Baxter International Annual Report 2000

FY2000 Annual Report · Baxter International

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Baxter International

2000 Annual Report

Is the world prepared for the explosive growth in life-threatening conditions?

Around the world, the number of people with hemophilia, kidney disease, immune deﬁciencies and other
life-threatening conditions is escalating at an unprecedented rate. The aging population also is creating an
increasing need for health care. The greatest need is in developing countries, where today, many people
currently go untreated. As economic expansion continues in these countries, treatment rates will increase.
Baxter is poised to meet this growing demand for health care worldwide — today and into the future.

Baxter overview

[Our Mission] Baxter team members around the world are
dedicated to a common mission: to provide critical therapies for
people with life-threatening conditions. The company manufactures
and markets products and services used to treat patients with
hemophilia, immune deﬁciencies, infectious diseases, cancer,
kidney disease, trauma and other disorders. 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 nearly 80 percent of sales coming
from products with leading market positions.

[Core Capabilities] Baxter’s businesses share several core
strengths that uniquely position the company to serve the health-
care needs of people around the world. These “core capabilities”
include technological expertise, manufacturing and quality
excellence, and global presence. The company has unmatched
expertise in plastic-container technologies, sterile-ﬂuid technologies,
and plasma-based and recombinant processing technologies.
Baxter’s global manufacturing network allows the company to
provide cost-effective, high-quality health-care products to patients
worldwide. Baxter also allies with leading scientiﬁc and technical
experts outside the company to complement its internal capabilities.

[Building for the Future] The new millennium will bring
medical breakthroughs that will extend the average life span
and make signiﬁcant inroads in the treatment and prevention of
disease. Baxter is involved in a number of these activities. For
example, Baxter researchers are developing new recombinant
proteins for use in a number of clinical therapies, and new vaccines
for the prevention of infectious diseases. The company is working
to enhance the safety of the blood supply with technologies to
inactivate pathogens in collected blood components. Company
researchers also are developing new technologies for renal therapy
and medication delivery, with the intent of bringing quality health
care to more and more people around the globe.

< Baxter Chairman and Chief Executive Ofﬁcer Harry M. Jansen Kraemer, Jr.,
in Tokyo with (left to right) Dr. Kiyoshi Kurokawa, dean of Tokai University
School of Medicine; Noriyuki Kubo, medical representative, Baxter Limited in
Japan; and Noriko Wakasone, deputy director, regulatory affairs, Baxter Limited.

[shareholders’ letter]

Dear Shareholders:
A year ago, I wrote to you after
completing my ﬁrst 12 months as
Baxter’s chief executive ofﬁcer, and
shared with you my vision for Baxter.
This year, having completed my ﬁrst
year as chairman of Baxter’s board
of directors, I am even more excited,
based on the results of a successful
year 2000, and more importantly, what
I believe are even better prospects
for a dynamic decade of accelerating
growth for your company.

First, let me remind you that Baxter
serves an extremely important role. The
products and services that we provide
help people with hemophilia, kidney
disease, cancer, immune deﬁciencies
and other disorders. Our mission is
to provide critical therapies for people
with life-threatening conditions. We
continue to enhance these therapies
and make quality health care available
to more and more people around the
world. All of us on the Baxter team are
very proud of our mission.

[A Successful Year: 2000] In Baxter’s 1999 annual report, I discussed
our focus on three key goals: building the Best Team in health care; being
the Best Partner to customers and patients; and being the Best Investment
for you, our shareholders. I am very pleased with our progress on these
three goals. I also discussed our Shared Values of respect, responsiveness,
and results as the foundation of everything we do. Our passion to achieve
these goals and live our values makes it possible for us to achieve our
business objectives.

As a shareholder, your interests, of course, are focused on the success
of your investment. We are very proud of our investment results. The best
barometer of our performance is Baxter’s total return (the sum of stock
appreciation plus dividends) compared to other indices. In the year 2000,
the combination of the increase in Baxter’s stock price and the dividend
from the spin-off of Edwards Lifesciences gave you a return of more than
49 percent. Baxter’s performance surpassed that of our peer group, the S&P
Healthcare Composite Index, and was far higher than the S&P 500 and
Dow Jones Industrial Average, both of which yielded negative returns in
2000. Our compound annual return since 1993 is 29 percent.

Also last year, I outlined for you speciﬁc ﬁnancial commitments for the
year 2000. They included increasing sales approximately 10 percent, growing
earnings in the mid-teens, and generating at least $500 million in opera-
tional cash ﬂow after investing more than $1 billion in capital expenditures
and research and development. I am happy to report that we met all of
our commitments, and I am conﬁdent that the momentum we have generated
will continue into 2001 and beyond.

[Growth and Innovation] We have made tremendous progress in recent
years in sharpening our operational focus, improving our ﬁnancial position,
and positioning Baxter for the future. We are now entering a phase in
which our focus is to signiﬁcantly increase the sales and earnings growth
of the company while continuing to introduce medical breakthroughs that
will make signiﬁcant inroads in the treatment and prevention of disease.
Nearly 80 percent of our sales are in markets in which we hold leading
positions. Yet, even in these markets, there are tremendous growth oppor-
tunities. As noted on the opening page of this report, many people in the

world with life-threatening diseases currently go untreated or are undertreated
because their countries have not yet reached a stage of economic develop-
ment to provide broad access to quality health care. The aging population
is creating additional needs, as people require a disproportionate amount
of health care in their later years. This creates a tremendous opportunity
for Baxter.

Given our global presence, Baxter is uniquely positioned to meet these
health-care needs around the world. Currently, more than 50 percent of our
sales are generated outside the United States. Another advantage is our
manufacturing strength. Today, we manufacture more than 85 percent of
what we sell, and we are the highest-quality, best-cost manufacturer in
virtually everything we produce.

Baxter also is uniquely positioned because of our focus on critical therapies

for life-threatening conditions. We are increasing our investments in research
and development to provide the best and most cost-effective therapies for
these conditions in the years ahead.

[The Future] So, when we look to Baxter’s future, there are several things
you can expect. First, we will continue to develop our leadership positions
in the critical therapies we’re involved in today. For example, in hemophilia,
we will continue to advance technologies used to produce clotting factor,
while increasing our production capacity to meet a tremendous global need.
In renal therapy, we will continue to develop new solutions and technologies
for peritoneal dialysis while expanding our capabilities in hemodialysis and
opening renal treatment centers.

You also will see us move into new areas that build off of or expand our
core capabilities. One recent example of this is our growing vaccines busi-
ness, where we continue to expand our expertise in recombinant technology.
Another is anesthesia, the fastest-growing area of our Medication Delivery
business, which builds on relationships we have with hospital pharmacists
and others involved in drug delivery. We expect sales in each of these areas
to exceed $1 billion by the end of the decade.

We also will continue to increase shareholder value by focusing on talent

management, allowing us to attract, retain and develop the best talent
in all functional areas; innovation, enabling us to develop new and better

products and services that will contribute
to the accelerated growth of the com-
pany; E-business, giving us the ability
to signiﬁcantly increase productivity and
get closer to our customers, business
partners and patients; and speed in
decision-making, reducing bureaucracy
and making us more agile in under-
standing and meeting customer and
patient needs.

I believe we are strongly positioned
for a great 2001, and equally important,
for a great decade ahead. Thank you
for your support. I can promise you that
the dedicated Baxter team of 45,000
members around the world will continue
to focus their energy and attention on
making Baxter even better in the future
than it has been in the past. Given our
great heritage, this is no small task. But
we are up to it. As you read the pages
that follow, I’m sure you will agree that
this is a special company, and the best
is yet to come.

As shareholders, this is your company.

I am very interested in hearing your
views, comments and questions. Please
do not hesitate to leave me an e-mail
at onebaxter@baxter.com.

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

2001 commitments

In 2001, Baxter expects its operational performance to once again
be very strong. Given the expansion of capacity in Thousand Oaks,
California, where the company produces recombinant Factor VIII
for people with hemophilia; new product introductions, which are
covered in the following pages of this report; and the successful
integration of recent acquisitions, Baxter expects its 2001 sales to
grow at an accelerated rate, in the low double digits. Excluding the
impact of foreign exchange, the company’s sales growth rate will
be even higher. Speciﬁcally:

– Sales growth in the company’s BioScience business will be
in the high teens, driven by the recombinant business growing
more than 20 percent and the continuing trend toward leuko-
reduction.

– Continuing efforts to grow peritoneal dialysis and expand the
hemodialysis business, along with continued growth in the
Renal Therapy Services (RTS) and RMS Disease Management
businesses, will drive sales growth in the Renal business to
the low to mid-teens in 2001.

– Sales growth in the Medication Delivery business will be in the
high single digits, driven by continued growth of the anesthesia
business, which will reach $500 million in sales in 2001.

As a result of Baxter’s accelerated sales growth and continued
focus on increasing its operating proﬁt margin, the company
expects its earnings growth rate for 2001 to be in the mid-teens.

The company also expects to once again generate more than $500
million in operational cash ﬂow, after investing more than $1 billion
in research and development and capital expenditures.

2000 highlights

net sales 1
[in billions of dollars]

$5.7

$6.4

$6.9

net income 1, 2
[in millions of dollars]

1998

1999

2000

$915

$688

$779

1998

1999

2000

operational cash ﬂow 1, 3
[in millions of dollars]

$588

$379

1998

1999

2000

stock price
[as of December 31]

$88.31

$61.49

$60.06

1998

1999

2000

compound annual return
[through December 31, 2000]

1 year

3 year

5 year

7 year

49%

24%

22%

29%

1. Excludes Edwards Lifesciences Corporation.

2. Net income excludes the cumulative effect of an accounting change, special charges
for spin-off costs, in-process research and development and acquisition-related costs,
net litigation, and exit and other reorganization costs, as applicable in each year.

3. See deﬁnition on page 24.

bioscience

Hemophilia is a genetic disorder that affects approximately one
in every 10,000 males born around the world. It is characterized
by the absence of one or more proteins, speciﬁcally those
responsible for clotting, in blood plasma. People with hemophilia
risk spontaneous internal bleeding episodes, which may result
in joint damage or even death if not treated. The most common
form of hemophilia is hemophilia A, characterized by the absence
of the clotting factor known as Factor VIII protein. Baxter is a
leading provider of Factor VIII derived from both human plasma
and recombinant methods.

While hemophilia A affects as many as 300,000 people worldwide,
approximately three-quarters of this population receive little or
no treatment. The situation is most acute in developing countries,
but even in the industrialized nations of France, Germany and
the United States, many patients continue to receive sub-optimal
levels of treatment.

Demand for Factor VIII continues to grow for a number of reasons.
These include improving access to quality care in developing
nations; the aging of adolescent patients who, as they grow,
require larger quantities of Factor VIII; and the increasing use of
Factor VIII to prevent bleeding episodes versus only infusing it
when bleeding episodes occur.

Baxter is well positioned to address the growing demand for
Factor VIII and to enhance its leadership position in this market-
place. One reason is the company’s history of innovation in
hemophilia therapy. Baxter was the ﬁrst company to introduce
both a monoclonal-puriﬁed plasma and recombinant Factor VIII,
and expects to be ﬁrst with a next-generation recombinant Factor
VIII using a totally protein-free manufacturing process. Secondly,
the company’s broad portfolio of products and services for
hemophilia provides patients with the widest range of therapy
and technology choices. A third reason is Baxter’s strong presence
in developing markets, where the need for hemophilia therapy
is greatest. And ﬁnally, the company’s extensive capabilities in
both plasma fractionation and recombinant processing make
Baxter a reliable source for meeting the therapeutic needs of
the world’s hemophilia population in a market where demand
continues to outstrip supply.

[ bioscience ]

bioscience

Plasma is a straw-colored liquid derived
from blood that contains a number of
components that play important roles
in the body. These components include
various proteins that regulate the
blood’s ability to clot, and others, such
as albumin, a blood-volume expander,
and gammaglobulins, which bolster
weakened immune systems. For years,
Baxter has been a leader in the process-
ing of therapeutic proteins from human
plasma. Increasingly, the company has
expanded its expertise in recombinant
technology to produce a widening range
of therapeutic proteins.

Baxter plans to grow its BioScience

business aggressively in the years
ahead. The company’s current thera-
peutic proteins, leaders in their markets,
have considerable growth potential.
The company also has a robust future
pipeline that will include recombinant
replacements for current plasma-derived
therapies, new biopharmaceuticals and
eventually gene therapies.

Recombinate Antihemophilic
Factor (rAHF)

Baxter’s Recombinate Antihemophilic
Factor (rAHF), produced in Thousand Oaks,
California, is the leading genetically
engineered Factor VIII on the market.

Historically, therapeutic proteins like Factor VIII were manufactured by

plasma fractionation. Recombinant Factor VIII, produced in cell culture,
does not depend on the availability or use of human plasma in the produc-
tion process. Therefore, the amount of recombinant Factor VIII that can
be produced is not limited by the availability of source plasma — which is
very important given the tremendous need for Factor VIII by the world’s
hemophilia community.

