chicago, Illinois

February 16, 2000

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

Consolidated Balance Sheets

as of December 31 ( in millions, except share information)

CURRENT ASSETS

Cash and equivalents

Accounts receivable

Notes and other current receivables

Inventories

Short-term deferred income taxes

Prepaid expenses

Total current assets

PROPERTY, PLANT AND EQUIPMENT, NET

OTHER ASSETS

Net assets of discontinued operation

Goodwill and other intangible assets

Insurance receivables

Other

Total other assets

Total assets

CURRENT LIABILITIES

Short-term debt

Current maturities of long-term debt and lease obligations

Accounts payable and accrued liabilities

Income taxes payable

Total current liabilities

LONG-TERM DEBT AND LEASE OBLIGATIONS

LONG-TERM DEFERRED INCOME TAXES

LONG-TERM LITIGATION LIABILITIES

OTHER LONG-TERM LIABILITIES

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY

Common stock, $1 par value, authorized

1999

$ 606

1,504

148

1,116

216

229

3,819

2,650

1,231

921

301

722

3,175

$9,644

$ 125

130

1,805

640

2,700

2,601

311

273

411

1998

$ 709

1,429

317

1,167

453

220

4,295

2,445

1,275

930

378

550

3,133

$9,873

$ 156

115

2,024

536

2,831

3,096

461

246

400

350,000,000 shares, issued 294,363,251 shares

in 1999 and 291,248,251 shares in 1998

Common stock in treasury, at cost,

4,163,737 shares in 1999 and 4,919,141 shares in 1998

Additional contributed capital

Retained earnings

Accumulated other comprehensive loss

Total stockholders’ equity

294

291

(269)

2,282

1,415

(374)

3,348

(210)

2,064

990

(296)

2,839

The accompanying notes are an integral part of these consolidated financial statements.

Total liabilities and stockholders’ equity

$9,644

$9,873

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

Consolidated Statements of Income

years ended December 31 ( in millions, except per share data)

OPERATIONS

Net sales

Costs and expenses

Cost of goods sold

Marketing and administrative expenses

Research and development expenses

In-process research and development

Exit and other reorganization costs

Net litigation charge

Interest, net

Goodwill amortization

Other expense (income)

1999

$6,380

3,568

1,311

332

–

1998

1997

$5,706

$5,259

3,142

1,208

323

116

122

178

124

(18)

2,877

1,145

339

220

–

131

(34)

Total costs and expenses

5,328

5,213

4,689

Income from continuing operations before income taxes

and cumulative effect of accounting change

Income tax expense

Income from continuing operations before cumulative effect

of accounting change

Discontinued operation

Income (loss) from discontinued operation, net of applicable

income tax expense of $19 in 1999,

$16 in 1998 and $24 in 1997

Net costs associated with effecting the business distribution

Total discontinued operation

Income before cumulative effect of accounting change

Cumulative effect of accounting change, net of income tax

benefit of $7

Net income

PER SHARE DATA

Earnings per basic common share

Continuing operations, before cumulative effect of

accounting change

Discontinued operation

Cumulative effect of accounting change

Net income

Earnings per diluted common share

Continuing operations, before cumulative effect of

accounting change

Discontinued operation

Cumulative effect of accounting change

Net income

Weighted average number of common shares outstanding

Basic

Diluted

The accompanying notes are an integral part of these consolidated financial statements.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

1,052

273

779

(19)

824

(27)

493

218

275

–

315

–

570

199

371

(71)

–

(71)

300

–

$ 797

$ 315

$ 300

$ 2.69

.15

(.09)

.97

.14

–

$ 1.34

(.26)

–

$ 2.75

$ 1.11

$ 1.08

$ 2.64

.15

(.09)

.95

.14

–

$ 1.31

(.25)

–

$ 2.70

$ 1.09

$ 1.06

290

295

284

289

278

282

Consolidated Statements of Cash Flows

years ended December 31 ( in millions) (brackets denote cash outflows)

1999

1998

1997

CASH FLOWS FROM
CONTINUING OPERATIONS

Income from continuing operations before cumulative

effect of accounting change

$779

$275

$371

Adjustments

Depreciation and amortization

Deferred income taxes

Gain (loss) on asset dispositions

In-process research and development

Exit and other reorganization costs

Net litigation charge

Other

Changes in balance sheet items

Accounts receivable

Inventories

Accounts payable and accrued liabilities

Net litigation payments and other

Cash flows from continuing operations

CASH FLOWS FROM DISCONTINUED OPERATION

CASH FLOWS FROM OPERATIONS

CASH FLOWS FROM
INVESTING ACTIVITIES

Capital expenditures

Additions to the pool of equipment leased

CASH FLOWS FROM
FINANCING ACTIVITIES

or rented to customers

Acquisitions (net of cash received)

and investments in affiliates

Divestitures and other asset dispositions

Cash flows from investing activities

Issuances of debt and lease obligations

Redemption of debt and lease obligations

Increase (decrease) in debt with maturities of

three months or less, net

Common stock cash dividends

Stock issued under Shared Investment Plan

Stock issued under employee benefit plans

Purchases of treasury stock

Cash flows from financing activities

EFFECT OF CURRENCY EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS

INCREASE (DECREASE) IN CASH AND EQUIVALENTS

CASH AND EQUIVALENTS AT BEGINNING OF YEAR

CASH AND EQUIVALENTS AT END OF YEAR

Supplemental information

Interest paid, net of portion capitalized

Income taxes paid

The accompanying notes are an integral part of these consolidated financial statements.

372

–

(103)

(243)

977

106

1,083

(529)

(102)

(179)

(735)

764

(481)

(552)

(338)

198

148

(184)

(445)

(6)

(103)

709

$606

$150

$197

344

(56)

(23)

116

122

178

(153)

(79)

165

(54)

837

102

939

(461)

318

(48)

220

–

(59)

(112)

(312)

472

558

(367)

(95)

(87)

(319)

(872)

1,143

(598)

(159)

(331)

–

118

–

173

244

465

$709

$191

$143

(606)

(23)

(1,083)

855

(465)

(316)

–

110

–

265

(36)

(296)

761

$465

$174

$170

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

years ended December 31 ( in millions)

COMMON STOCK

Beginning of year

Common stock issued for acquisitions

Stock issued under Shared Investment Plan

End of year

COMMON STOCK IN TREASURY

Beginning of year

Common stock issued for acquisitions

Purchases of common stock

Common stock issued under employee benefit plans

End of year

ADDITIONAL CONTRIBUTED CAPITAL

Beginning of year

Common stock issued for acquisitions

Stock issued under Shared Investment Plan

Common stock issued under employee benefit plans

End of year

RETAINED EARNINGS

Beginning of year

Net income

Elimination of reporting lag for certain international operations

Common stock cash dividends

End of year

ACCUMULATED OTHER COMPREHENSIVE LOSS

Beginning of year

Other comprehensive loss

End of year

Total stockholders’ equity

COMPREHENSIVE INCOME

1999

1998

1997

$ 291

$ 288

–

$ 294

$ 291

$ 288

$ (210)

$ (329)

$ (611)

–

(184)

125

–

119

178

–

104

$ (269)

$ (210)

$ (329)

$2,064

–

195

$1,876

189

–

(1)

$1,825

–

$2,282

$2,064

$1,876

$ 990

$1,006

$1,022

797

(34)

(338)

315

–

(331)

300

–

(316)

$1,415

$ 990

$1,006

$ (296)

(78)

$ (374)

$ (222)

(74)

$ (296)

(20)

(202)

$ (222)

$3,348

$2,839

$2,619

Currency translation adjustments, net of tax (benefit) of $87 in 1999 and ($56) in 1998

(80)

(75)

$ (202)

Unrealized net gain on marketable equity securities, net of tax of $1 in 1999 and $1 in 1998

Other comprehensive loss

Net income

Elimination of reporting lag for certain international operations, net of tax benefit of $22

Total comprehensive income

The accompanying notes are an integral part of these consolidated financial statements.

(78)

797

(34)

(74)

315

–

(202)

300

–

$ 685

$ 241

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

Notes to Consolidated Financial Statements

1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial statement presentation

The preparation of the financial statements in conformity with

generally accepted accounting principles (GAAP) requires

management to make estimates and assumptions that affect

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 $78

million and $97 million at December 31, 1999 and 1998 respectively.

Property, plant and equipment

reported amounts and related disclosures. Actual results could differ

as of December 31 ( in millions)

from those estimates.

Basis of consolidation

The consolidated financial statements include the accounts of Baxter

Land
Buildings and leasehold improvements
Machinery and equipment
Equipment with customers
Construction in progress

International Inc. and its majority-owned, controlled subsidiaries

(Baxter or the company). Prior to fiscal 1999, all operations outside

Total property, plant and equipment, at cost
Accumulated depreciation and amortization

1999

93
987
2,615
489
525

4,709
(2,059)

1998

92
1,009
2,526
444
437

4,508
(2,063)

the United States and its territories had been included in the

Property, plant and equipment, net

$2,650

$2,445

consolidated financial statements on the basis of fiscal years ending

November 30 in order to facilitate timely consolidation. In conjunction

Depreciation and amortization are principally calculated on the

with the implementation of new financial systems, this one-month lag

straight-line method over the estimated useful lives of the related

was eliminated as of the beginning of fiscal 1999 for certain of these

assets, which range from 20 to 50 years for buildings and

international operations, and the December 1998 net loss from

improvements and from three to 15 years for machinery and

operations of $34 million for these entities was recorded directly to

equipment. Leasehold improvements are amortized over the life of

retained earnings. The one-month reporting lag for the remainder of

the related facility lease or the asset, whichever is shorter. Straight-

the international operations will be eliminated in 2001.

line and accelerated methods of depreciation are used for income tax

Foreign currency translation

purposes. Accumulated amortization for assets under capital lease

was $10 million and $5 million at December 31, 1999 and 1998,

The results of operations for non-U.S. subsidiaries, other than those

respectively. Depreciation expense was $290 million, $269 million

located in highly inflationary countries, are translated into U.S. dollars

and $266 million in 1999, 1998 and 1997, respectively. Repairs and

using the average exchange rates during the year, while assets and

maintenance expense was $97 million, $93 million and $96 million in

liabilities are translated using period-end rates. Resulting translation

1999, 1998 and 1997, respectively.

adjustments are recorded as currency translation adjustments within

other comprehensive income. Where foreign affiliates operate in

Goodwill and other intangible assets

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

as of December 31 ( in millions)

Goodwill
Accumulated amortization

adjustments reflected in the consolidated statements of income.

Net goodwill

Revenue recognition

Other intangible assets
Accumulated amortization

The company’s practice is to recognize revenues from product sales

Net other intangible assets

Goodwill and other intangible assets

1999

$737
(113)

624

677
(380)

297

$921

1998

$684
(94)

590

688
(348)

340

$930

when title transfers.

Inventories

as of December 31 ( in millions)

Raw materials
Work in process
Finished products

Total inventories

1999

$ 251
193
672

$1,116

1998

$ 282
226
659

$1,167

Intangible assets are amortized on a straight-line basis. Goodwill is

amortized over estimated useful lives ranging from 15 to 40 years;

other intangible assets, consisting of purchased patents, trademarks

and other identified rights, are amortized over their legal or estimated

useful lives, whichever is shorter (generally not exceeding 17 years).

The company’s policy is to review the carrying amounts of goodwill

and other intangible assets whenever events or changes in

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

Notes to Consolidated Financial Statements

circumstances indicate that the carrying amount of an asset may not

Derivatives

be recoverable. Such events or circumstances might include a

Realized gains and losses on hedges of existing assets or liabilities

significant decline in market share, a significant decline in profits,

are included in the carrying amounts of those assets or liabilities and

rapid changes in technology, significant litigation or other items. In

ultimately are recognized in other income or expense. Gains and

evaluating the recoverability of goodwill and other intangible assets,

losses and option premiums relating to qualifying hedges of firm

management’s policy is to compare the carrying amounts of such

commitments or anticipated transactions are deferred and

assets with the estimated undiscounted future operating cash flows.

recognized in income as offsets of gains and losses resulting from

In the event an impairment exists, an impairment charge would be

the underlying hedged transactions. Gains and losses relating to

determined by comparing the carrying amounts of the asset to the

terminations of qualifying hedges are included in the carrying

applicable estimated future cash flows, discounted at a risk-adjusted

amounts and amortized over the remaining expected lives of the

interest rate. In addition, the remaining amortization period for the

underlying assets or liabilities. In circumstances where the underlying

impaired asset would be reassessed and revised if necessary.

assets or liabilities are sold or no longer exist, any remaining carrying

Management does not believe the carrying amounts of goodwill and

value adjustments are recognized in other income or expense. Gains

other intangible assets are impaired at December 31, 1999.

and losses on hedges of net investments are reported as currency

Earnings per share (EPS)

translation adjustments in stockholders’ equity. The interest rate

differential relating to interest rate swaps used to hedge debt

The numerator for both basic and diluted EPS is net earnings

obligations and net investments in foreign affiliates is reflected as an

available to common shareholders. The denominator for basic EPS is

adjustment to interest expense over the lives of the swaps. Equity

the weighted-average number of common shares outstanding during

forward agreements are accounted for in accordance with their

the period. The following is a reconciliation of the shares

settlement terms and are recorded directly to equity. Cash flows from

(denominator) of the basic and diluted per-share computations:

derivatives are classified in the same category as the cash flows from

years ended December 31 ( in million of shares)

Basic EPS

Effect of dilutive securities

1999

290

1998

284

1997

278

Employee stock options
Employee stock purchase plans and
equity forward agreements

–

the related investment, borrowing or foreign exchange activity.

Cash and equivalents

Cash and equivalents include cash, certificates of deposit and

marketable securities with an original maturity of three months or less.

Diluted EPS

295

289

282

Reclassifications

Certain reclassifications have been made to conform the 1998 and

1997 financial statements and notes to the 1999 presentation.

New accounting pronouncement

In June 1998, the FASB issued Statement No. 133, “Accounting for

Derivative Instruments and Hedging Activities” (Statement No. 133),

which was later amended by Statement No. 137, “Accounting for

Derivative Instruments and Hedging Activities — Deferral of the

Effective Date of FASB Statement No. 133”. Statement No. 133, as

amended, requires companies to record derivatives on the balance

sheet as assets or liabilities measured at fair value. The accounting

treatment of gains and losses resulting from changes in the value of

derivatives will depend on the use of the derivative and whether it

qualifies for hedge accounting. The company will adopt SFAS No.

133, as amended, no later than January 1, 2001, as required, and is

currently assessing the impact of adoption on its consolidated

financial statements.

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 and

unrealized net gains and losses on marketable equity securities.

Accumulated currency translation adjustments were ($377) million,

($297) million, and ($222) million at December 31, 1999, 1998 and

1997, respectively. Accumulated unrealized net gains on marketable

equity securities were immaterial in each year.

Start-up costs

Effective at the beginning of 1999, the company adopted AICPA

Statement of Position (SOP) 98-5, “Reporting on the Costs of

Start-up Activities.” This SOP required that the costs of start-up

and organization activities previously capitalized be expensed and

reported as a cumulative effect of a change in accounting princi-

ple, and requires that such costs subsequent to adoption be

expensed as incurred. The after-tax cumulative effect of this

accounting change was $27 million.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

2 DISCONTINUED OPERATION

On July 11, 1999, the board of directors of Baxter approved a plan to

spin off to Baxter stockholders its CardioVascular business, to be

named Edwards Lifesciences Corporation (Edwards), which provides

a comprehensive line of products and services to treat late-stage

cardiovascular disease. Management expects that shares of

Edwards will be distributed in a tax-free distribution to Baxter

stockholders on March 31, 2000. The distribution will result in

Edwards operating as an independent entity with publicly traded

common stock. 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.

The following selected financial data for Edwards is presented for

informational purposes only and does not necessarily reflect what the

results of operations and financial position would have been had the

ues of the net tangible assets, identifiable intangible assets and liabili-

ties acquired was allocated to goodwill, and is being amortized on a

straight-line basis over periods ranging from 15 to 40 years. As fur-

ther discussed below, a portion of the purchase price for certain of

the acquisitions was allocated to in-process research and develop-

ment (IPR&D) which, under GAAP, was immediately expensed.

Significant acquisitions

The following is a summary of the company’s significant recent

acquisitions along with the purchase price and the allocation of the

purchase price to IPR&D and intangible assets.