Baxter is committed to increasing the supply of recombinant Factor VIII

in the marketplace. In 2000, the company tripled its production capacity
for its own recombinant Factor VIII, Recombinate Antihemophilic Factor
(rAHF). This will lead to signiﬁcant growth in sales of Recombinate Factor
VIII, which already is the leading genetically engineered Factor VIII on
the market. In Neuchâtel, Switzerland, Baxter is building a multi-purpose
facility that will produce Baxter’s next-generation recombinant Factor VIII
using a totally protein-free manufacturing process, as well as additional
recombinant proteins.

With recombinant products representing a greater portion of Baxter’s
BioScience business in the years ahead, the company will continue to invest
in recombinant production capacity and technology. These investments
will lead to future sales growth of products and services for the treatment
of hemophilia, as well as from the introduction of new biopharmaceuticals
and vaccines.

Baxter’s acquisition of North American

Vaccine Inc. in 2000 enhanced Baxter’s
presence in the $7-billion global vaccines
market — a market that is expected to
grow 13 percent annually over the next
ﬁve years, resulting in a $13-billion
market by 2005. More than 80 percent
of future vaccines will be produced using
recombinant technology.

Baxter will continue to build its
expertise in recombinant technology
through both internal development
and alliances with outside partners.
Other examples of recombinant proteins
currently under development include
alpha-1-antitrypsin for treatment of
hereditary emphysema and other res-
piratory diseases; C1 Esterase Inhibitor
for treatment of hereditary angioedema;
a bactericidal permeability increasing
(BPI) protein to treat a range of diseases
caused by bacteria; and recombinant
hemoglobin, to deliver oxygen to
vital organs.

[Business Description] Baxter is a leading producer of biophar-
maceuticals for the treatment of hemophilia, immune deﬁciencies
and other life-threatening disorders. These products include
coagulation factors, immune globulins, biosurgery products and
vaccines. The company also is a leading manufacturer of manual and automated
blood-collection, processing and storage systems. These products are used by
hospitals, blood banks and plasma-collection centers to collect and process blood
components for therapeutic use. Therapeutic blood components are used to treat
patients undergoing surgery, cancer therapy and other critical therapies.

[Growth Strategy] Baxter will continue to grow its global leadership
in biopharmaceuticals for the treatment of hemophilia and immune
deﬁciencies by broadening its portfolio, advancing technology and
increasing production capacity. Growth opportunities are presented
by the tremendous need for and increasing use of these products around
the world, and the continued growth of both plasma-derived and recombinant-
derived therapies. Baxter will continue to expand its pipeline of innovative
biopharmaceuticals and vaccines through both internal development and
acquisitions and alliances. Baxter also continues to focus on increased production
and safety of transfusion products through advanced automation, leukoreduction
and pathogen inactivation.

[Product Development]
In 2000, Baxter received approval in the
United Kingdom for NeisVac-C, a new meningococcemia vaccine.
The company also received approval from the U.S. Food and Drug
Administration (FDA) for a new application device for its Tisseel
ﬁbrin sealant. In the next 12 months, Baxter expects FDA approval for a liquid
form of IGIV, and European approval for a new therapeutic protein for protein
C deﬁciency and pathogen-inactivation technology for platelets. Other products
in development include a next-generation recombinant Factor VIII using a totally
protein-free manufacturing process; a cell culture-derived vaccine for inﬂuenza;
a new tetanus, diphtheria and acellular pertussis vaccine; a European vaccine for
Lyme disease; pathogen-inactivation technology for plasma and red cells; and
a recombinant form of hemoglobin that may be used instead of blood to carry
oxygen to vital organs.

[Acquisitions and Alliances]
In 2000, Baxter completed its
acquisition of North American Vaccine Inc., based in Columbia,
Maryland, broadening its position in the global vaccines market.
The company also established an equity position in British vaccine
developer Acambis (formerly known as Peptide Therapeutics Group), which will
better position each company to develop and commercialize their respective
vaccine pipelines. In addition, Baxter formed alliances with XOMA Ltd. for the
rights to a recombinant protein for treatment of a range of diseases caused by
bacteria; Arriva Pharmaceuticals (formerly known as AlphaOne Pharmaceuticals,
Inc.) to co-develop a recombinant alpha-1-antitrypsin protein to treat hereditary
emphysema and other respiratory diseases; and Pharming Group N.V. to collaborate
on the development of a recombinant, transgenic C1 inhibitor to treat hereditary
angioedema.

kidneytherapy

Fifty years ago, people with end-stage renal disease (ESRD), or
kidney failure, faced certain death. There was no treatment that
could replicate the function of the kidneys — to remove toxins,
waste and excess water from the bloodstream — and transplants
were not yet a viable option. In 1956, Baxter introduced the ﬁrst
commercial hemodialysis (HD) machine, making life-saving dialysis
therapy possible for thousands of people worldwide.

Today, there are approximately one million dialysis patients world-
wide. Approximately 86 percent of them use HD as their primary
therapy. The other 14 percent use peritoneal dialysis (PD), a newer,
home-based therapy pioneered by Baxter in the late 1970s. Today,
Baxter is a world leader in providing products and services to
people with ESRD, serving patients in more than 100 countries.

In developing countries, many people with ESRD currently go
untreated. For example, dialysis-treatment rates in Latin America,
parts of Asia, Eastern Europe and other developing regions lag
far behind those of more developed countries. In Latin America,
dialysis-treatment rates average approximately 250 patients per
million. By contrast, the United States has nearly 1,000 dialysis
patients per million, and Japan, which has a very high incidence
of kidney disease, has more than 1,600 per million.

Fortunately, dialysis-treatment rates are expected to grow
signiﬁcantly in developing countries in the years ahead as
economic growth occurs. In Latin America, for example, dialysis-
treatment rates are expected to double over the next several years
due to the aging population, increasing health-care coverage
and greater diagnosis of kidney disease. Baxter already has a
presence in many developing regions and is poised to bring
life-saving dialysis therapy to the millions who need it.

There is no cure for ESRD. Without either dialysis or a kidney
transplant, a person with ESRD will die. Baxter is committed to
providing a full range of products and services for patients with
kidney disease in the years to come.

[ kidney therapy ]

kidneytherapy

Baxter introduced peritoneal dialysis
(PD) in the late 1970s and continues
to focus on increasing the number of
patients using PD as a complementary
option to the more traditional treatment
of hemodialysis (HD). As a home
therapy, PD presents lifestyle advantages,
allowing patients to work or be at
home while administering their therapy.
It also does not require a capital-intensive
infrastructure (clinics and personnel),
making it ideal for use in developing
countries, where many people with
kidney disease currently go untreated.
PD growth continues to be a signiﬁ-
cant priority for Baxter. One challenge
is to continue to educate patients, the
medical community and reimbursement
authorities about the cost, lifestyle,
clinical outcomes and other advantages
of the therapy. For example, not only
is the average annual total cost of PD
to the health-care system less than HD,
current research reveals clinical advan-
tages, as well. Recent studies show
lower mortality rates among PD patients
compared to patients on HD during the
ﬁrst two years of therapy, with equivalent
outcomes after two years.

Extraneal

Extraneal peritoneal dialysis solution
improves the removal of excess ﬂuids
and toxins from patients with end-stage
renal disease. The product is approved
in 28 countries and under regulatory
review in the United States.

A tremendous opportunity also exists for Baxter in HD. Recently, the
company has made signiﬁcant investments to increase its presence in the
HD market while continuing its commitment to growing PD. A major step
was the recent acquisition of Althin Medical AB, a Swedish manufacturer
of dialyzers and instrumentation for HD. Baxter also plans to introduce a
ﬁrst-generation instrument for home hemodialysis in 2001. By strengthening
its portfolio in both PD and HD, Baxter provides products and services along
the entire continuum of care for patients, many of whom may beneﬁt from
both therapies during the course of their treatment.

Baxter has several initiatives to ensure that patients are aware of thera-

peutic advances and treatment options. For example, last year Baxter
launched an educational Web site (kidneydirections.com) worldwide, which
has been visited by tens of thousands of people. This program provides
relevant information to patients as they progress through the phases of
kidney disease. Another example is the company’s Kidney Patient Educator
program. Baxter employs nurses as kidney patient educators in the United
States to whom nephrologists refer their patients in the early phase of
end-stage kidney disease. The kidney patient educators provide information
on a patient’s treatment options, enabling them to make informed choices
about which treatment modality they might prefer.

According to a recent study, when
informed of their choices, nearly half
of the patients say they would prefer
PD over HD. Over the past three years,
Baxter’s kidney patient educators have
met with more than 20,000 U.S. patients,
of which approximately 6,000 have
initiated dialysis, with about one-third
of them starting on PD therapy. The
current national average for patients
initiating PD across the United States
is approximately 10 percent.

Baxter is fully committed to helping

people with kidney disease live better
lives through innovative products and
services, and through timely and com-
prehensive education programs. By
meeting the needs of the kidney patient,
Baxter is continually improving the
quality and availability of renal care for
people around the world.

[Business Description] Baxter provides a range of products and
services for the treatment of kidney disease. These include products
for both peritoneal dialysis (PD) and hemodialysis (HD) as well as
research initiatives in xenotransplantation. Baxter is the world’s leading
manufacturer of PD products, which include dialysis solutions, container systems
and automated cyclers. For HD, Baxter manufactures dialyzers and HD machines.
The company’s Renal Therapy Services (RTS) business operates dialysis clinics
in partnership with local physicians in 13 countries outside the United States,
while RMS Disease Management Inc. partners with U.S. nephrologists to provide
a kidney disease management program to health-care payers. Baxter’s RMS
Lifeline Inc. helps to improve the delivery and outcomes of interventional renal
care in the United States through dedicated outpatient centers.

[Growth Strategy] The company’s strategy is to continue to drive
PD growth while also investing in signiﬁcant expansion of HD products
and services. New products will come from internal development,
acquisitions, alliances and e-health initiatives. The company also
continues to grow its RTS business and expand its product lines globally,
particularly in developing markets where many people with end-stage renal
disease are currently under-treated. In addition, Baxter intends to continue
developing technology-based products and services that improve therapeutic
outcomes.

[Product Development] Baxter continues to develop new PD
solutions to better manage speciﬁc patient needs. One example is
Extraneal, which improves the removal of excess ﬂuids and toxins
from patients with end-stage renal disease. Introduced in Europe in
1997 and approved in 28 countries, Extraneal today is being used by more than
6,000 European patients — more than a third of Baxter’s European PD population —
and is currently under regulatory review in the United States. Another solution,
Physioneal, was introduced in Europe and began clinical trials in Japan in 2000.
Also in 2000, as a result of Baxter’s acquisition of Althin Medical, the company
began selling an HD machine globally called the Tina. Baxter also introduced a
new HD machine called Meridian in the United States. Future products include
several new HD dialyzers and the Aurora home HD machine. The company also
is continuing research in the area of xenotransplantation.

[Acquisitions and Alliances] In March 2000, Baxter completed its
acquisition of Althin Medical AB, a leading manufacturer of HD products,
based in Ronneby, Sweden. The acquisition greatly expands Baxter’s
product offering for HD and strengthens its position in the global HD
marketplace. The company’s joint venture with Gambro AB of Sweden for the
manufacture of dialyzers for both Baxter and Gambro at Baxter’s renal-products
plant in Mountain Home, Arkansas, continues to perform well, with more than
3 million dialyzers manufactured in 2000.

medicationdelivery

Before 1931, hospitals considered intravenous (IV) therapy a last
resort due to inadequate quality control in the preparation of IV
solutions. In 1931, Baxter revolutionized health care by inventing
an innovative process to manufacture large, carefully controlled
batches of IV solutions premixed in glass, and later, ﬂexible
containers. Since then, the company has expanded its capabilities
to include a broad range of technologies to help physicians,
pharmacists, nurses and anesthesiologists effectively and efﬁciently
treat countless patients worldwide. These and other medication-
delivery products replenish ﬂuids, provide nutrition, prevent pain,
and deliver antibiotics and other drugs to patients through a wide
range of containers, access systems and electronic infusion pumps.

More than 15,000 employees in approximately 30 Baxter
manufacturing plants around the world — from Toongabbie,
Australia, to Alliston, Canada — produce more than a billion
finished goods for this business a year. They ﬁll nearly two and a
half million units of IV solutions a day. Baxter also manufactures
the majority of its access systems and electronic infusion pumps
through its worldwide network of manufacturing plants. These plants
have consistently reduced manufacturing costs while improving
product quality through high-speed automation, more efﬁcient
supply-chain practices and other measures.

With a growing array of new products, continuous inroads in global
expansion and ongoing manufacturing excellence, Baxter’s
Medication Delivery business has a bright future. Consistent
with its rich past, it is ready to continue making medical history.

[ medication delivery ]

medicationdelivery

Baxter is known worldwide as a leading
manufacturer of intravenous (IV) solu-
tions. But standard IVs—used primarily
for ﬂuid replenishment, electrolyte
therapy and vein access — make up
only about a quarter of Baxter’s sales
in the area of medication delivery.
Higher-margin “specialty products,”
such as anesthetic agents, premixed
drugs and reconstitution devices, nutri-
tion products, and delivery devices,
such as the Colleague pump and others,
make up the rest and represent the
greatest areas of growth for Baxter.

Anesthesia, the fastest-growing area
of Baxter’s Medication Delivery business,
has played a major role in making
surgical intervention a viable therapeutic
option in health care. Certainly, no
surgical procedure could take place if
not for a way to keep the patient from
feeling pain.

Colleague volumetric
infusion pump

The Colleague triple-channel volumetric
infusion pump allows clinicians to administer
up to three intravenous solutions at a time
to a patient from a single pump.

In just over two years, Baxter’s anesthesia business has grown from
$80 million in sales to more than $450 million today, and is expected to be
a $1-billion business for Baxter by 2005. This growth is built on the acquisi-
tion in 1998 of Ohmeda Pharmaceutical Products, a U.S.-based manufacturer
of inhalation agents and acute-care injectible drugs, whose product line
was a perfect complement to Baxter’s existing line of anesthesia-delivery
devices; geographic expansion; and the broadening of the product offering
and call points within the critical-care setting.

Greatly contributing to the ﬁnancial success of the anesthesia business

in 2000 was Baxter’s launch in 1999 of the ﬁrst generic propofol, supplied
through an alliance with Sicor Inc. (formerly GensiaSicor Pharmaceuticals).
This injectible, generic form of the drug, which previously had been under
patent, offered customers, for the ﬁrst time, a comparable product at a lower
price. Sales of propofol exceeded $100 million in 2000.

In the area of anesthesia devices, the company acquired the U.S. rights
to the PSA 4000 Patient State Analyzer, manufactured by Physiometrix Inc.
of North Billerica, Massachusetts. The device monitors a patient’s response
to anesthesia, providing the anesthesiologist with a real-time picture of
brain-wave activity to optimize the delivery of anesthetic agents. Baxter also
launched a new anesthesia pump, called the Ipump Pain Management
System, which delivers pain medication epidurally.

[Business Description] Baxter manufactures a range of products
that deliver ﬂuids and drugs to patients. These include large- and
small-volume intravenous (IV) solutions, IV administration sets,
premixed drugs for IV administration, reconstitution devices,
IV nutrition solutions and devices, IV infusion pumps, anesthesia-delivery
devices, anesthetic agents, acute-care injectible pharmaceuticals, ambulatory
infusion systems and pharmacy services.

[Growth Strategy] Baxter continues to participate in the consolidation
of the global marketplace for medication-delivery products, particularly
in developing markets where there are still a large number of local
and regional players. The company will accelerate expansion of its
higher-margin specialty products outside the United States, where currently the
business has a strong base in IV sets and solutions, and will continue to develop
new technologies for medication delivery through internal product development
and acquisitions and alliances. Baxter also will leverage its strength in the
anesthesia marketplace to expand its position in medication delivery across
the peri-operative arena — pre-surgery, surgery and post-surgery.

[Product Development] In 2000, Baxter upgraded its Colleague
electronic infusion pump for global use, and added multiple
languages for certain key markets. Worldwide placements of the
Colleague pump continue to rise, with 50,000 new channels placed in
2000. Also in 2000, the company introduced a new pump for post-operative pain
management, called the Ipump Pain Management System, in the United States.
Also programmed in multiple languages and designed for global use, Baxter will
launch the Ipump in Europe and Canada in 2001. In addition, the company launched
several new premixed IV drugs in 2000, including its ﬁrst global premixed drug,
called AGGRASTAT, a cardiac compound developed by Merck.

[Acquisitions and Alliances] Over the last two years, Baxter has
made several acquisitions intended to broaden its portfolio of
medication-delivery products. These include Ohmeda Pharmaceutical
Products, enhancing Baxter’s offering in anesthesia; Pharmacia &
Upjohn’s German-based IV and nutrition business; and the ambulatory infusion
pump business of Sabratek Corporation. Baxter also reacquired the distribution
rights for the Ohmeda pharmaceutical products in Europe and Canada to serve
as a base to build its specialty-product offerings in these key markets. Baxter
acquired a French company called Biodome, which has a technology for efﬁcient,
low-cost reconstitution of drugs for both injection and infusion. The company
also received exclusive U.S. distribution rights from Physiometrix Inc. for the
PSA 4000 anesthesia monitoring system, which helps anesthesiologists monitor
a patient’s level of consciousness during surgery.

To date, Baxter’s anesthesia products

have been sold primarily in the United
States, but the company expects tremen-
dous growth for these products in other
markets. In 2000, the company made
major inroads in establishing Canadian
and European anesthesia organizations.
The company created direct sales and
marketing forces in Belgium, France,
Germany, Ireland, Italy, The Netherlands,
the Nordic region, Switzerland and the
United Kingdom to sell both current and
future anesthesia products in Europe.
The area of anesthesia encompasses

all three aspects of Baxter’s growth
strategy for its Medication Delivery
business: technological innovation,
geographic expansion of specialty
products and entry into new market
segments. By the year 2005, more than
half of Baxter’s Medication Delivery
business will be outside the United
States, with the greatest growth derived
from higher-margin specialty products.

financial information

19 Management’s Discussion

29 Consolidated Balance Sheets

33 Notes to Consolidated Financial

and Analysis

Statements

28 Management’s Responsibilities

49 Directors and Executive Ofﬁcers

for Financial Reporting

31 Consolidated Statements

of Cash Flows

50 Company Information

30 Consolidated Statements of Income

28 Report of Independent Accountants

32 Consolidated Statements

of Stockholders’ Equity and
Comprehensive Income

Management’s Discussion and Analysis

This discussion and analysis presents the factors that had a material effect on Baxter International Inc.’s (Baxter or the company)

results of operations and cash ﬂows during the three years ended December 31, 2000, 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.

The matters discussed in this Annual Report include forward-looking statements that involve risks and uncertainties, including,

but not limited to, currency exchange rates, interest rates, technological advances in the medical ﬁeld, economic conditions, demand

and market acceptance risks for new and existing products, technologies and health-care services, the impact of competitive products

and pricing, manufacturing capacity, new plant start-ups, global regulatory, trade and tax policies, 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. 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.

Management’s ﬁnancial objectives for 2000, which were outlined in last year’s Annual Report and are summarized below, were

established based on Baxter’s results excluding the cardiovascular business, the stock of which was distributed to

shareholders on March 31, 2000. Refer to Note 2 to the consolidated ﬁnancial statements for further information regarding the

spin-off of the cardiovascular business. The company’s consolidated ﬁnancial statements and related notes have been restated

to reﬂect the ﬁnancial position, results of operations and cash ﬂows of the cardiovascular business as a discontinued operation.

The results presented below reﬂect the results of continuing operations only.

Key Financial Objectives and Results

2000 OBJECTIVES

RESULTS

Increase net sales approximately 10 percent.

Net sales increased eight percent in 2000. Excluding ﬂuctuations

in currency exchange rates, net sales increased 12 percent.

Grow net earnings in the mid-teens.

Net earnings from continuing operations increased 17 percent

in 2000, excluding the cumulative effect of a change in accounting

principle in 1999 and the charge for in-process research and

development (IPR&D) and acquisition-related costs in 2000.

Generate a minimum of $500 million in operational

The company generated operational cash ﬂow of $588 million

cash ﬂow after investing more than $1 billion in

during 2000. The total of capital expenditures and research and

capital improvements and research and development.

development expenses was more than $1 billion.

Company and Industry Overview

Baxter is a global leader in providing critical therapies for life-threatening conditions and operates in three segments, which are

described in Note 13. The company manufactures and markets products and services used to treat patients with hemophilia,

immune deﬁciencies, infectious diseases, cancer, kidney disease, trauma and other disorders. The company generates 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 innovative products and services, investing in human resources, upgrading and expanding facilities, leveraging its cost

structure, making acquisitions, and entering into alliances and joint venture arrangements.

Results of Continuing Operations

Net Sales Trends

years ended December 31 (in millions)

Medication Delivery

BioScience

Renal

Total net sales

years ended December 31 (in millions)

United States

International

Total net sales

1999

1998

2000

Percent increase

2000

$2,719

2,353

1,824

$2,524

$2,314

2,176

1,680

1,862

1,530

$6,896

$6,380

$5,706

1999

17%

10%

12%

2000

$3,194

3,702

$6,896

1999

$2,921

3,459

$6,380

1998

$2,609

3,097

$5,706

Percent increase

2000

1999

12%

Excluding ﬂuctuations in currency exchange rates, which impacted sales growth unfavorably for all three segments, total net sales

growth was 12 percent in 2000. The company’s sales growth was unfavorably impacted by ﬂuctuations in currency exchange rates

in 2000 principally due to the weakening of the Euro relative to the United States Dollar, partially offset by the strengthening of

the Japanese Yen.

Medication Delivery The Medication Delivery segment generated eight percent and nine percent sales growth in 2000 and 1999,

respectively. Excluding the impact of ﬂuctuations in currency exchange rates, sales growth was 11 percent in 2000. Of the constant-

currency sales growth, approximately two points and four points of growth in 2000 and 1999, respectively, was generated by recent

acquisitions, principally the January 2000 acquisition of a domestic ambulatory and infusion pump business, the September 1999

acquisition of a nutrition and ﬂuid therapy business in Europe and the April 1998 acquisition of a domestic manufacturer of inhalants

and drugs used for general and local anesthesia. Approximately three points of growth in both 2000 and 1999 was generated from

the segment’s late-1999 exclusive agreement to sell the ﬁrst generic formulation of Propofol approved by the United States Food

and Drug Administration. Propofol is an intravenous drug used for the induction or maintenance of anesthesia in surgery, and as a

sedative in monitored anesthesia care. The remaining sales growth in both periods was principally due to increased sales of

Colleague ® electronic infusion pumps and intravenous ﬂuids and administration sets used with electronic infusion pumps, as well

as growth in products for nutrition-based therapies. Such sales growth in 2000 was partially offset by the effect of terminations of

certain distribution agreements that were not part of the segment’s core businesses. Sales in the United States and Western Europe

have been impacted by competitive pricing pressures and cost pressures from health-care providers. These factors were more than

offset by increased penetration and new product introductions in emerging markets, as well as increased sales due to new distribution

and alliance agreements, new products and acquisitions. Management expects these trends to continue.

BioScience Sales in the BioScience segment increased eight percent and 17 percent in 2000 and 1999, respectively. Excluding the

impact of ﬂuctuations in currency exchange rates, sales growth was 14 percent in 2000, with growth particularly strong outside the

United States. The June 2000 acquisition of North American Vaccine, Inc. (NAV), which is further discussed in Note 3, contributed

approximately three points to the segment’s constant-currency sales growth rate in 2000. As a result of the company’s increase in

manufacturing capacity for Recombinate Antihemophilic Factor (rAHF) in late 1998 and late 2000, and the strong demand for this product,

sales of Recombinate contributed approximately three points and nine points to the segment’s constant-currency percentage sales

growth in 2000 and 1999, respectively. Strong sales growth is expected to continue as a result of the recent capacity expansions and

anticipated demand for this product. Approximately six points of the growth in both 2000 and 1999 was due to increased sales of

plasma-derived products, primarily as a result of improved product supply and strong growth of Gammagard® S/D IGIV. Sales in the

blood-collection and processing businesses also grew in both 2000 and 1999, principally due to an increase in sales of products that

provide for leukoreduction, which is the removal of white blood cells from blood products used for transfusion. Sales growth in

these businesses has been negatively affected by regulatory and production issues facing certain of the company’s customers in the

plasma-fractionation industry. The effects of regulatory, supply, competitive and other pressures on the BioScience segment are

expected to continue to be more than offset by the effects of global expansion, technological advancement and innovation,

increases in manufacturing capacity, and strategic alliances, joint ventures and acquisitions.

Renal The Renal segment generated sales growth of nine percent and 10 percent in 2000 and 1999, respectively. Excluding the

impact of ﬂuctuations in currency exchange rates, sales growth was 11 percent in 2000 and six percent in 1999. Sales related to the

March 2000 acquisition of Althin Medical A.B. (Althin), a manufacturer of hemodialysis products, contributed approximately four

points to the segment’s growth rate in 2000. Signiﬁcant growth was generated by the segment’s Renal Therapy Services business,

which operates dialysis clinics in partnership with local physicians in international markets, and the Renal Management Strategies

business, which is a renal-disease management organization, with revenues from these businesses increasing over $60 million in

2000 and over $80 million in 1999. The remaining sales growth in the Renal segment was driven principally by continued penetration

of products for peritoneal dialysis. Penetration of products used for peritoneal dialysis continues to be strongest in emerging

markets such as Latin America and Asia, where many people with end-stage renal disease are currently under-treated. Sales in

certain geographic markets continue to be affected by strong pricing pressures and the effects of market consolidation. These issues

are expected to continue to be more than offset by increased penetration of peritoneal dialysis, growth in sales of hemodialysis

products, continued expansion into developing markets, and alliances and acquisitions.