( in millions)

Somatogen, Inc.

Bieffe Medital S.p.A.

Immuno
International AG

Acquisition
date

Purchase
price

Intangible assets
Other
Goodwill

IPR&D

May
1998

December
1997

December
1996

$206

$116

188

–

124

569

220

125

business operated as a stand-alone entity.

Somatogen, Inc. (Somatogen) was a developer of recombinant

years ended December 31 ( in millions)

Net sales

1999

$906

1998

$893

1997

$879

hemoglobin-based technology, which was acquired for

approximately 3.5 million shares of Baxter International Inc. common

stock. Somatogen shareholders are entitled to a contingent deferred

cash payment of up to $2.00 per Somatogen share, or

Income from discontinued operation in 1999 included $19 million in

approximately $42 million, based on a percentage of sales of future

net costs directly associated with effecting the business distribution.

products through the year 2007. Bieffe Medital S.p.A. (Bieffe) was a

Basic and diluted EPS in 1999 relating to the net-of-tax net cost was

manufacturer of dialysis and intravenous solutions and containers.

$.07 and $.06.

as of December 31 ( in millions)

Net current assets
Net noncurrent assets

Total net assets

1999

1998

$ 207
1,024

$ 200
1,075

$1,231

$1,275

Through the issuance of new third-party debt, approximately $550

million of Baxter’s existing debt will be indirectly assumed by Edwards.

3 ACQUISITIONS AND DIVESTITURES

Accounting for acquisitions

All acquisitions during the three years ended December 31, 1999,

were accounted for under the purchase method. Results of opera-

tions of acquired companies are included in the company’s results of

operations as of the respective acquisition dates. Pro forma informa-

tion is not presented with respect to the acquisitions as it is not

material. The purchase price of each acquisition was allocated to the

net assets acquired based on estimates of their fair values at the date

of the acquisition. The excess of the purchase price over the fair val-

Immuno International AG (Immuno) was a manufacturer of

biopharmaceutical products and services for transfusion medicine.

In addition, Research Medical, Inc., which is part of the discontinued

operation, was acquired in March 1997 for approximately 4.8 million

shares of Baxter International Inc. common stock.

In November 1999, the company entered into a definitive agreement

to acquire North American Vaccine, Inc. (NAV), a developer of

vaccines for the prevention of infectious diseases, for approximately

$390 million. Prior to the closing of the acquisition, Baxter has

guaranteed a $30 million NAV credit facility, of which $10 million of

NAV borrowings were outstanding at December 31, 1999. It is

expected that a substantial portion of the purchase price of NAV will

be allocated to IPR&D and immediately expensed. In December 1999,

the company entered into a definitive agreement to acquire Althin

Medical, a manufacturer of hemodialysis products, for approximately

$130 million, including assumed debt. Management is in the process

of estimating the portion of the purchase price which will be allocated

to IPR&D. The closings of the acquisitions are subject to certain terms

and conditions. Both transactions are expected to close in the first six

months of 2000.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

Notes to Consolidated Financial Statements

IPR&D

based therapies and vaccines, respectively. Material net cash inflows

Amounts allocated to IPR&D were determined on the basis of

for the most significant projects were forecasted to commence

independent appraisals using the income approach, which measures

between 1998 and 2000. Assumed additional research and develop-

the value of an asset by the present value of its future economic

ment expenditures prior to the various dates of project introductions

benefits. Estimated cash flows were discounted to their present

totaled approximately $77 million. The projects are currently at

values at rates of return that incorporate the risk-free rate, the

various stages of development and virtually all of the significant

expected rate of inflation, and risks associated with the particular

projects that were in-process at the acquisition date are ongoing at

projects, including their stages of completion. Projected revenue and

December 31, 1999. As part of the post-acquisition integration and

cost assumptions were determined considering the company’s

R&D rationalization process, management reassessed all of Immuno’s

historical experience and industry trends and averages. No value was

ongoing R&D projects in conjunction with a re-evaluation of Baxter’s

assigned to any IPR&D project unless it was probable of being

existing R&D projects, and re-prioritized certain projects, resulting in

further developed.

modifications to originally planned timetables for certain of the projects.

Such changes in timetables were also significantly influenced by

The following is a summary of the amounts allocated to IPR&D by

marketplace trends and competitive factors occurring since the

significant project category:

( in millions)

Oxygen-carrying therapeutics
Plasma-based therapies
Vaccines

Total

Somatogen

Immuno

$116

$142
78

$220

Somatogen was a development-stage company and no revenue had

ever been generated from commercial product sales. The develop-

ment of oxygen-carrying therapeutics is a strategic priority to Baxter.

At the time of the acquisition, Baxter was in final-stage (Phase III)

clinical trials with its HemAssist® (DCLHb) product. Baxter acquired

Somatogen to advance the development of new generations of

recombinant oxygen-carrying technology-based products with

enhanced attributes. Subsequent to the date of the acquisition,

Baxter decided to end its HemAssist (DCLHb) program and focus on

Somatogen’s next-generation program. Material net cash inflows

relating to Somatogen’s IPR&D were forecasted in the valuation to

begin in 2004. Estimated research and development (R&D) costs to

be incurred prior to 2004 were forecasted in the valuation to total

approximately $100 million. A discount rate of 22 percent was used

in the valuation. As the R&D efforts progress, it is currently forecasted

that material net cash inflows relating to Somatogen’s IPR&D as of

acquisition date will not begin until after 2005. Also, it is currently

estimated that over $250 million of R&D costs will be incurred

between the date of acquisition and 2006, with increasing levels of

spending to be incurred each year. Approximately $18 million and

$10 million of R&D costs were expensed in 1999 and 1998,

respectively.

With respect to Immuno, the two project categories were comprised

of 18 projects, many of which were comprised of multiple sub-

projects. The status of development, stage of completion, assump-

tions, nature and timing of remaining efforts for completion, risks and

uncertainties, and other key factors varied by individual project.

Discount rates of 18 percent and 35 percent were used for plasma-

acquisition date. Most significantly, the timetables for certain of the

plasma-based therapies projects have been delayed in order to

accelerate the development of the next-generation recombinant

Factor VIII concentrate for hemophilia treatment, given the strong and

accelerating demand for recombinant products in the marketplace.

In general, projects are not currently projected to be delayed by more

than two to four years from the acquisition date timetables. Total

additional R&D expenditures prior to the various dates of product

introductions are not currently forecasted to be substantially different

from that assumed in the model. Approximately $24 million,

$25 million and $36 million of R&D costs have been expensed in

1999, 1998 and 1997, respectively.

With respect to Somatogen and Immuno IPR&D, the products

currently under development are at various stages of development,

and substantial further research and development, pre-clinical 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 market-

place 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.

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 following is a summary of significant

reserves and related activity for recent acquisitions. Actions executed

to date and anticipated in the future with respect to these

acquisitions are substantially consistent with the original plans.

Management expects the plans to be substantially complete in

accordance with the originally established timetable. Management

believes remaining reserves are adequate to complete the actions

contemplated by the plans.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

as of or for the years ended
December 31( in millions)

Original reserve

Employee-related costs
Contract termination and other costs

Total original reserve

1997 reserve utilization
1998 reserve utilization
1999 reserve utilization

Balance at December 31, 1999

Bieffe

Immuno

Clintec

$ 6
13

$19

n/a
(3)
(2)

$14

$38
41

$79

(4)
(22)
(11)

$42

$18
5

$23

(1)
(3)
(1)

$18

Employee-related costs consisted principally of employee severance

associated with headcount reductions in Europe impacting various

functions at the acquired companies. The headcount reductions for

Immuno primarily impacted the sales and marketing functions, and

for Clintec Nutrition Company (Clintec), primarily impacted the

manufacturing function. Utilization of reserves for employee-related

costs totaled $2 million in 1998 for Bieffe, $6 million, $16 million and

$2 million in 1999, 1998 and 1997, respectively, for Immuno, and

$3 million and $1 million in 1998 and 1997, respectively, for Clintec.

Contract termination and other costs related principally to the exiting

of activities and termination of distribution, lease and other contracts

Included in the total charge was a $74 million charge to write down

certain assets to estimated sales or salvage value due to impairment.