Gross Margin and Expense Ratios

years ended December 31 (as a percent of sales)

Gross margin

Marketing and administrative expenses

2000

44.4%

20.1%

1999

44.1%

20.5%

1998

44.9%

21.2%

The change in the gross margin in both 2000 and 1999 was partly due to changes in the products and services mix and ﬂuctuations

in currency exchange rates. The improved sales mix in 2000 was principally due to signiﬁcantly higher sales of Recombinate and

vaccines within the BioScience segment. The reduction in 1999 was impacted by higher costs related to increased investments

and reduced production in the BioScience segment in response to heightened FDA regulatory activity with respect to safety and

quality systems.

The reduction in the expense ratio in both 2000 and 1999 was due to a number of factors. The company has been making signiﬁcant

investments in order to attract and retain a highly talented workforce. Such investments include increased cash compensation

as well as increased long-term Baxter stock incentives. The effect of these strategic investments was more than offset by

the company’s aggressive management of expenses, leveraging of recent acquisitions, improved pension plan asset returns and

hedging activities.

In addition, various recently implemented e-business and strategic sourcing initiatives have resulted in signiﬁcant efﬁciencies and

cost savings to the company, which has contributed to an improved gross margin and expense ratio, particularly in 2000, and have

allowed management to redeploy valuable resources within the company. Management expects to continue to make strategic

investments while leveraging and closely managing costs in 2001.

Research and Development

years ended December 31 (in millions)

Research and development expenses

as a percent of sales

2000

$379

1999

$332

1998

$323

Percent increase

2000

14%

1999

Research and development (R&D) expenses above exclude in-process R&D (IPR&D) charges, which principally consisted of a $250

million IPR&D charge relating to the acquisition of NAV in 2000 and a $116 million IPR&D charge relating to the acquisition of

Somatogen, Inc. in 1998. Refer to Note 3 for a discussion of signiﬁcant acquisitions, along with related IPR&D charges. R&D expenses

increased in all three segments in both 2000 and 1999. The overall increase was primarily due to spending in the BioScience

segment, principally relating to the next-generation recombinant product, the next-generation oxygen-therapeutics

program, initiatives in the wound management and plasma-based products areas, and, in 2000, to the acquisition of NAV.

Management plans to continue to make signiﬁcant investments in the R&D initiatives mentioned above as well as other projects

across the three segments in 2001.

Exit and Other Reorganization Costs
Refer to Note 4 for a discussion of a charge recorded in 1998 for exit and other reorganization costs. The company recorded a $122

million charge in 1998 principally related to the decisions to end the clinical development of the company’s ﬁrst-generation oxygen-

carrying therapeutic program, exit certain non-strategic investments, primarily in Asia, and reorganize certain other activities. The

program is substantially complete as originally planned. Management believes remaining reserves for exit and other reorganization

programs are adequate to complete the actions contemplated by the programs. Future cash expenditures will be funded with cash

generated from operations. Management anticipates employee compensation and other cost savings from the programs will be

invested in R&D, new business initiatives, and expansion into growing international markets.

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, which are further discussed in Note 3, 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. Management believes remaining reserves are adequate to

complete the actions contemplated by the plans.

Net Litigation Charge
As further discussed in Note 12, the company recorded $29 million of income in 2000, which was principally a result of favorable

adjustments to the mammary implant insurance receivables due to settlements negotiated with certain insurance companies during

2000. The company recorded a $178 million net litigation charge in 1998 relating to mammary implants, plasma-based therapies

(relating to the BioScience segment) and other litigation.

Goodwill Amortization
Goodwill amortization increased in 2000 principally due to the acquisition of NAV.

Other Income and Expense
Net interest expense declined in 2000 and 1999 due principally to the impact of a greater mix of foreign currency denominated debt,

which bears a lower average interest rate, and to lower average debt levels. In 2000, these factors were partially offset by the impact

of increased interest rates, principally in the United States and Europe. Management does not expect net interest expense to change

signiﬁcantly in 2001.

As further discussed in Note 10, other income in 2000 consisted principally of net gains relating to foreign currency hedging

instruments, partially offset by losses relating to the early termination of debt. Other 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 Medication Delivery segment.

Pretax Income
Refer to Note 13 for a summary of ﬁnancial results by segment. Certain items are maintained at the company’s corporate headquarters

and are not allocated to the segments. They primarily include hedging activities, certain foreign currency ﬂuctuations, net interest

expense, corporate headquarters costs, and certain nonrecurring gains and losses.

Medication Delivery Growth in pretax income of one percent and eight percent in 2000 and 1999, respectively, was primarily a result

of strong sales, and the leveraging of expenses in conjunction with recent acquisitions, partially offset by the unfavorable impact of

ﬂuctuations in currency exchange rates in both periods, increased pump service costs in 2000 and the termination of certain

non-core distribution agreements in 2000.

BioScience The 23 percent and eight percent growth in pretax income in 2000 and 1999, respectively, was principally driven by

strong sales, improved manufacturing efﬁciencies, and the leveraging and close management of marketing and administrative

expenses, partially offset by the unfavorable impact of ﬂuctuations in currency exchange rates and signiﬁcantly increased R&D

expenditures. The impact of eased supply constraints and manufacturing capacity expansions for Recombinate also contributed to

the growth in pretax income.

Renal Pretax income declined three percent and increased 43 percent in 2000 and 1999, respectively. A signiﬁcant contributor to the

increase in 1999 was the impact of the strengthening Japanese Yen. In 2000, the effect of the strengthening Japanese Yen was more

than offset by the effect of the signiﬁcantly weakening Euro. Excluding the effects of currency exchange rate ﬂuctuations, pretax

income increased due to strong sales, partially offset by a less favorable mix of sales and services, and higher R&D and sales and

marketing investments in the business.

Income Taxes
Excluding the 2000 charge for IPR&D and acquisition-related costs and the 1998 charges for IPR&D, exit and other reorganization

costs and net litigation, along with a related provision in 1998 for U.S. taxes on previously unremitted foreign earnings (collectively,

“special charges”), the effective income tax rate from continuing operations was approximately 26 percent, 26 percent and 24 percent

in 2000, 1999 and 1998, respectively. Management does not expect a signiﬁcant change in the effective tax rate in 2001.

Income from Continuing Operations Before Cumulative Effect of Accounting Change and Special Charges

years ended December 31 (in millions)

Income from continuing operations

before cumulative effect of accounting change

2000

1999

1998

2000

1999

Percent increase

in 1999 and special charges in 2000 and 1998

$915

$779

$688

17%

13%

Income from continuing operations before cumulative effect of accounting change per the consolidated statements of income was

$738 million, $779 million and $275 million in 2000, 1999 and 1998, respectively.

Earnings Per Share from Continuing Operations
Excluding the cumulative effect of an accounting change in 1999 and the special charges in 2000 and 1998, earnings per diluted share

in 2000, 1999 and 1998 were $3.06, $2.64 and $2.38, respectively, and the growth in earnings per diluted share was 16 percent and

11 percent in 2000 and 1999, respectively.

Discontinued Operation
As further discussed in Note 2, on March 31, 2000, Baxter stockholders of record on March 29, 2000 received all of the outstanding

stock of Edwards Lifesciences Corporation (Edwards), the company’s cardiovascular business, in a tax-free spin-off. Income from

the discontinued operation grew 60 percent in 1999, or approximately $24 million, largely due to favorable currency exchange rate

ﬂuctuations, principally due to the strengthening of the Japanese Yen, and an improved mix of sales.

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 SOP does not have a material impact on the company’s results of operations.

Liquidity and Capital Resources

Cash ﬂows from continuing operations per the consolidated statements of cash ﬂows increased during 2000 principally as a result of

higher earnings (before non-cash items), decreased cash payments pertaining to the company’s litigation, a decrease in receivables

and a higher liabilities balance. These increases in cash ﬂows were partially offset by the effect of higher inventories. Cash ﬂows

from continuing operations increased in 1999 due principally to higher earnings, lower inventories and lower other asset balances.

These increases were partially offset principally by higher net cash outﬂows relating to litigation and lower liabilities balances.

Accounts receivable balances generally increase as the company generates sales growth in certain regions outside the United States,

which have longer collection periods. As further discussed in Note 6, cash ﬂows beneﬁted from the sales of certain trade accounts

receivable whereby the company realized net cash inﬂows of $195 million, $65 million and $150 million in 2000, 1999 and 1998,

respectively. Such receivables were sold to reduce the overall costs of ﬁnancing the receivables.

Cash ﬂows related to the discontinued operation decreased in 2000 due to the effect of the spin-off of Edwards on March 31, 2000.

Cash outﬂows from investing activities increased in 2000 and decreased in 1999. Capital expenditures (including additions to the

pool of equipment leased or rented to customers) increased three and 13 percent in 2000 and 1999, respectively, as the company

increased its investments in various capital projects across all three segments. The growth in capital expenditures principally reﬂected

increases in manufacturing capacity in the BioScience segment, and, in 1999, to the implementation of a new integrated operational

system. Capital expenditures are made at a sufﬁcient level to support the strategic and operating needs of the businesses. Management

expects to invest between $600 million and $700 million in capital expenditures in 2001.

Net cash outﬂows relating to acquisitions increased in 2000 and decreased in 1999. In 2000, net cash outﬂows relating to acquisitions

included approximately $55 million related to the acquisition of Althin and approximately $63 million related to the acquisition of

NAV. As further discussed in Note 3, a portion of the purchase price for both of these acquisitions was paid in Baxter International

Inc. common stock. Approximately $131 million of the total outﬂows in 2000 related to several acquisitions and investments in the

Medication Delivery segment, principally the acquisition of a domestic ambulatory and infusion pump business and a contingent

purchase price payment associated with the 1998 acquisition of a domestic manufacturer of inhalants and drugs used for general

and local anesthesia. Approximately $15 million of the company’s net cash outﬂows relating to acquisitions in 2000 related to the

acquisition of dialysis centers in international markets. 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 International AG. 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 nutrition and ﬂuid therapy business in Europe. In 1998, net cash outﬂows relating to acquisitions included

approximately $142 million pertaining to the acquisition of Bieffe Medital S.p.A., a manufacturer of dialysis and intravenous solutions

and containers, approximately $94 million related to an acquisition of a domestic manufacturer of inhalants and drugs used for

general and local anesthesia, and the remainder primarily related to acquisitions of dialysis centers in international markets. Refer

to Note 3 for further information regarding signiﬁcant acquisitions.

The cash ﬂows relating to divestitures and other asset dispositions in 2000 principally related to the spin-off of Edwards on March 31,

2000. In 1999, the company generated approximately $30 million of cash relating to a prior year divestiture in the BioScience segment

and approximately $42 million of cash relating to the sale and leaseback of certain assets.

Cash ﬂows from ﬁnancing activities increased in 2000 and decreased in 1999. Common stock dividends decreased in 2000 due to

the company’s change from a quarterly to an annual dividend payout schedule effective at the beginning of the year, and increased

in 1999 due to a higher number of shares outstanding. As further discussed in Note 8, included in total outﬂows in 1999 was $198

million in cash inﬂows relating to the Shared Investment Plan. Cash received for stock issued under employee beneﬁt plans

increased in 2000 and 1999 primarily due to a higher level of employee stock option exercises, coupled with a higher average stock

option exercise price. A portion of the increase in 2000 was due to required exercises of stock options by employees transferring

to Edwards as a result of the March 31, 2000 spin-off of that business, as well as to increased stock purchases by employees.

Purchases of treasury stock increased in both 2000 and 1999, as more shares were purchased at higher market prices.

Management assesses the company’s liquidity in terms of its overall ability to mobilize cash to support ongoing business levels and

to fund its growth. Management uses an internal performance measure called operational cash ﬂow that evaluates each operating

business and geographic region on all aspects of cash ﬂow under its direct control. Operational cash ﬂow, as deﬁned, reﬂects all

litigation payments and related insurance recoveries except for those payments and recoveries relating to mammary implants, which

the company never manufactured or sold. The company expects to generate more than $500 million in operational cash ﬂow in 2001.

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

2000

$1,233

(648)

(48)

$ 588

1999

$977

(631)

190

$588

1998

$837

(556)

$379

The company’s net-debt-to-capital ratio was 40.1 percent and 40.2 percent at December 31, 2000 and 1999, respectively. In order to

better match the currency denomination of its assets and liabilities, the company rebalanced certain of its debt during 2000. The

company acquired approximately $878 million of its U.S. Dollar denominated debt securities during 2000 and increased its non-U.S.

Dollar denominated debt. 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 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 company’s board of directors authorized

the repurchase of up to $500 million of common stock over a period of several years, all of which was repurchased by early 2000.

In November 1999, the board of directors authorized the repurchase of an additional $500 million over a period of several years,

of which approximately two-thirds has been repurchased as of December 31, 2000.

As of December 31, 2000, 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 November 2000, the board of directors declared an annual dividend on the company’s common stock of $1.164 per share.

The dividend, which was payable on January 8, 2001 to stockholders of record as of December 15, 2000, is a continuation of the

current annual rate.

Euro Conversion

On January 1, 1999, certain member countries 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.

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 or ﬁnancial condition. 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, management 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. Refer to Note 6 for further information regarding the company’s ﬁnancial instruments.

Currency Risk The company operates on a global basis and is exposed to the risk that its earnings, cash ﬂows and equity could be

adversely impacted by ﬂuctuations in currency exchange rates. The company is primarily exposed to currency exchange-rate risk

with respect to its transactions and net assets denominated in Japanese Yen, Euro, British Pound and Swiss Franc. The company

manages its foreign currency exposures and capital structure on a consolidated basis, which allows the company to net exposures

and take advantage of any natural offsets. The company also utilizes derivative ﬁnancial instruments to further reduce the net

exposure to currency ﬂuctuations. The company principally enters into foreign currency option and forward agreements to hedge

ﬁrm commitments and anticipated but not yet committed sales expected to be denominated in foreign currencies. The company

enters into foreign currency forward agreements to hedge certain receivables and payables denominated in foreign currencies. The

company also hedges certain of its net investments in international afﬁliates principally using cross-currency swap agreements.

As part of its risk-management program, the company performs sensitivity analyses to assess potential changes in fair value

relating to hypothetical movements in currency exchange rates. A sensitivity analysis of changes in the fair value of foreign exchange

option and forward contracts outstanding at December 31, 2000 indicated that, if the U.S. Dollar uniformly ﬂuctuated unfavorably

by 10 percent against all currencies, the fair value of those contracts would decrease by $20 million. A similar analysis performed

with respect to option and forward contracts outstanding at December 31, 1999 indicated that the fair value of such contracts would

decrease by $16 million. With respect to the company’s cross-currency swap agreements, if the U.S. Dollar uniformly weakened by

10 percent, the fair value of the contracts would decrease by $83 million and $295 million as of December 31, 2000 and 1999, respectively.

Any increase or decrease in the fair value of cross-currency swap agreements as a result of ﬂuctuations in currency exchange rates

is offset almost completely by the change in the value of the hedged net investments in foreign afﬁliates. The amount above for

2000 is less than that for 1999 due to the signiﬁcantly lower notional amount of cross-currency swap agreements outstanding at

December 31, 2000 as compared to the prior year-end. These sensitivity analyses disregard the possibility that currency exchange

rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency.

Interest Rate Risk As part of its risk-management program, the company performs sensitivity analyses to assess potential gains and

losses in earnings relating to hypothetical movements in interest rates. A 44 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 2000 and 1999 earnings and on the fair

value of the company’s ﬁxed-rate ﬁnancial instruments as of the end of such ﬁscal years.

As discussed in Note 6, the fair values of the company’s long-term litigation liabilities and related insurance receivables were

computed by discounting the expected cash ﬂows based on currently available information. A 10 percent movement in the assumed

discount rate would have an immaterial effect on the fair values of those assets and liabilities.

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 to the company’s consolidated ﬁnancial position.

Legal Proceedings

See Note 12 for a discussion of the company’s legal contingencies and related insurance coverage 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.

New Accounting and Disclosure Standards

Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended

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

No. 133” and SFAS No. 138, “Accounting for Certain Hedging Activities” (collectively, SFAS No. 133), is effective for the company

as of January 1, 2001. SFAS No. 133 requires that a company recognize all derivatives as assets or liabilities measured at fair value.

The accounting for changes in the fair value of a derivative depends on the use of the derivative. Adoption of SFAS No. 133 will

result in a cumulative after-tax reduction in net income of approximately $52 million and a cumulative after-tax increase in other

comprehensive income of approximately $8 million, both of which will be recorded at the beginning of ﬁscal year 2001. The ongoing

impact of SFAS No. 133 is not expected to be material.

SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (SFAS No. 140) was

issued in September 2000 and is effective for transfers, servicings and extinguishments occurring after March 31, 2001. SFAS

No. 140 replaces SFAS No. 125, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”

(SFAS No. 125). Although SFAS No. 140 clariﬁes or amends various aspects of SFAS No. 125, most of the fundamental concepts from

SFAS No. 125 have been brought forward without modiﬁcation. SFAS No. 140 is not expected to have a material impact on the

company’s consolidated ﬁnancial statements.

Management’s Responsibilities for Financial Reporting

The accompanying ﬁnancial statements and other ﬁnancial data have been prepared by management, which is responsible for their

integrity and objectivity. The statements have been prepared in conformity with accounting principles generally accepted in the

United States 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 safeguarding of assets. 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.
Chairman and Chief
Executive Ofﬁcer

Brian P. Anderson
Senior Vice President and
Chief Financial Ofﬁcer

Report of Independent Accountants

To the Board of Directors and Stockholders of Baxter International Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, cash ﬂows and

stockholders’ equity and comprehensive income present fairly, in all material respects, the ﬁnancial position of Baxter International

Inc. (the company) and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash ﬂows for

each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the

United States of America. These ﬁnancial statements are the responsibility of the company’s management; our responsibility is to

express an opinion on these ﬁnancial statements based on our audits. We conducted our audits of these statements in accordance

with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit

to obtain reasonable assurance about whether the ﬁnancial statements are free of material misstatement. An audit includes

examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements, assessing the accounting

principles used and signiﬁcant estimates made by management, and evaluating the overall ﬁnancial statement presentation.

We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Chicago, Illinois
February 16, 2001, except for Note 14,
which is as of February 28, 2001

Consolidated Balance Sheets

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

Cash and equivalents

Accounts receivable

Notes and other current receivables

Inventories

Short-term deferred income taxes

Prepaid expenses

Total current assets

Net assets of discontinued operation

Goodwill and other intangible assets

Insurance receivables

Other

Total other assets

Total assets

Short-term debt

Current maturities of long-term debt and

lease obligations

Accounts payable and accrued liabilities

Income taxes payable

Total current liabilities

Current Assets

Property, Plant and Equipment, Net

Other Assets

Current Liabilities

Long-Term Debt and Lease Obligations

Long-Term Deferred Income Taxes

Long-Term Litigation Liabilities

Other Long-Term Liabilities

Commitments and Contingencies

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

2000

$ 579

1,387

155

1,159

159

212

3,651

2,807

–

1,239

160

876

2,275

$8,733

$ 576

1,990

748

3,372

1,726

160

184

632

Stockholders’ Equity

Common stock, $1 par value, authorized

350,000,000 shares, issued 298,133,251 shares

in 2000 and 294,363,251 shares in 1999

298

294

Common stock in treasury, at cost,

4,953,062 shares in 2000 and

4,163,737 shares in 1999

Additional contributed capital

Retained earnings

Accumulated other comprehensive loss

Total stockholders’ equity

Total liabilities and stockholders’ equity

(349)

2,506

853

(649)

2,659

$8,733

(269)

2,282

1,415

(374)

3,348

$9,644

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

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

and acquisition-related costs

Exit and other reorganization costs

Net litigation (income) costs

Goodwill amortization

Operating income

Interest expense, net

Other (income) expense

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 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

Discontinued operation

Cumulative effect of accounting change

Net income

Earnings per diluted common share

Continuing operations

Discontinued operation

Cumulative effect of accounting change

Net income

Weighted average number of

common shares outstanding

2000

$6,896

3,833

1,385

379

286

–

(29)

1,011

(20)

946

208

738

740

–

$ 740

$ 2.52

0.01

–

$ 2.53

$ 2.47

0.01

–

$ 2.48

1999

$6,380

3,568

1,311

332

–

1,150

1,052

273

779

824

(27)

$ 797

$ 2.69

0.15

(0.09)

$ 2.75

$ 2.64

0.15

(0.09)

$ 2.70

1998

$5,706

3,142

1,208

323

116

122

178

599

124

(18)

493

218

275

315

–

$ 315

$ 0.97

0.14

–

$ 1.11

$ 0.95

0.14

–

$ 1.09

Basic

Diluted

292

299

290

295

284

289

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

Consolidated Statements of Cash Flows

as of or for the years ended December 31 (in millions) (brackets denote cash outﬂows)

2000

1999

1998

Cash Flows from Operations

Income from continuing operations before

cumulative effect of accounting change

$738

$779

$275

Adjustments

Depreciation and amortization

Deferred income taxes

Loss (gain) on asset dispositions

In-process research and development

and acquisition-related costs

Exit and other reorganization costs

Net litigation (income) 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

or rented to customers

Acquisitions (net of cash received)

and investments in afﬁliates

Divestitures and other asset dispositions

Cash ﬂows from investing activities

Cash Flows from Financing Activities

Issuances of debt obligations

Redemption of debt 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 Foreign 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.

405

(170)

286

–

(29)

(114)

(58)

1,233

(19)

1,214

(547)

(101)

(345)

(60)

(1,053)

1,180

(1,953)

879

(84)

–

233

(375)

(120)

(68)

(27)

606

$579

$110

$279

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)

(95)

(319)

(872)

1,143

(598)

(159)

(331)

–

118

–

173

244

465

$709

$191

$143

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

Purchase 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

Distribution of Edwards Lifesciences Corporation common stock to stockholders

End of year

Accumulated Other Comprehensive Loss

Beginning of year

Other comprehensive loss

End of year

Total stockholders’ equity

Comprehensive Income

Net income

Currency translation adjustments, net of tax expense (beneﬁt)

of $82 in 2000, $87 in 1999 and $(56) in 1998

Unrealized net gain on marketable equity securities, net of tax

of $15 in 2000, $1 in 1999 and $1 in 1998

Other comprehensive loss

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.

2000

1999

1998

$ 294

$ 291

$ 288

–

298

(269)

(375)

248

(349)

2,282

239

–

(15)

–

294

(210)

–

(184)

125

(269)

2,064

–

195

–

291

(329)

–

119

(210)

1,876

189

–

(1)

2,506

2,282

2,064

1,415

740

–

(341)

(961)

853

(374)

(275)

(649)

990

797

(34)

(338)

–

1,415

(296)

(78)

(374)

1,006

315

–

(331)

–

990

(222)

(74)

(296)

$2,659

$3,348

$2,839

$ 740

$ 797

$ 315

(297)

(275)

(80)

(78)

(75)

(74)

–

$ 465

(34)

$ 685

–

$ 241

Notes to Consolidated Financial Statements

Warranty expense
The company provides for the estimated costs that may be

incurred under its warranty programs at the time revenue

Summary of Signiﬁcant Accounting Policies

is recognized.

Inventories

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

reported amounts and related disclosures. Actual results could

differ from those estimates.

as of December 31 (in millions)

Raw materials

Work in process

Finished products

Total inventories

2000

$ 261

174

724

1999

$ 251

193

672

$1,159

$1,116

in the ﬁrst ﬁscal quarter of 1999. Effective in the ﬁrst quarter

Land

of 2001, the one-month lag was eliminated for the remaining

Buildings and leasehold improvements

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 $110 million and $78 million at December 31, 2000 and

1999, respectively.

Property, plant and equipment

as of December 31 (in millions)

Machinery and equipment

Equipment with customers

Construction in progress

Total property, plant and equipment, at cost

4,978

Accumulated depreciation and amortization

(2,171)

Property, plant and equipment, net

$2,807

2000

$ 113

967

2,822

484

592

1999

987

2,615

489

525

4,709

(2,059)

$2,650

Depreciation and amortization are principally calculated on the

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

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

improvements and from three to 15 years for machinery and

equipment. Leasehold improvements are amortized over the life

of the related facility lease or the asset, whichever is shorter.

Straight-line and accelerated methods of depreciation are used

for income tax purposes. Accumulated amortization for assets

under capital lease was $11 million and $10 million at December

31, 2000 and 1999, respectively. Depreciation expense was $308

million, $290 million and $269 million in 2000, 1999 and 1998,

respectively. Repairs and maintenance expense was $105 million,

$97 million and $93 million in 2000, 1999 and 1998, respectively.

Basis of consolidation
The consolidated ﬁnancial statements include the accounts

of Baxter International Inc. and its majority-owned, controlled

subsidiaries (Baxter or the company). Effective in the ﬁrst

quarter of 1999 and in conjunction with the implementation

of new ﬁnancial systems, the company eliminated the one-month

lag in reporting certain international operations to facilitate more

timely consolidation. The December 1998 net loss of $34 million

for these operations was recorded directly to retained earnings

international operations.

Foreign currency translation
The results of operations for non-U.S. subsidiaries, other than

those located in highly inﬂationary countries, are translated into

U.S. dollars using the average exchange rates during the year,

while assets and liabilities are translated using period-end rates.

Resulting translation adjustments are recorded as currency

translation adjustments within other comprehensive income.

Where foreign afﬁliates operate in highly inﬂationary economies,

non-monetary amounts are remeasured at historical exchange

rates while monetary assets and liabilities are remeasured at

the current rate with the related adjustments reﬂected in the

consolidated statements of income.

Revenue recognition
The company’s policy is to recognize revenues from product

sales and services when earned, as deﬁned by GAAP, and in

accordance with SEC Staff Accounting Bulletin No. 101. Revenue

is recognized when persuasive evidence of the arrangement

exists, delivery has occurred or services have been rendered, the

price is ﬁxed or determinable, and collectibility is reasonably

assured. For product sales, revenue is not recognized until title

and risk of loss have transferred. Prior to revenue recognition,

the company substantially completes the terms speciﬁed in the

arrangement, and any remaining obligations are inconsequential

or perfunctory. Provisions for discounts, rebates to customers,

and returns are provided for at the time the related sales are

recorded, and are classiﬁed as adjustments to sales.