The majority of the asset writedowns related to assets located in a

manufacturing facility in Neuchâtel, Switzerland, that were used

solely in the development and manufacture of HemAssist (DCLHb),

and had no alternative future use. Activities ceased upon the

decision to end the clinical development of HemAssist (DCLHb). In

1999, the company began modifications to this manufacturing facility,

which was designed to manufacture a human hemoglobin product,

to produce recombinant biopharmaceutical products. Such alternate

production is expected to commence at the Neuchâtel facility in the

next two to three years.

The following is a summary of the components of the remainder of

the charge and utilization of such reserves to date:

as of or for the years ended
December 31 ( in millions)

Employee-
related costs

Other
costs

Original charge
1998 utilization
1999 utilization

Reserves at December 31, 1999

$34
(12)
(16)

$ 6

$14
(6)
(7)

$ 1

Total

$48
(18)
(23)

$ 7

of the acquired companies that existed prior to the acquisition date

Employee-related costs consisted principally of employee severance

that either continued with no economic benefit or required payment

resulting from the elimination of approximately 375 positions

of a cancellation penalty.

Divestiture

worldwide. The headcount reductions affected various functions and

pertained principally to the Blood Therapies and I.V. Systems/Medical

Products segments. Approximately 340 positions have been

In December 1997, the company sold certain assets of its

eliminated through December 31, 1999. The other costs related

Immunotherapy division to Nexell Therapeutics Inc. (Nexell) and

principally to contractual obligations that existed prior to the date of

recognized a pretax gain of $32 million. Proceeds received included

the charge that either continued with no economic benefit or required

publicly traded common stock, convertible preferred stock and

payment of a cancellation penalty. The majority of such costs related

warrants to acquire additional common stock in the future. Sale of

to the terminated HemAssist (DCLHb) program and included

the common stock is subject to certain restrictions.

cancellation costs associated with a minimum purchase agreement.

4 EXIT AND OTHER REORGANIZATION COSTS

In September 1998, the company decided to end the clinical

development of the Blood Therapies’ segment’s first-generation

oxygen-carrying therapeutic, HemAssist (DCLHb), which was based

on human hemoglobin, and focus on the next-generation program,

which is based on genetically engineered hemoglobin molecules. The

company also decided to exit certain non-strategic investments,

primarily in Asia, and reorganize certain other activities. As a result of

these decisions, the company recorded a $122 million pretax charge

in the third quarter of 1998.

In September 1995, the company recorded a pretax charge of

$103 million primarily to eliminate excess plant capacity and reduce

manufacturing costs. The charge predominantly related to the

closure and disposal of the intravenous-solutions plant and

warehouse in Carolina, Puerto Rico, which was part of the I.V.

Systems/Medical Products segment. Management’s plan entailed

transferring production to other facilities in Puerto Rico and the

United States upon receipt of the necessary approvals from the

United States Food and Drug Administration, and then selling or

otherwise disposing of the facility. All production and warehousing

was consolidated into other facilities as of year-end 1998 in accor-

dance with the original plan. The total charge included a $67 million

charge to write down the facility to estimated sales value due to

impairment. Suspended depreciation on the facility totaled

approximately $6 million per year since the date of the charge.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

Notes to Consolidated Financial Statements

The following is a summary of the components of the remainder of

The company leases certain facilities and equipment under capital

the charge and utilization of such reserves by year and category:

and operating leases expiring at various dates. Most of the operating

as of or for the years ended
December 31 ( in millions)

Employee-
related costs

Other
costs

Original charge
1995 utilization
1996 utilization
1997 utilization
1998 utilization
1999 utilization

Reserves at December 31, 1999

$ 27
(1)
(10)
(1)
(5)
(10)

$ –

$9
–
(1)
(2)
(6)
–

$–

Total

$ 36
(1)
(11)
(3)
(11)
(10)

$ –

Employee-related costs consisted principally of employee severance

resulting from the elimination of approximately 1,200 positions,

principally in Puerto Rico. Certain positions, primarily direct labor,

were added to other facilities to support the increased production

levels at those sites. Other costs principally related to contractual

obligations that existed prior to the date of the charge and either

continued with no economic benefit or required payment of a

cancellation penalty. The reserves were fully utilized during 1999 as

employee severance was paid and other wind-down activities were

completed. Management’s objectives for the plan were met

substantially in accordance with the originally estimated cost and

timetable.

5 LONG-TERM DEBT, CREDIT FACILITIES & LEASE OBLIGATIONS

as of December 31 ( in millions)

Commercial paper

Short-term notes

9.25% notes due 1999

Zero coupon notes

due 2000 (unamortized original
issue discounts of $9 and $24,
respectively)

8.125% notes due 2001

7.625% notes due 2002

7.125% notes due 2007

7.25% notes due 2008

9.5% notes due 2008

7.65% debentures due 2027

6.625% debentures due 2028

Other

Total long-term debt and
lease obligations

Current portion

Long-term portion

Effective
interest rate

5.3%

3.0%

9.6%

10.9%

6.2%

7.5%

7.1%

7.5%

9.5%

7.6%

6.7%

1999

1998

$ 668

$ 800

646

–

120

155

151

251

198

202

249

659

123

158

151

251

198

202

249

246

2,731
(130)

3,211
(115)

$2,601

$3,096

leases contain renewal options. Rent expense under operating leases

was $91 million, $79 million and $77 million in 1999, 1998 and 1997,

respectively.

Future minimum lease payments and debt maturities

as of or for the years ended

December 31 ( in millions)

2000
2001
2002
2003
2004
Thereafter

Total obligations and commitments

Amounts representing interest,

discounts, premiums and deferred
financing costs

Total long-term debt and present
value of lease obligations

Operating
leases

$ 73
56
42
28
25
58

$282

Aggregate debt
maturities
and capital
leases

$ 138
61
154
1,3881
3
1,013

2,757

(26)

$2,731

1. Includes $1,314 million of commercial paper and short-term notes supported by

long-term credit facilities expiring in 2003.

The company maintains two revolving credit facilities which total

$1.2 billion. Of this total, $400 million will expire in 2000 and another

$800 million facility will expire in 2003. The facilities enable the

company to borrow funds 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, 1999

or 1998. Baxter also maintains or guarantees other short-term credit

arrangements which totaled approximately $447 million at December

31, 1999. Approximately $93 million and $94 million of borrowings

were outstanding under these facilities at December 31, 1999 and

1998, respectively. At December 31, 1999 and 1998, commercial

paper and short-term notes together totaling $718 million and $800

million, respectively, have been classified with long-term debt as they

are supported by the long-term credit facilities, which management

intends to continue to refinance.

During 1998, a wholly-owned subsidiary of the company entered into

an $800 million revolving credit facility, which expires in 2003 and

enables the subsidiary to borrow funds at variable interest rates. The

agreement contains various covenants, including a minimum interest

coverage ratio, a maximum debt-to-adjusted earnings ratio and a

minimum adjusted net worth amount. There were $596 million and

$659 million in borrowings outstanding under this facility at

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

December 31, 1999 and 1998, respectively, and they were

The company has entered into foreign exchange contracts, for up to

denominated in Swiss Francs. These borrowings are secured and

10 years, to hedge certain of its net investments in foreign affiliates.

guaranteed by a pledge of the shares of the borrower and certain of

These contracts hedge the U.S. dollar value of foreign currency

its subsidiaries.

6 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Concentrations of credit risk

In the normal course of business, the company provides credit to

denominated net assets from the effects of volatility in currency

exchange rates by creating debt denominated in the respective

currencies of the underlying net assets. The increase or decrease in

the debt balance is directly offset by a corresponding fluctuation in

the underlying net assets.

Interest rate and foreign exchange contracts

customers in the health-care industry, performs credit evaluations of

as of December 31 ( in millions)

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 $34 million and $37 million at December 31, 1999 and

1998, respectively.

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.

Interest rate risk management

Baxter uses forward contracts, options and interest rate swaps

generally from one to three years in duration to manage the

company’s exposure to adverse movements in interest rates. The

book values of debt at December 31, 1999 and 1998 reflect deferred

hedge gains of $11 million and $16 million, respectively, offset by

$2 million and $2 million of deferred hedge losses, respectively.