Goodwill and other intangible assets

as of December 31 (in millions)

Goodwill

Accumulated amortization

Net goodwill

Other intangible assets

Accumulated amortization

Net other intangible assets

2000

$1,094

(138)

956

701

(418)

283

Goodwill and other intangible assets

$1,239

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 ($674) million

and ($377) million at December 31, 2000 and 1999, respectively.

Accumulated unrealized net gains on unrestricted marketable

equity securities were $25 million and $3 million at December 31,

2000 and 1999, respectively.

1999

$737

(113)

624

677

(380)

297

$921

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 intangibles whenever

events or changes in circumstances indicate that the carrying

amount of an asset may not be recoverable. Such events or

circumstances might include a signiﬁcant decline in market

share, a signiﬁcant decline in proﬁts, rapid changes in technology,

signiﬁcant litigation or other items. In evaluating the recoverability

of goodwill and other intangible assets, management’s policy is

to compare the carrying amounts of such assets with the estimated

undiscounted future operating cash ﬂows. In the event impairment

exists, an impairment charge would be determined by comparing

the carrying amounts of the asset to the applicable estimated

future cash ﬂows, discounted at a risk-adjusted interest rate. In

addition, the remaining amortization period for the impaired asset

would be reassessed and revised if necessary. Management

does not believe the carrying amounts of goodwill and other

intangible assets are impaired at December 31, 2000.

Earnings per share (EPS)
The numerator for both basic and diluted EPS is net earnings

available to common shareholders. The denominator for basic EPS

is the weighted-average number of common shares outstanding

during the period. The following is a reconciliation of the shares

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

years ended December 31
(in million of shares)

Basic

Effect of dilutive securities

Employee stock options

Employee stock purchase plans

and equity forward agreements

2000

292

1999

290

1998

284

–

Diluted

299

295

289

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

principle and that such costs subsequent to adoption be

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

accounting change was $27 million.

Derivatives
Gains and losses relating to foreign currency purchased options

and forward agreements that are designated and effective as

hedges of ﬁrm commitments and anticipated transactions are

deferred and recognized in income as offsets of gains and losses

resulting from the underlying hedged items. Purchased option

premiums are deferred and recognized in income to the extent

considered effective. Premiums and discounts related to forward

agreements are capitalized and amortized over the period of

the underlying agreement. Deferred amounts are classiﬁed in

inventories. Gains, losses and option premiums relating to

foreign currency derivative instruments not qualifying as hedges

for accounting purposes are recognized in income immediately.

Such instruments are classiﬁed in accounts payable and accrued

liabilities. Gains, losses relating to terminations of qualifying

hedges are generally deferred and recognized consistent with

the income or loss recognition of the underlying hedged items.

In circumstances where the underlying hedged items are sold or

no longer exist, any remaining gains or losses are recognized

immediately in income. The effective portions of gains and losses

on hedges of net investments in foreign afﬁliates are reported as

currency translation adjustments in stockholders’ equity. The

interest rate differentials relating to interest rate swaps used to

hedge debt obligations and cross-currency swap contracts used

to hedge net investments in foreign afﬁliates are reﬂected as an

adjustment to interest expense over the lives of the ﬁnancial

instruments. Gains or losses relating to terminations of

cross-currency swap contracts used to hedge net investments in

foreign afﬁliates are recognized immediately and recorded

in other income or expense. Instruments that are indexed to and

potentially settled in the company’s stock are accounted for in

accordance with Emerging Issues Task Force Issue Nos. 00-7

and 00-19. Cash ﬂows from derivatives are classiﬁed in the same

category as the cash ﬂows from the related hedged activity.

Cash and equivalents
Cash and equivalents include cash, certificates of deposit

In 2000, 1999 and 1998, the company recorded income from the

discontinued operation of $14 million, $64 million and $40 million,

and marketable securities with an original maturity of three

respectively, which was net of income tax expense of $5 million,

months or less.

$19 million and $16 million, respectively. In addition, in 2000 and

1999 the company recorded $12 million (including tax of $6 million)

Shipping and handling costs
Shipping and handling costs are classiﬁed in either cost of goods

and $19 million, respectively, of net costs directly associated with

effecting the business distribution. The impact of these costs on

sold or marketing and administrative expenses based on their

basic earnings per share was $.04 and $.07 in 2000 and 1999,

nature. Approximately $200 million of shipping and handling

respectively, and the impact on diluted earnings per share was

costs were classiﬁed in marketing and administrative expenses

$.04 and $.06 in 2000 and 1999, respectively. Net sales of the

in each of 2000, 1999 and 1998.

Reclassiﬁcations
Certain reclassiﬁcations have been made to conform the 1999 and

discontinued operation were $906 million in 1999, $893 million

in 1998, and $252 million for the three-month period ended

March 31, 2000.

Through the issuance of new third-party debt, approximately

1998 ﬁnancial statements and notes to the 2000 presentation.

$502 million of Baxter’s debt was indirectly assumed by Edwards

upon spin-off. The distribution of Edwards stock totaled $961 million.

New accounting pronouncements
Statement of Financial Accounting Standards No. 133, “Accounting

The cardiovascular business in Japan was not transferred to

Edwards at the time of distribution due to Japanese regulatory

for Derivative Instruments and Hedging Activities,” as amended

requirements and business culture considerations. The business

by SFAS No. 137, “Accounting for Derivative Instruments and

is operated pursuant to a contractual joint venture under which

Hedging Activities — Deferral of the Effective Date of FASB

a Japanese subsidiary of Baxter retains ownership of the business

Statement No. 133” and SFAS No. 138, “Accounting for Certain

assets, but a subsidiary of Edwards holds a 90 percent proﬁt

Hedging Activities” (collectively, SFAS No. 133), is effective for

interest. Edwards has an option to purchase the Japanese

the company as of January 1, 2001. SFAS No. 133 requires that

assets, which option may be exercised no earlier than 28 months

a company recognize all derivatives as assets or liabilities

following the spin-off date and no later than 60 months following

measured at fair value. The accounting for changes in the fair

the spin-off date. The exercise price of the option is approximately

value of a derivative depends on the use of the derivative.

26.4 billion Japanese Yen, of which Edwards would obtain

Adoption of SFAS No. 133 will result in a cumulative after-tax

approximately 23.2 billion Japanese Yen upon termination of the

reduction in net income of approximately $52 million and a

joint venture for the return of its fair value in the joint venture at

cumulative after-tax increase in other comprehensive income of

inception. Included in Baxter’s consolidated balance sheet at

approximately $8 million, both of which will be recorded at the

December 31, 2000 was a $203 million liability relating to this

beginning of ﬁscal year 2001. The ongoing impact of SFAS

contractual joint venture, which was established in connection

No. 133 is not expected to be material.

with the accounting for the spin-off of Edwards.

SFAS No. 140, “Accounting for Transfers and Servicing of

Financial Assets and Extinguishments of Liabilities” (SFAS No.

140) was issued in September 2000 and is effective for transfers,

Acquisitions and Divestitures

servicings and extinguishments occurring after March 31, 2001.

SFAS No. 140 replaces SFAS No. 125, “Accounting for Transfers

and Servicing of Financial Assets and Extinguishments of

Accounting for acquisitions
All acquisitions during the three years ended December 31, 2000

Liabilities” (SFAS No. 125). Although SFAS No. 140 clariﬁes or

were accounted for under the purchase method. Results of

amends various aspects of SFAS No. 125, most of the fundamental

operations of acquired companies are included in the company’s

concepts from SFAS No. 125 have been brought forward without

results of operations as of the respective acquisition dates. The

modiﬁcation. SFAS No. 140 is not expected to have a material

purchase price of each acquisition was allocated to the net assets

impact on the company’s consolidated ﬁnancial statements.

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

Discontinued Operation

acquisition. The excess of the purchase price over the fair values

of the net tangible assets, identiﬁable intangible assets and

liabilities acquired was allocated to goodwill. As further discussed

below, a portion of the purchase price for certain of the acquisitions

On March 31, 2000, Baxter stockholders of record on March 29,

was allocated to in-process research and development (IPR&D)

2000, received all of the outstanding stock of Edwards

which, under GAAP, was immediately expensed.

Lifesciences Corporation (Edwards), the company’s cardiovascular

business, in a tax-free spin-off. The company’s consolidated

ﬁnancial statements and related notes have been adjusted and

restated to reﬂect the ﬁnancial position, results of operations

and cash ﬂows of Edwards as a discontinued operation.

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

acquisitions along with the allocation of the purchase price to

IPR&D and intangible assets.

(in millions)

North American

Vaccine, Inc.

Somatogen, Inc.

Acquisition Purchase
price

date

IPR&D

Intangible assets
Goodwill Other

June

2000

May

1998

December

$328

$250

$245

$10

206

116

Bieffe Medital S.p.A.

1997

188

–

124

North American Vaccine, Inc. (NAV) was engaged in the research,

development, production and sales of vaccines for the prevention

of human infectious diseases. Somatogen, Inc. (Somatogen) was

a developer of recombinant hemoglobin-based technology, and

no revenue had ever been generated from commercial product

sales. Somatogen shareholders are entitled to a contingent

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

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

future products through the year 2007. The acquisitions of NAV

and Somatogen are included in the BioScience segment. Bieffe

Medital S.p.A. (Bieffe), which was a manufacturer of dialysis and

intravenous solutions and containers, is included in both the

Renal and the Medication Delivery segments. The purchase prices

of NAV and Somatogen were principally paid in approximately

3,770,000 and 3,547,000 shares, respectively, of Baxter

International Inc. common stock. A portion of the purchase price

of the Renal segment’s acquisition of Althin Medical A.B. was

paid in approximately 592,000 shares of Baxter common stock.

The $286 million charge for IPR&D and acquisition-related

costs recorded in 2000 consisted principally of the above-

mentioned $250 million charge relating to NAV, insigniﬁcant

IPR&D charges pertaining to three other acquisitions, as well as

certain charges associated with one of the Medication Delivery

segment’s acquisitions.

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

independent valuations using the income approach, which

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

economic beneﬁts. Estimated cash ﬂows were discounted to

their present values at rates of return that incorporate the

risk-free rate, the expected rate of inﬂation, and risks associated

with the particular projects. The valuations incorporated the stages

of completion of the IPR&D projects. Projected revenue and

cost assumptions were determined considering the company’s

historical experience and industry trends and averages. No value

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

being further developed.

The following is a summary of signiﬁcant amounts allocated to

IPR&D during the last several years, by signiﬁcant project category.

(in millions)

NAV Somatogen

Immuno

Oxygen-carrying therapeutics

Plasma-based therapies

Vaccines

Total

$116

$142

$220

$250

Material net cash inﬂows for signiﬁcant IPR&D projects for

NAV were forecasted in the valuation to commence between

2002 and 2005. A discount rate of 20 percent was used for all

projects, which

include Streptococcal B, Pneumococcal,

Meningococcal B/C/Y and other vaccines. Assumed additional

research and development (R&D) expenditures prior to the dates

of product introductions totaled approximately $85 million. The

status of development, stage of completion, assumptions,

nature and timing of remaining efforts for completion, risks and

uncertainties, and other key factors varied by individual vaccine

project. The percentage completion rate for signiﬁcant projects

ranged in the valuation from approximately 65 percent to over 90

percent, with the weighted-average completion rate approximately

70 percent. Subsequent to the June 2000 acquisition date, the

projects have been proceeding in accordance with the original

projections. Approximately $8 million of R&D costs were

expensed in 2000 subsequent to the acquisition date relating to

these projects.

Material net cash inﬂows relating to Somatogen’s IPR&D were

forecasted to begin in 2004. A discount rate of 22 percent was

used in the valuation. Estimated R&D costs to be incurred prior to

2004 were forecasted to total approximately $100 million. 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 2006. Also, it is currently estimated

that over $200 million of R&D costs will be incurred between the

date of acquisition and 2006. During 2000, the results of preclinical

studies were submitted to the U.S. Food and Drug Administration

as part of an investigational new drug application. Pending the

outcome of the FDA’s review of the application, the company

plans to begin human clinical trials in 2001. Approximately $18

million, $18 million and $10 million of R&D costs were expended

in 2000, 1999 and 1998, respectively, relating to these projects.

Immuno International AG (Immuno), a manufacturer of bio-

pharmaceutical products and services for transfusion medicine,

was acquired by the company in December 1996, and is included

in the BioScience segment. The two project categories were

comprised of 18 projects, many of which were comprised of

multiple sub-projects. As part of the post-acquisition integration

and R&D rationalization process, management reassessed all of

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

of Baxter’s existing R&D projects, and re-prioritized certain projects,

resulting in modiﬁcations to originally planned timetables for

certain of the projects and terminations of other projects. Such

Acquisition reserves
Based on plans formulated at acquisition date, as part of the

revisions to original plans were also signiﬁcantly inﬂuenced by

allocation of purchase price, reserves have been established for

marketplace trends and competitive factors occurring since the

certain acquisitions. The following is a summary of the reserves

acquisition date. Most signiﬁcantly, the timetables for certain of

and related activity pertaining to the acquisition of Immuno.

the plasma-based therapies projects have been altered in order to

Reserves established for certain of the company’s acquisitions

accelerate the development of the next-generation recombinant

during the period are not included below as such reserves were

Factor VIII concentrate for hemophilia treatment, given the

not material. Actions executed to date and anticipated in the future

strong and accelerating demand for recombinant products in

with respect to the acquisition-related plans are substantially

the marketplace. As a result of the timetable revisions and

consistent with the original plans. Management believes remaining

terminations, actual R&D expenditures since acquisition date

reserves are adequate to complete the actions contemplated

have been over 40 percent lower than that assumed in the

by the plans.

model. Total additional R&D expenditures are currently forecasted

to be less than those assumed in the model. Approximately

$15 million, $30 million and $25 million of R&D costs have

been expensed in 2000, 1999 and 1998, respectively, relating

to these projects.