Foreign exchange risk management

The company principally hedges the following currencies: Japanese

Yen, the Euro and Swiss Franc. The company enters into various

types of foreign exchange contracts to protect the company from the

risk that the eventual net dollar cash flows resulting from transactions

with foreign customers and suppliers may be adversely affected by

changes in currency exchange rates. The company also enters into

foreign exchange contracts, with terms generally less than two years,

to hedge anticipated but not yet committed sales expected to be

denominated in foreign currencies. Deferred hedging gains on

hedges of anticipated but not yet committed sales totaled $7 million

and $2 million at December 31, 1999 and 1998, respectively.

1999
Notional Market
values
amounts

1998
Notional Market
values
amounts

$ 300

$ 600

$ (3)

Interest rate contracts
Floating to fixed rate hedges

Average pay rate 7.4% in

1999 and 5.4% in 1998
Average receive rate 5.8% in
1999 and 5.6% in 1998

Foreign exchange contracts
Forwards and options primarily

used to hedge anticipated sales

Japanese Yen
Euro
Other currencies

$ 714
672
40

(2)
17
–

$ 489
220
88

$ (1)
2
2

Total

$1,426

$ 15

$ 797

Forwards and swaps used to
hedge net investments in
foreign affiliates

Japanese Yen
Euro
Other currencies

$ 315
2,650
15

$(113)
175
–

$ 315
2,250
82

$ (58)
(144)
–

Total

$2,980

$ 62

$2,647

$(202)

Forwards used to hedge certain
receivables and payables
(primarily Japanese Yen, Euro
and Swiss Franc)

–

$ 274

–

In conjunction with the spin-off of Edwards, it is expected that certain

of the foreign exchange contracts summarized above, principally

those used to hedge anticipated sales, will be transferred to

Edwards. The estimated total notional amount and market value of

such contracts totaled $350 million and $1 million, respectively, at

December 31, 1999.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

Notes to Consolidated Financial Statements

Fair values of financial instruments

as of December 31 ( in millions)

1999

1998

1999

1998

Carrying amounts

Approximate
fair values

Assets

Long-term insurance
receivables

Investments in affiliates
Foreign exchange hedges

Liabilities

Short-term debt
Short-term borrowings

$301
145
25

$408
118
8

$248
158
15

$351
115
4

125

156

125

156

plans and its stock purchase plans. The compensation expense

recognized for continuing operations for performance-based,

restricted and other stock plans was $26 million, $15 million and

$11 million in 1999, 1998 and 1997, respectively. 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 FASB Statement No. 123, “Accounting for Stock-

Based Compensation,” the company’s income from continuing

operations before cumulative effect of accounting change and related

earnings per share (EPS) would have been reduced to the pro forma

classified as long term

1,314

1,459

1,312

1,462

amounts indicated below:

Other long-term debt

and lease obligations

1,417

1,752

1,326

1,854

Long-term litigation

liabilities

273

246

237

217

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 all other financial instruments approximate

their fair values due to the short-term maturities of these assets and

liabilities.

7 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

as of December 31 ( in millions)

Accounts payable, principally trade
Employee compensation and withholdings
Litigation
Pension and other deferred benefits
Property, payroll and other taxes
Other

Accounts payable and accrued liabilities

1999

$ 612
260
183
40
105
605

$1,805

1998

$ 507
222
475
18
85
717

$2,024

8 COMMON AND PREFERRED STOCK

Baxter has several stock-based compensation plans, which are

described below. The company applies APB Opinion No. 25,

“Accounting for Stock Issued to Employees,” and related

interpretations in accounting for its plans. Accordingly, no

Pro forma income and EPS

years ended December 31
( in millions, except per share data)

Pro forma income
Pro forma basic EPS
Pro forma diluted EPS

1999

$ 728
$2.51
$2.48

1998

$222
$ .78
$ .77

1997

$ 340
$1.22
$1.21

Pro forma compensation expense for stock options and employee-

stock subscriptions was calculated using the Black-Scholes model.

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%

of market value on the date of grant. Vesting terms vary, with most

outstanding options vesting 100% in three years, 100% in five years,

or ratably over three years.

Employees of Edwards will be required to exercise any vested

options within 90 days from the date of spin-off, which is currently

anticipated to occur on March 31, 2000. All unvested options will be

canceled 90 days after the date of spin-off.

Stock options outstanding at December 31, 1999

(option shares
in thousands)

Options outstanding

Options exercisable

Weighted-
average

remaining Weighted-
average
exercise
price

contractual
life
(years)

3.7
4.6
7.2
8.7

6.1

$24.32
34.17
47.48
63.58

$52.20

Outstanding

1,346
2,222
5,947
9,294

18,809

Range of
exercise
prices

$19 – 26
27 – 40
41 – 51
52 – 84

$19 – 84

Weighted-
average
exercise
price

Exercisable

1,346
2,222
4,717
470

$24.32
34.17
47.57
56.34

8,755

$41.06

As of December 31, 1998 and 1997, there were 4,565,000 and

compensation cost has been recognized for its fixed stock option

6,314,000 options exercisable, respectively, at weighted-average

exercise prices of $30.27 and $29.84, respectively.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

Stock option activity

(option shares in thousands)

Options outstanding at January 1, 1997
Granted
Exercised
Forfeited

Options outstanding at December 31, 1997
Granted
Exercised
Forfeited

Options outstanding at December 31, 1998
Granted
Exercised
Forfeited

Options outstanding at December 31, 1999

12,501
4,208
(2,406)
(421)

13,882
4,806
(1,728)
(587)

16,373
5,013
(1,958)
(619)

18,809

$34.89
47.59
29.04
38.76

39.64
59.83
28.69
49.51

46.37
66.73
39.18
56.73

$52.20

Included in the tables above are grants of certain premium-priced

options. During 1998, approximately 450,000 premium-priced stock

options were granted with a weighted-average exercise price of

$76.78 and a weighted-average fair value of $12.70. During 1996,

approximately 2.4 million premium-priced stock options were granted

with an exercise price of $51 and a weighted-average fair value of

$11.01. All of such options granted in 1998 and 1.7 million of such

options granted in 1996 are outstanding at December 31, 1999.

Pro forma compensation expense was calculated with the following

weighted-average assumptions for grants in 1999, 1998, and 1997,

respectively: dividend yield of 1.5%, 1.5% and 2.1%; expected life of

six, six and seven years; expected volatility of 29%, 29% and 28%;

and risk-free interest rates of 5.4%, 5.3% and 6.2%. The weighted-

average fair value of options granted during the year were $22.59,

$18.58 and $15.95 in 1999, 1998 and 1997, respectively.

Stock options had also been granted to The Baxter Allegiance

Foundation (a philanthropic organization). A total of 2,198,478

options had been granted in 1991 and 1992 at a weighted-average

exercise price of $31.44. All of the 1,952,253 options outstanding at

December 31, 1998 were either exercised or forfeited during 1999.

Employee stock purchase plans

The company has employee stock purchase plans whereby it is

authorized, as of December 31, 1999, to issue up to 10 million

shares of common stock to its employees, nearly all of whom are

eligible to participate. The purchase price is the lower of 85% of the

closing market price on the date of subscription or 85% of the

closing market price as defined by the plans. The total subscription

amount for each participant cannot exceed 25% of current annual

pay. Under the plans, the company sold 777,618, 810,855 and

Weighted-
average
exercise price

760,490 shares to employees in 1999, 1998 and 1997, respectively.

Pro forma compensation expense was estimated with the following

weighted-average assumptions for 1999, 1998 and 1997,

respectively: dividend yield of 1.5%, 1.5% and 2.1%; expected life of

one year for all periods; expected volatility of 33% for all periods, and

risk-free interest rates of 5.4%, 4.4% and 5.7%. The weighted-

average fair value of those purchase rights granted in 1999, 1998

and 1997 was $20.09, $15.16 and $13.27, respectively.

Restricted stock and performance-share plans

Under various plans, the company has made grants of restricted

stock and performance shares in the form of the company’s common

stock to provide incentive compensation to key employees and non-

employee directors. Under the long-term incentive plan, grants are

generally made annually and are earned based on the achievement

of financial performance targets, adjusted up or down by the

company’s stock performance against the change in the Standard &

Poor’s Medical Products and Supplies Index. The restricted shares

vest one year after they are earned.

At December 31, 1999, 589,950 shares were subject to restrictions,

which lapse between 2000 and 2002, and 348,553 shares were

subject to restrictions that lapse upon achievement of future

performance objectives and related vesting periods. During 1999,

1998 and 1997, 542,500, 242,740 and 24,930 shares, respectively,

of restricted stock and performance shares were granted at

weighted-average grant-date fair values of $63.99, $58.74 and

$51.29 per share, respectively.

Shared investment plan

In 1999, the company sold approximately 3.1 million shares of the

company’s common stock to 142 of Baxter’s senior managers for

approximately $198 million in cash. This plan, which is similar to one

implemented in 1994, directly aligns management and shareholder

interests. The Baxter managers used full-recourse personal bank

loans to purchase the stock at the May 3, 1999 closing price of

$63.625. Baxter has agreed to guarantee repayment to the banks in

the event of default by a participant in the plan. The total outstanding

participant loan amount relating to the 1999 Shared Investment Plan

at December 31, 1999 was $195 million.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

at its option, terminate and settle these agreements early at any time

End of year

Notes to Consolidated Financial Statements

Stock repurchase programs

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, of which $451 million has been repurchased as of

December 31, 1999. The remainder of the authorized amount is

expected to be repurchased in 2000. In November 1999, the board

of directors authorized the repurchase of an additional $500 million

over a period of several years.

Equity forward agreements

In order to partially offset the dilutive effect of stock issuances under

the company’s employee stock option plans, the company entered

into forward agreements during 1999 with independent third parties

related to approximately 7.5 million shares of Baxter 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,

before maturity. In conjunction with its stock repurchase program, the

company terminated one of the agreements during 1999 prior to

original maturity date, delivering approximately $33 million in cash to

the counterparty for 500,000 shares of its common stock. As of

December 31, 1999, agreements related to approximately 3.3 million

shares mature in 2000 at exercise prices ranging from $68 to $71

per share and agreements related to approximately 3.7 million shares

mature in 2002 at exercise prices ranging from $73 to $81 per share.

Other

Approximately 100 million shares of no par value preferred stock are

authorized for issuance in series with varying terms as determined by

the board of directors.

In March 1999, common stockholders received a dividend of one

preferred stock purchase right (collectively, the “Rights”) for each

share of common stock. These Rights replaced similar rights that

expired in March 1999. The Rights may become exercisable at a

specified time after (1) a person or group acquires 15% or more of

the company’s common stock or (2) a tender or exchange offer for

15% or more of the company’s common stock. 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.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

9 RETIREMENT AND OTHER BENEFIT PROGRAMS

The company sponsors several qualified and nonqualified pension

plans and other postretirement benefit plans for its employees.

Reconciliation of plans’ benefit obligations, assets and funded status

as of or for the years ended
December 31 ( in millions)

Benefit obligation
Beginning of year
Service cost
Interest cost
Participant contributions
Actuarial (gain) loss
Acquisitions
Curtailment gain
Benefit payments
Currency exchange-rate

changes and other

Fair value of plan assets
Beginning of year
Actual return on plan assets
Employer contributions
Participant contributions
Acquisitions
Benefit payments
Currency exchange-rate

changes and other

End of year

Funded status
Funded status at December 31
Unrecognized

transition obligation
Unrecognized net gains
Unrecognized prior-service cost

Pension
benefits

Other
benefits

1999

1998

1999

1998

$1,427
48
103
2
(148)
1
(7)
(76)

$1,305
41
96
2
60
–
(3)
(74)

$ 200
3
13
3
(30)
–
(3)
(11)

$ 202
3
14
3
(12)
–
–
(10)

(6)

–

1,344

1,427

–

175

–

200

1,472
302
13
2
11
(76)

1,309
179
53
2
–
(74)

–

1,724

1,472

–
–
8
3

(11)

–

–
–
7
3
–
(10)

–

380

(175)

(200)

9
(390)
(3)

18
(66)
2

–
(98)
–

–
(75)
–

Net amount recognized

(4) $

(1)

$(273)

$(275)

Prepaid benefit cost
Accrued benefit liability

$ 121
(125)

$ 119
(120)

–
(273)

–
(275)

Net amount recognized

(4) $

(1)

$(273)

$(275)

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 $140 million, $128 million and $23 million,

respectively, at December 31, 1999, and $146 million, $123 million

and $18 million, respectively, at December 31, 1998.

Net periodic benefit cost

years ended December 31 ( in millions)

1999

1998

1997

Pension benefits
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of transition obligation

Net periodic pension benefits cost

Other benefits
Service cost
Interest cost
Recognized actuarial gain

Net periodic other benefits cost

$48
102
(133)
1
6

$24

$ 3
12
(7)

$ 8

$41
96
(117)
1
6

$27

$ 3
14
(6)

$11

$36
90
(109)
2
6

$25

$ 3
14
(6)

$11

The net periodic benefit cost amounts pertain to both continuing and

discontinued operations.

Assumptions used in determining benefit obligations

Discount rate

U.S. and Puerto Rico plans
International plans (average)

8.25%
5.7%

7.25%
5.4%

8.25%
n/a

7.25%
n/a

Expected return on plan assets

U.S. and Puerto Rico plans
International plans (average)

10.5%
6.9%

10.5%
7.0%

Rate of compensation increase

U.S. and Puerto Rico plans
International plans (average)

4.5%
4.1%

4.5%
4.2%

n/a
n/a

Annual rate of increase in the

per-capita cost
Rate decreased to
By the year ended

n/a
n/a
n/a

7.5%
5.5%

8.0%
5.0%

2002

Effect of a one percent change in assumed health-care cost trend rate

One percent
increase

One percent
decrease

( in millions)

1999

1998

1999

1998

Effect on total of service and
interest cost components

Effect on postretirement
benefit obligation

With respect to employees of the CardioVascular business, the

company has announced its intent to freeze benefits at the date of

spin-off under the U.S. defined benefit pension plan and under other

plans that provide retirees with health-care and life insurance

benefits. The pension liability related to such employees’ service prior

to the spin-off date will 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) relating to these benefit plan

curtailments.

10 INTEREST AND OTHER (INCOME) EXPENSE

Interest expense, net

years ended December 31 ( in millions)

1999

1998

1997

Interest, net

Interest costs
Interest costs capitalized

Allocated to discontinued operation
Allocated to continuing operations

$165
(13)

152
(35)

$117

$ 30
$ 87

$198
(5)

193
(32)

$161

$ 37
$124

$206
(8)

198
(35)

$163

$ 32
$131

The allocation of interest to continuing and discontinued operations

was based on relative net assets of these operations.

Other expense (income)

years ended December 31 ( in millions)

1999

1998

1997

Equity in (income) losses of affiliates
Asset dispositions, net
Foreign exchange
Other

Total other expense (income)

$ 5
13
(8)
1

$11

$ 3
(23)
–
2

$(18)

$ (2)
(48)
(22)
38

$(34)

11 INCOME TAXES

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.

Pension
benefits

Other
benefits

Interest expense
Interest income

1999

1998

1999

1998

Total interest, net

Most U.S. employees are eligible to participate in a qualified defined

and international jurisdictions. In the opinion of management, the

contribution plan. Company matching contributions relating to

company has made adequate provisions for tax expenses for all

continuing operations were $14 million, $14 million and $11 million in

years subject to examination.

1999, 1998 and 1997, respectively.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

Notes to Consolidated Financial Statements

Income before income tax expense by category

Income tax expense rate reconciliation

years ended December 31 ( in millions)

U.S.
International

1999

$ 330
722

1998

$ 78
415

1997

$167
403

Income from continuing operations

before income taxes and cumulative
effect of accounting change

$1,052

$493

$570

Income tax expense

years ended December 31 ( in millions)

1999

1998

1997

Current
U.S.

Federal
State and local

International

Current income tax expense

Deferred
U.S.