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

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

Original reserve

Employee-related costs

Contract termination and other costs

Total original reserve

products currently under development are at various stages of

1998 and prior reserve utilization

development, and substantial further research and development,

1999 reserve utilization

pre-clinical testing and clinical trials will be required to determine

2000 reserve utilization

their technical feasibility and commercial viability. There can

Balance at December 31, 2000

Immuno

$38

(26)

(11)

(16)

$26

Employee-related costs consisted principally of employee

severance associated with headcount reductions in Europe and

primarily impacted the sales and marketing functions. Utilization

of reserves for employee-related costs totaled $3 million, $6 million

and $16 million in 2000, 1999 and 1998, respectively. Contract

termination and other costs related principally to the exiting of

activities and termination of distribution, lease and other contracts

of the acquired company that existed prior to the acquisition

date that either continued with no economic beneﬁt or required

payment of a cancellation penalty.

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.

Pro forma information
The following unaudited pro forma information presents a

summary of the company’s consolidated results of operations

as if acquisitions had occurred as of the beginning of

fiscal years 2000 and 1999, respectively, giving effect to purchase

accounting adjustments but excluding the 2000 charge for

IPR&D and acquisition-related costs.

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

Net sales

Income from continuing operations before

cumulative effect of accounting change

Net income

Net income per diluted common share

2000

$7,005

$ 896

$ 2.99

1999

$6,614

$ 781

$ 754

$ 2.52

These pro forma results of operations have been presented for

comparative purposes only and do not purport to be indicative

of the results of operations which actually would have resulted

had the acquisitions occurred on the date indicated, or which

may result in the future. The diluted pro forma earnings and

per-share earnings included in the table above primarily reﬂect

the historical pre-acquisition net losses reported by NAV.

Exit and Other Reorganization Costs

Long-Term Debt, Credit Facilities
and Lease Obligations

In 1998, the company decided to end the clinical development of

the BioScience 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

as of December 31 (in millions)

Commercial paper

Short-term notes

Zero coupon notes

due 2000 (unamortized original

issue discount of $9)

8.125% notes due 2001

pretax charge in 1998. Included in the total charge was a $74

7.625% notes due 2002

million charge to write down certain assets to estimated sales or

7.125% notes due 2007

salvage value due to impairment. The majority of the asset

writedowns related to machinery and equipment 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.

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

2000

1999

6.4% $ 800

$ 668

3.5%

513

646

10.3%

6.2%

7.5%

7.1%

7.5%

9.5%

7.6%

6.7%

–

147
75

120

155

151

251

198

202

249
16

1,784

(58)

2,731

(130)

$1,726

$2,601

Such alternate production is expected to commence at the

In order to better match the currency denomination of its assets

Neuchâtel facility in the next two years.

and liabilities, the company rebalanced certain of its debt during

The following is a summary of the components of the remainder

2000. The company acquired approximately $878 million of its

of the charge and the utilization of such reserves.

U.S. Dollar denominated debt securities during 2000 and

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

Employee-
related costs

Original charge

1998 utilization

1999 utilization

2000 utilization

Reserves at December 31, 2000

$34

(12)

(16)

(4)

$ 2

Other
costs

$14

(6)

(7)

–

$ 1

Total

$48

(18)

(23)

(4)

$ 3

increased its Japanese Yen and Euro denominated debt. The net

costs associated with the early termination of the U.S. Dollar

denominated debt of $15 million were recorded in other expense

as they were not material. The increase in debt denominated in

Japanese Yen and Euro was classiﬁed in short-term debt as of

December 31, 2000. Management intends to replace the majority

of this short-term debt with long-term debt during 2001.

The company leases certain facilities and equipment under

Employee-related costs consisted principally of employee

capital and operating leases expiring at various dates. Most of

severance resulting from the elimination of approximately

the operating leases contain renewal options. Rent expense

375 positions worldwide. The headcount reductions affected

under operating leases was $99 million, $91 million and

various functions and pertained principally to the BioScience

$79 million in 2000, 1999 and 1998, respectively.

and Medication Delivery segments. Approximately 360 positions

have been eliminated through December 31, 2000. The other

costs related principally to contractual obligations that existed

prior to the date of the charge that either continued with no

economic beneﬁt or required payment of a cancellation penalty.

The majority of such costs related to the terminated HemAssist

(DCLHb) program and included cancellation costs associated

with a minimum purchase agreement.

Future minimum lease payments and debt maturities

Financial Instruments and Risk Management

Aggregate debt
maturities
and capital
leases

Operating
leases

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

$ 82

customers in the health-care industry, performs credit evaluations

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

2001

2002

2003

2004

2005

Thereafter

50
1,3361
3

341

Total obligations and commitments

$348

1,794

Amounts representing interest,

discounts, premiums and deferred

ﬁnancing costs

Total long-term debt and present

value of lease obligations

(10)

$1,784

1. Includes approximately $1.3 billion 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 $1.5 billion. Of this total, $700 million will expire in 2001

and $800 million will expire in 2003. The facilities enable

the company to borrow funds in U.S. Dollars or Euros 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, 2000 or 1999.

Baxter also maintains or guarantees other short-term credit

arrangements which totaled approximately $418 million at

December 31, 2000. Approximately $61 million and $93 million

of borrowings were outstanding under these facilities at

December 31, 2000 and 1999, respectively.

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 $513 million and $596 million in borrowings

outstanding under this facility at December 31, 2000 and 1999,

respectively, and they were denominated in Swiss Francs. These

borrowings are secured and guaranteed by a pledge of the

shares of the borrower and certain of its subsidiaries.

At December 31, 2000 and 1999, commercial paper and short-

term notes together totaling approximately $1.3 billion have

been classiﬁed with long-term debt as they are supported by the

long-term credit facilities discussed above, which management

intends to continue to reﬁnance.

of these customers and maintains reserves for potential credit

losses which, when realized, have been within the range of

management’s allowance for doubtful accounts. The allowance

for doubtful accounts was $43 million and $34 million at

December 31, 2000 and 1999, respectively.

In order to reduce its overall ﬁnancing costs, the company

periodically sells its trade accounts receivable. In 2000, the

company generated net operating cash inﬂows of approximately

$195 million relating to such sales. Under the terms of the sales

arrangements, the company has the ability to sell certain accounts

receivable on an ongoing basis, continues to service the sold

receivables, and is subject to recourse provisions. Management

believes the company is adequately reserved with respect to the

recourse provisions. In 2000, proceeds from new sales totaled

approximately $1.5 billion and cash collections reinvested totaled

approximately $1.3 billion. The portfolio of accounts receivable

that the company services totaled approximately $590 million at

December 31, 2000. The net gains and losses recognized upon

sale of the receivables, amounts relating to the company’s servicing

of the receivables, and delinquencies were not material to the

consolidated ﬁnancial statements.

Other concentrations of risk
The company invests the majority of its excess cash in certiﬁcates

of deposit or money market accounts and, where appropriate,

diversiﬁes the concentration of cash among different ﬁnancial

institutions. With respect to financial instruments, where

appropriate, the company has diversified its selection of

counterparties, and has arranged collateralization and master-

netting agreements to minimize the risk of loss.

Interest rate risk management
Baxter uses interest rate swaps generally from less than one year

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, 2000 and 1999 reﬂect deferred hedge gains of $2

million and $11 million, respectively, offset by $2 million of

deferred hedge losses at December 31, 1999.

Foreign exchange risk management
The company enters into various types of foreign exchange

contracts to protect the company from risks associated with the

fluctuation in currency exchange rates. The company principally

enters into foreign currency option and forward contracts, with

terms generally less than three years, to hedge ﬁrm commitments

and 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

Equity risk management
In order to partially offset the potentially dilutive effect of

$20 million and $7 million at December 31, 2000 and 1999,

employee stock options, the company has entered into forward

respectively. The company also enters into foreign currency

agreements with independent third parties related to the

forward agreements to hedge certain receivables and payables

company’s common stock. The forward agreements require the

denominated in foreign currencies. The company principally

company to purchase its common stock from the counterparties

hedges the following currencies: Japanese Yen, Euro, British

on speciﬁed future dates and at speciﬁed prices. The company

Pound and Swiss Franc.

can, at its option, require settlement of the agreements with

The company also enters into cross-currency swap agreements,

shares of its common stock or, in some cases, cash, in lieu of

with original maturities up to 10 years, to hedge certain of its net

physical settlement. The company may, at its option, terminate

investments in foreign afﬁliates. In conjunction with the company’s

and settle these agreements early at any time before maturity.

rebalancing of its debt portfolio and in anticipation of the adoption

At December 31, 2000, agreements related to approximately

of SFAS No. 133, certain of such contracts were terminated in

2.5 million shares mature in 2001 at an average exercise price

2000, and a gain was recognized in other income. Refer to Note

of approximately $58 per share and agreements related to

10 for further information. In order to hedge certain of its net

approximately 3.7 million shares mature in 2002 at exercise

investments in foreign afﬁliates in the future, the company

prices ranging from $70 to $78 per share. At December 31, 1999,

plans to designate a portion of its debt denominated in foreign

agreements related to approximately 7.0 million shares were

currencies as hedges of these net investments, as well as use

outstanding.

cross-currency swap agreements.

In connection with the company’s stock repurchase program,

during 2000 the company issued put options and purchased call

Interest rate and foreign exchange contracts

options on shares of its common stock. The put options give

as of December 31 (in millions)

Interest rate contracts
Floating to ﬁxed rate swaps

Average pay rate 5.1% in

2000 and 7.4% in 1999

2000
Notional Market
values
amounts

1999
Notional Market
values
amounts

the purchaser the right to sell Baxter common stock to the

company at contractually speciﬁed prices. The call options give

the company the right to purchase Baxter common stock at

contractually speciﬁed prices. The agreements were executed

$ 100

$ –

$ 300

with independent third parties, and the cost of the call options

Average receive rate 6.3% in

2000 and 5.8% in 1999

Foreign exchange contracts
Forwards and options used to

hedge ﬁrm commitments

and anticipated sales

Japanese Yen

$ 578

$ 26

$ 483

Euro

Other currencies

439

610

(1)

was offset by the premium from the put options. The company

can, at its option, require settlement of the agreements with

shares of its common stock or, in some cases, cash, in lieu of

physical settlement. The company may, at its option, terminate

and settle these agreements at any time before maturity. In

conjunction with its stock repurchase program, the company

terminated certain of these contracts during the 2000. At

December 31, 2000, put options for approximately 1.5 million

shares of common stock and call options for approximately 1.0

million shares of common stock were outstanding. The exercise

Total

$1,086

$ 40

$1,127 $ 15

prices of the outstanding put options were $56 per share and

the exercise prices of the outstanding call options were $62

per share. The contracts mature in 2001.

Forwards and swaps used to

hedge net investments in

foreign afﬁliates

Japanese Yen

Euro

Other currencies

$ 115

$ (6)

$ 315 $(113)

650

(64)

(3)

2,650

175

–

Total

$ 833

$(73)

$2,980

$ 62

Forwards used to hedge certain

receivables and payables

(primarily Japanese Yen,

Euro and Swiss Franc)

$ 14

58 $

–

The following is a summary of the carrying amounts and

approximate fair values of the company’s ﬁnancial instruments

included in the consolidated balance sheets.

Fair values of ﬁnancial instruments

as of December 31
(in millions)

Assets

Long-term insurance

Carrying amounts
1999
2000

Approximate
fair values

2000

1999

receivables

$160

$301

$145

$248

Investments in afﬁliates

Foreign exchange hedges

195

145

312

158

Liabilities

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. No compensation

cost has been recognized for ﬁxed stock option plans and stock

purchase plans. The compensation expense recognized for

continuing operations for performance-based, restricted and

other stock plans was $23 million, $26 million and $15 million

in 2000, 1999 and 1998, 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 SFAS No. 123, “Accounting for Stock-Based

Short-term debt

576

125

576

125

Compensation,” the company’s net income and related earnings

Short-term borrowings

classiﬁed as long term1 1,313

1,314

1,313

1,311

Other long-term debt

and lease obligations2

471

1,417

487

1,326

Long-term litigation

liabilities

184

273

170

237

1. Includes interest rate hedging instruments.

2. Includes swaps used to hedge net investments in foreign afﬁliates.

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

amounts indicated below.