Federal
State and local

International

Deferred income tax expense (benefit)

$ (12)
35
151

174

68
17
14

$119
3
151

273

(3)
5
(57)

(55)

$ 91
(19)
125

197

(49)
25
26

Income tax expense

$273

$218

$199

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)

1999

1998

1997

Deferred tax assets

Accrued expenses
Accrued postretirement benefits
Alternative minimum tax credit
Tax credits and net operating losses
Valuation allowances

Total deferred tax assets

Deferred tax liabilities

Asset basis differences
Subsidiaries’ unremitted earnings
Other

Total deferred tax liabilities

$389
102
162
100
(43)

710

471
160
35

666

$349
103
164
179
(34)

761

473
188
13

674

$280
103
114
136
(45)

588

510
91
4

605

years ended December 31 ( in millions)

Income tax expense at statutory rate
Tax-exempt operations
State and local taxes
Repatriation of foreign earnings
Foreign tax expense
IPR&D expense
Other factors

Income tax expense

1999

$368
(134)
23
–
18
–
(2)

$273

1998

$172
(120)
(3)
87
46
41
(5)

$218

1997

$200
(114)
(7)
–
43
77
–

$199

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 2002. Appropriate taxes have

been provided for these operations assuming repatriation of all

available earnings. In addition, the company has other manufacturing

operations outside the United States, which benefit from reductions

in local tax rates under tax incentives that will continue at least

until 2002.

U.S. federal income taxes, net of available foreign tax credits, on

unremitted earnings deemed permanently reinvested would be

approximately $371 million as of December 31, 1999.

12 LEGAL PROCEEDINGS, COMMITMENTS & 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 Baxter. 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, 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

Net deferred tax asset (liability)

$ 44

$ 87

$ (17)

charges in excess of presently established reserves. While such a

There are $4 million and $15 million of foreign tax credit carryforwards

which expire in 2002 and 2003, respectively.

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 Baxter’s

Annual Report on Form 10-K for the year ended December 31, 1999.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

Mammary implant litigation

The mammary implant litigation includes issues related to which of

The company, together with certain of its subsidiaries, is currently a

Baxter’s insurers are responsible for covering each matter and the

defendant in various courts in a number of lawsuits brought by

extent of the company’s claims for contribution against third parties.

individuals, all seeking damages for injuries of various types allegedly

Baxter believes that a substantial portion of its liability and defense

caused by silicone mammary implants formerly manufactured by the

costs for mammary implant litigation will be covered by insurance,

Heyer-Schulte division (Heyer-Schulte) of American Hospital Supply

subject to self-insurance retentions, exclusions, conditions, coverage

Corporation (AHSC). AHSC, which was acquired by the company in

gaps, policy limits and insurer solvency.

1985, divested its Heyer-Schulte division in 1984.

Plasma-based therapies litigation

A class action on behalf of all women with silicone mammary

Baxter currently is a defendant in a number of claims and lawsuits

implants was filed in March 1994. The class action was certified for

brought by individuals who have hemophilia, all seeking damages for

settlement purposes only by the federal court in which it was filed in

injuries allegedly caused by antihemophilic factor concentrates VIII or IX

September 1994, and the settlement terms were subsequently

derived from human blood plasma (factor concentrates) processed by

revised and approved in December 1995. The monetary provisions

the company from the late 1970s to the mid-1980s. The typical case or

of the settlement provide compensation for all present and future

claim alleges that the individual was infected with the HIV virus by factor

plaintiffs and claimants through a series of specific funds and a

concentrates, which contained the HIV virus. None of these cases

disease-compensation program involving certain specified medical

involves factor concentrates currently processed by the company.

conditions. All appeals directly challenging the settlement have been

dismissed. In January 1996, Baxter, Bristol-Myers Squibb Company

In addition, Immuno has unsettled claims for damages for injuries

and Minnesota Mining and Manufacturing Company each paid

allegedly caused by its plasma-based therapies. A portion of the

$125 million into the court-established fund as an initial fund to pay

liability and defense costs related to these claims will be covered by

claims under the settlement. In addition to the class action, there are

insurance, subject to exclusions, conditions, policy limits and other

a large number of individual suits currently pending against the

factors. In addition, pursuant to the stock purchase agreement

company, primarily consisting of plaintiffs who have opted-out of

between the company and Immuno, approximately 84 million Swiss

the class action.

Francs of the purchase price was withheld to cover these contingent

liabilities. In April 1999, the stock purchase agreement between the

In 1993, Baxter accrued $556 million for its estimated liability

company and Immuno was amended to revise the holdback amount

resulting from the settlement of the mammary related class action

from 84 million Swiss Francs to 26 million Swiss Francs (or approxi-

and recorded a receivable for estimated insurance recoveries totaling

mately $16 million at December 31, 1999) in consideration for an

$426 million, resulting in a net charge of $130 million. In 1995, based

April 1999 payment by the company of 29 million Swiss Francs to

on a continuing evaluation of this litigation, the company accrued an

Immuno as additional purchase price. Based on management’s

additional $298 million for its estimated liability to litigate or settle

estimates, the company has recorded an appropriate liability and

cases and claims involving opt-outs and recorded an additional

related insurance receivable with regard to the matters above.

receivable for estimated insurance recoveries totaling $258 million,

resulting in an additional net charge of $40 million. In 1998, the

Baxter is also currently a defendant in a number of claims and

company accrued an additional $250 million for its estimated liability

lawsuits, including one certified class action in the U.S.D.C. for the

resulting from the class action settlement and remaining opt-out

Central District of California, brought by individuals who infused the

cases and claims, and recorded a receivable for related estimated

company’s Gammagard® IVIG (intravenous immunoglobulin), all of

insurance recoveries of $121 million, resulting in an additional net

whom are seeking damages for Hepatitis C infections allegedly

charge of $129 million.

caused by infusing Gammagard® IVIG. In December 1999, the

U.S.D.C. for the Central District of California granted preliminary

In December 1998, a panel of independent medical experts

approval to a proposed settlement of the class action agreed upon

appointed by a federal judge announced their findings that reported

by plaintiffs’ class counsel and Baxter that would provide financial

medical studies contained no clear evidence of a connection

compensation for U.S. individuals who used Gammagard® IVIG

between silicone mammary implants and traditional or atypical

between January 1993 and February 1994.

systemic diseases. In June 1999, a similar conclusion was

announced by a committee of independent medical experts from the

Baxter believes that a substantial portion of the liability and defense

Institute of Medicine, an arm of the National Academy of Sciences.

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.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

Notes to Consolidated Financial Statements

In 1993, the company accrued $131 million for its estimated

worldwide liability for litigation and settlement expenses involving

factor concentrates cases and recorded a receivable for insurance

coverage of $83 million, resulting in a net charge of $48 million. In

1995, significant developments occurred, primarily in the United

States, Europe and Japan relative to claims and litigation pertaining

to Baxter’s plasma-based therapies. The company revised its

estimated exposure from the $131 million previously recorded for

factor concentrates litigation to $378 million for all litigation relating to

plasma-based therapies, including the factor concentrates litigation

and the Gammagard ® IVIG litigation. Related estimated insurance

recoveries were revised from $83 million for factor concentrates to

$274 million for all plasma-based therapies. This resulted in a net

charge of $56 million in 1995. The company further 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 litigation

As of September 30, 1996, Allegiance Corporation (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.

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.

Commitment

In November 1999, the company and Nexell entered into an

agreement whereby Baxter agreed to guarantee certain amounts, up

to a maximum of $63 million, associated with a private placement by

Nexell of preferred stock and other securities.

13 SEGMENT INFORMATION

Baxter’s continuing operations are comprised of three segments,

each of which are strategic businesses that are managed

separately because each business develops, manufactures and sells

distinct products and services. The segments are as follows:

I.V. Systems/Medical Products, technologies and systems to provide

intravenous fluid and drug delivery; Blood Therapies, biopharmaceutical

and blood-collection and separation products and technologies;

and Renal, products and services to treat end-stage kidney disease.

As discussed in Note 2, the company plans to spin off Edwards to

Baxter shareholders. Financial information for Edwards, which is

substantially the same as the former CardioVascular segment, is now

being reported as a discontinued operation. The three segments’

principal products include intravenous solutions and infusion pumps;

blood-clotting therapies, vaccines, and machines for collecting,

separating and storing blood; and dialysis equipment, solutions and

supplies. The company’s products and services are used in more

than 100 countries, with the principal markets being the United States,

Europe, Japan and Latin America.

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.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

as of or for the years ended
December 31 ( in millions)

1999

Net sales

Depreciation and amortization

Pretax income

Assets

Expenditures for long-lived assets

1998

Net sales

Depreciation and amortization

Pretax income

Assets

Expenditures for long-lived assets

1997

Net sales

Depreciation and amortization

Pretax income

Assets

Expenditures for long-lived assets

I.V. Systems/
Medical
Products

Blood
Therapies

Renal

Other

Total

$2,524

145

424

2,447

175

$2,314

137

392

2,257

146

$2,110

128

331

1,937

135

$2,176

114

435

2,632

235

$1,862

101

404

2,655

212

$1,765

375

2,305

191

$1,680

318

1,342

125

$1,530

223

1,353

129

$1,384

301

1,055

100

–

$ 32

(125)

3,223

–

$ 25

(526)

3,608

–

$ 25

(437)

3,215

$6,380

372

1,052

9,644

631

$5,706

344

493

9,873

556

$5,259

318

570

8,512

454

Included in 1997 pretax income for the Blood Therapies segment is a

With respect to depreciation and amortization, and expenditures for

$17 million gain relating to the disposal of a non-strategic investment,

long-lived assets, the difference between the segment totals and the

and a $32 million gain relating to the divestiture of certain assets of

consolidated totals related to assets maintained at Corporate.

the Immunotherapy division.

as of or for the years ended
December 31 ( in millions)

Pretax income
Total pretax income from segments
Unallocated amounts

In-process research and
development expense
Charge for exit and other
reorganization costs

Net litigation charge
Interest expense, net
Certain currency exchange

rate fluctuations

Gain on disposal of investment
Other Corporate items

Consolidated income from continuing

operations before income taxes and
cumulative effect of accounting change

Geographic information

1999

1998

1997

The following geographic area data include net sales based on

product shipment destination and long-lived assets based on

$1,177

$1,019

$1,007

physical location.

–

(116)

(220)

as of or for the years ended
December 31 ( in millions)

–
–
(87)

25
–
(63)

(122)
(178)
(124)

27
20
(33)

–
–
(131)

41
–
(127)

Net sales
United States
Japan
Other countries

Consolidated totals

Long-lived assets
United States
Austria
Other countries

1999

1998

1997

$2,921
482
2,977

$2,609
405
2,692

$2,371
416
2,472

$6,380

$5,706

$5,259

$1,361
344
945

$1,250
326
869

$1,078
304
761

$1,052

$ 493

$ 570

Consolidated totals

$2,650

$2,445

$2,143

Assets
Total segment assets
Unallocated assets

1999

1998

1997

$6,421

$6,265

$5,297

Cash and equivalents
Deferred income taxes
Insurance receivables
Net assets of discontinued operation
Other Corporate assets

606
417
417
1,231
552

709
583
639
1,275
402

465
280
735
1,337
398

Consolidated total assets

$9,644

$9,873

$8,512

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

Notes to Consolidated Financial Statements

14 QUARTERLY FINANCIAL RESULTS AND MARKET FOR THE COMPANY’S STOCK (UNAUDITED)

years ended December 31
( in millions, except per share data)

1999

Net sales

Gross profit

Income from continuing operations

before cumulative effect of

accounting change

Net income

Per common share

Income from continuing operations

before cumulative effect of

accounting change

Basic

Diluted

Net income 1, 2

Basic

Diluted

Dividends

Market price

High

Low

1998

Net sales

Gross profit

Income (loss) from continuing operations 3, 4

Net income (loss) 3, 4

Per common share

Income (loss) from continuing operations 3, 4

Basic

Diluted

Net income (loss) 3, 4

Basic

Diluted

Dividends

Market price

High

Low

First
quarter

$1,462

625

162

151

.56

.55

.53

.52

.2910

75.94

62.56

Second
quarter

$1,560

690

189

207

.65

.64

.71

.70

.2910

68.63

60.38

Third
quarter

$1,589

713

197

210

.67

.72

.71

.2910

70.75

58.69

Fourth
quarter

$1,769

784

231

229

.80

.78

.79

.77

.2910

68.75

59.31

$1,256

$1,419

$1,427

$1,604

563

148

164

.53

.52

.59

.58

654

.18

.22

.2910

62.44

48.50

59.56

51.50

633

(127)

(124)

(.44)

(0.43)

.2910

63.50

52.38

714

202

212

.70

.69

.74

.73

.2910

66.00

56.38

Total
year

$6,380

2,812

779

797

2.69

2.64

2.75

2.70

1.164

75.94

58.69

$5,706

2,564

275

315

.97

.95

1.11

1.09

1.164

66.00

48.50

1. The first quarter includes a $27 million charge for the cumulative effect of an accounting change.

2. The fourth quarter includes $19 million in net costs associated with effecting the distribution of the CardioVascular business.

3. The second quarter includes a $116 million charge for in-process research and development relating to the acquisition of Somatogen.

4. The third quarter includes a $178 million net litigation charge and a $122 million charge for exit and other reorganization costs.

Baxter common stock is listed on the New York, Chicago and Pacific

Exchange is the principal market on which the company’s common

Stock Exchanges, on the London Stock Exchange and on the Swiss

stock is traded. At January 31, 2000, there were approximately

stock exchanges of Zurich, Basel and Geneva. The New York Stock

60,800 holders of record of the company’s common stock.

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t

Directors and Executive Officers

BOARD OF DIRECTORS

Walter E. Boomer
President and
Chief Executive Officer
Rogers Corporation

Pei-yuan Chia
Retired Vice Chairman
Citicorp and Citibank, N.A.

John W. Colloton
Vice President for Statewide
Health Services
The University of Iowa

Susan Crown
Vice President
Henry Crown and Company

EXECUTIVE OFFICERS

Baxter International Inc.

Brian P. Anderson 1, 2
Senior Vice President and
Chief Financial Officer

Timothy B. Anderson 1, 2
Group Vice President
Corporate Strategy and
Development

Kshitij Mohan
Corporate Vice President
Corporate Research and
Technical Services

John L. Quick
Corporate Vice President
Quality/Regulatory

John F. Gaither, Jr. 1, 2
Corporate Vice President
Corporate Development

Jan Stern Reed 1, 2
Corporate Secretary and
Assistant General Counsel

Harry M. Jansen Kraemer, Jr. 1, 2
Chairman and
Chief Executive Officer

Thomas J. Sabatino, Jr. 1, 2
Corporate Vice President
and General Counsel

Steven J. Meyer 1, 2
Treasurer

Michael J. Tucker
Senior Vice President
Human Resources

Mary Johnston Evans
Former Director and Vice Chairman
Amtrak

Frank R. Frame
Retired Deputy Chairman
The Hongkong and Shanghai
Banking Corporation Limited

Harry M. Jansen Kraemer, Jr.
Chairman and
Chief Executive Officer
Baxter International Inc.

Arnold J. Levine, Ph.D.
President
The Rockefeller University

Martha R. Ingram
Chairman of the Board
Ingram Industries Inc.

Georges C. St. Laurent, Jr.
Retired Chief Executive Officer
Western Bank

Thomas T. Stallkamp
Vice Chairman and
Chief Executive Officer
MSX International

Monroe E. Trout, M.D.
Chairman of the Board
Cytyc Corporation

Fred L. Turner
Senior Chairman
McDonald’s Corporation

HONORARY DIRECTOR

William B. Graham
Chairman Emeritus of the Board
Baxter International Inc.

Baxter World Trade Corporation

Baxter Healthcare Corporation

Eric A. Beard
Corporate Vice President
and President
Global Hemodialysis and Europe

David F. Drohan
Corporate Vice President
and President
I.V. Systems/Medical Products

Carlos del Salto
Senior Vice President
Intercontinental/Asia and
President Latin America

Thomas H. Glanzmann 1
Corporate Vice President
and President
Hyland Immuno

J. Robert Hurley
Corporate Vice President
Japan/China

Donald W. Joseph 1
Group Vice President
Renal

J. Michael Gatling
Corporate Vice President
Global Manufacturing Operations

Jack L. McGinley 2
Group Vice President
I.V. Systems/Medical Products,
Renal and Fenwal

David C. McKee 2
Corporate Vice President
and Deputy General Counsel

Michael A. Mussallem 2
Group Vice President
CardioVascular
and Biopharmaceuticals

1. Also an executive officer of Baxter

Healthcare Corporation

2. Also an executive officer of Baxter

World Trade Corporation

As of February 23, 2000

B a x t e r I n t e r n a t i o n a l 1 9 9 9 A n n u a l R e p o r t