Pro forma net income and EPS

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

Pro forma net income

Pro forma basic EPS

2000

$ 681

$2.33

$2.29

1999

$ 746

$2.57

$2.54

1998

$262

$ .92

$ .91

The fair values of certain of the investments in afﬁliates are not

Pro forma diluted EPS

readily determinable as the investments are not traded in a market.

For these investments, fair value is assumed to approximate

Pro forma compensation expense for stock options and employee-

carrying value. With respect to the approximate fair values of

stock subscriptions was calculated using the Black-Scholes model.

the company’s unrestricted marketable investments in afﬁliates,

All outstanding options were modiﬁed as a result of the spin-off

the total net unrealized gain at December 31, 2000 consists of

of Edwards. Equitable adjustments were made to the number of

gross unrealized gains of $50 million net of gross unrealized

shares and exercise price for each option and employee stock

losses of $9 million, and the total at December 31, 1999 consists

subscription outstanding.

of gross unrealized gains of $7 million net of gross unrealized

losses of $2 million. Although the company’s litigation remains

unresolved by ﬁnal orders or settlement agreements in some

Fixed stock option plans
Stock options have been granted at various dates. All grants

cases, the estimated fair values of insurance receivables and

have a 10-year initial term and have an exercise price at least

long-term litigation liabilities were computed by discounting the

equal to 100% of market value on the date of grant. Vesting

expected cash ﬂows based on currently available information.

terms vary, with most outstanding options vesting 100% in one

The approximate fair values of other assets and liabilities are

year or 100% in three years.

based on quoted market prices, where available.

The carrying values of all other ﬁnancial instruments approximate

Stock options outstanding at December 31, 2000

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

(option shares in thousands)

and liabilities.

Accounts Payable and Accrued Liabilities

Range of
exercise

as of December 31 (in millions)

Accounts payable, principally trade

2000

$ 659

1999

$ 612

Employee compensation and withholdings

Litigation

Pension and other deferred beneﬁts

Property, payroll and other taxes

Other

238

177

822

260

183

105

605

Accounts payable and accrued liabilities

$1,990

$1,805

Options outstanding
Weighted-
average
remaining
contractual
life
(years)

prices Outstanding

$20-39

40-49

50-59

60-79

80-83

2,495

4,583

5,934

4,556

6,933

$20-83

24,501

3.5

6.2

8.1

8.2

9.8

7.8

Options exercisable

Weighted-
average
exercise
price

$29.42

45.45

53.87

–

Exercisable

2,495

4,583

247

–

7,325

$40.66

Weighted-
average
exercise
price

$29.42

45.45

54.72

64.53

82.53

$60.21

As of December 31, 1999 and 1998, there were 8,755,000 and

4,565,000 options exercisable, respectively, at weighted-average

exercise prices of $41.06 and $30.27, respectively.

Stock option activity

(option shares in thousands)

Options outstanding at January 1, 1998

Granted

Exercised

Forfeited

Options outstanding at December 31, 1998

Granted

Exercised

Forfeited

Options outstanding at December 31, 1999

Granted

Exercised

Forfeited

Equitable adjustment

Weighted-
average
exercise
price

$39.64

59.83

28.69

49.51

46.37

66.73

39.18

56.73

52.20

75.32

39.47

57.81

–

13,882

4,806

(1,728)

(587)

16,373

5,013

(1,958)

(619)

18,809

9,520

(2,853)

(1,921)

946

Options outstanding at December 31, 2000

24,501

$60.21

Included in the tables above are certain premium-priced

options. During 1998, approximately 470,000 premium-priced

stock options were granted with a weighted-average exercise

price of $73 and a weighted-average fair value of approximately

$13 per option. During 1996, approximately 2.5 million premium-

stock options were granted with an exercise price of $49 and a

weighted-average fair value of approximately $11 per option. All

of such options granted in 1998 and 1.4 million of such options

granted in 1996 are outstanding at December 31, 2000.

Pro forma compensation expense was calculated with the

following weighted-average assumptions for grants in 2000,

1999 and 1998, respectively: dividend yield of 1.25%, 1.5% and

1.5%; expected life of six years for all periods; expected volatility

of 31%, 29% and 29%; and risk-free interest rates of 6.1%, 5.4%

and 5.3%. The weighted-average fair value of options granted

during the year were $27.49, $22.59 and $18.58 in 2000, 1999

and 1998, respectively.

Employees of Edwards were required to exercise any vested

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

on March 31, 2000. All unvested options were canceled 90 days

after the date of spin-off.

Employee stock purchase plans
The company has employee stock purchase plans whereby it is

authorized, as of December 31, 2000, 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

percent of the closing market price on the date of subscription

or 85 percent of the closing market price as deﬁned by the plans.

The total subscription amount for each participant cannot exceed

25 percent of current annual pay. Under the plans, the company

sold 1,387,022 and 777,618 and 810,855 shares to employees in

2000, 1999 and 1998, respectively. Pro forma compensation

expense was estimated with the following weighted-average

assumptions for 2000, 1999 and 1998, respectively: dividend yield

of 1.4%, 1.5% and 1.5%: expected volatility of 33% for all periods,

and risk-free interest rates of 6.2%, 5.4% and 4.4%. The weighted-

average fair value of those purchase rights granted in 2000, 1999

and 1998 was $22.98, $20.09 and $15.16, respectively.

Restricted stock and performance-share plans
The long-term incentive plan includes both stock options

and restricted stock. Under the plan, grants of restricted stock

are generally made annually and are earned based on the

achievement of ﬁnancial performance targets. The restricted

stock component of the long-term incentive plan is being

eliminated effective in 2001 and, instead, a greater number of

stock options will be granted to participants in the plan with

terms and conditions similar to existing stock option plans.

The year 2000 was a transition year whereby most participants

in the plan elected to receive incremental stock options and

were no longer eligible to earn restricted stock. The number of

stock options granted pursuant to the revised plan is based on

the achievement of ﬁnancial performance objectives.

The company also has other incentive compensation plans

whereby grants of restricted stock and performance shares are

made to key employees and non-employee directors. At

December 31, 2000, approximately 84,000 shares of stock were

subject to restrictions, the majority of which lapse in 2001 and

2002. During 2000, 1999 and 1998, approximately 249,500,

542,500 and 242,700 shares, respectively, of restricted stock and

performance shares were granted at weighted-average grant-date

fair values of $65.75, $63.99 and $58.74 per share, respectively.

The majority of the restricted stock granted in 2000 was forfeited

pursuant to the long-term incentive plan transition discussed above.

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

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 $63.63.

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 at December 31, 2000 was $188 million.

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, all of which was repurchased by early

2000. In November 1999, the board of directors authorized the

repurchase of an additional $500 million over a period of several

years, of which approximately two-thirds has been repurchased

as of December 31, 2000.

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

Assets held by the trusts of the plans consist primarily of equity

one preferred stock purchase right (collectively, the Rights) for

securities. The accumulated beneﬁt obligation is in excess of

each share of common stock. These Rights replaced similar

plan assets for certain of the company’s pension plans. The

rights that expired in March 1999. The Rights may become

projected beneﬁt obligation, accumulated beneﬁt obligation,

exercisable at a speciﬁed time after (1) a person or group

and fair value of plan assets for these plans was $159 million,

acquires 15 percent or more of the company’s common stock or

$142 million and $17 million, respectively, at December 31, 2000,

(2) a tender or exchange offer for 15 percent or more of the

and $140 million, $128 million and $23 million, respectively, at

company’s common stock. Once exercisable, the holder of each

December 31, 1999.

Right is entitled to purchase, upon payment of the exercise

price, shares of the company’s common stock having a market

Net periodic beneﬁt cost

value equal to two times the exercise price of the Rights. The

Rights have a current exercise price of $275. The Rights expire

years ended December 31 (in millions)

2000

1999

1998

on March 23, 2009, unless earlier redeemed by the company

under certain circumstances at a price of $0.01 per Right.

Pension beneﬁts
Service cost

Interest cost

$41

113

$48

102

$41

(117)

Expected return on plan assets

(159)

(133)

Amortization of prior service cost

Amortization of transition obligation

–

Net periodic pension beneﬁt cost

$ –

$24

$27

Other beneﬁts
Service cost

Interest cost

Recognized actuarial gain

Net periodic other beneﬁt cost

$ 3

(7)

$10

$ 3

(7)

$ 8

$ 3

(6)

$11

The net periodic benefit cost amounts principally pertain to
continuing operations.

Assumptions used in determining beneﬁt obligations

Pension beneﬁts
1999
2000

Other beneﬁts
2000

1999

Discount rate

U.S. and Puerto Rico plans

7.75% 8.25%

International plans (average) 5.8%

5.7%

n/a

Expected return on plan assets

U.S. and Puerto Rico plans

11.0% 10.5%

International plans (average) 8.1%

6.9%

Rate of compensation increase

U.S. and Puerto Rico plans

4.5%

International plans (average) 4.0%

Annual rate of increase in the

per-capita cost

Rate decreased to

by the year ended

n/a

4.5%

4.1%

n/a

7.5%

5.5%

2003

7.5%

5.5%

2002

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

Retirement and Other Beneﬁt Programs

The company sponsors several qualiﬁed and nonqualiﬁed pension

plans for its employees. The company also sponsors certain

unfunded contributory health-care and life insurance beneﬁts

for substantially all domestic retired employees.

Reconciliation of plans’ beneﬁt obligations,
assets and funded status

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

Pension beneﬁts
1999
2000

Other beneﬁts
2000

1999

Beneﬁt obligations
Beginning of year

Service cost

Interest cost

Participant contributions

Actuarial loss (gain)

Acquisitions (divestitures), net

Curtailments and settlements

Beneﬁt payments

Currency exchange-rate

changes and other

End of year

Fair value of plan assets
Beginning of year

Actual return on plan assets

Employer contributions

Participant contributions

Acquisitions (divestitures), net

Curtailments and settlements

Beneﬁt payments

Currency exchange-rate

changes and other

Funded status
Funded status at December 31

Unrecognized

$1,344

$1,427

$ 175

$ 200

113

147

(10)

(78)

102

(148)

(7)

(76)

–

(30)

–

(3)

(11)

(5)

1,555

1,344

–

219

175

–

(76)

(11)

1,724

173

1,472

302

(8)

(11)

(78)

(14)

–

transition obligation

Unrecognized net gains

(252)

(390)

Unrecognized prior-service cost

Net amount recognized

–

(3)

(4)

–

(56)

–

(98)

–

$(275) $(273)

Prepaid beneﬁt cost

$ 143

$ 121

–

Accrued beneﬁt liability

(139)

(125)

(275)

(273)

Net amount recognized

(4)

$(275) $(273)

End of year

1,807

1,724

–

(in millions)

One percent
increase
1999

2000

One percent
decrease
1999

2000

252

380

(219)

(175)

Effect on total of service and

interest cost components

$ 3

$ 2

Effect on postretirement

beneﬁt obligation

$29

$21

$24

$18

With respect to the employees of Edwards, the company froze
beneﬁts at the date of spin-off under the U.S. deﬁned beneﬁt
pension plan and under plans that provide retirees with
health-care and life insurance beneﬁts. The pension liabilities
related to such employees’ service prior to the spin-off date
remain with Baxter. Included in net costs associated with effecting
the business distribution in 1999 was a $5 million gain (net of tax
of $4 million) relating to these beneﬁt plan curtailments.

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

Income before income tax expense by category

years ended December 31 (in millions)

U.S.

International

2000

$353

593

1999

$ 330

722

1998

$ 78

415

Income from continuing operations

before income taxes and cumulative

effect of accounting change

$946

$1,052

$493

deﬁned contribution plan. Company matching contributions

Income tax expense

relating to continuing operations were $15 million, $14 million

and $14 million in 2000, 1999 and 1998, respectively.

years ended December 31 (in millions)

2000

1999

1998

Interest and Other (Income) Expense

Interest expense, net

years ended December 31 (in millions)

2000

1999

1998

Interest expense, net

Interest costs

Interest costs capitalized

Interest expense

Interest income

Total interest expense, net

Allocated to discontinued operation

Allocated to continuing operations

$146

$165

$198

(15)

131

(39)

$ 92

$ 85

(13)

152

(35)

$117

$ 30

$ 87

(5)

193

(32)

$161

$ 37

$124

The allocation of interest to continuing and discontinued operations

was based on relative net assets of these operations.

Current

U.S.

Federal

State and local

International

Current income tax expense

Deferred

U.S.

Federal

State and local

International

$142

$ (13)

$119

189

378

(98)

(21)

(51)

156

181

152

274

(3)

(58)

(56)

Deferred income tax expense (beneﬁt)

(170)

Income tax expense

$208

$273

$218

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

Other (income) expense

years ended December 31 (in millions)

2000

1999

1998

years ended December 31 (in millions)

2000

1999

1998

Equity in losses of afﬁliates

and minority interests

Asset dispositions, net

Foreign currency

Loss on early extinguishments of debt

Other

$ 9

(57)

$ 5

(8)

–

$ 3

(23)

–

Total other (income) expense

$(20)

$11

$(18)

Included in foreign currency income in 2000 was approximately

$66 million of gains associated with the termination of cross-

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

currency swap agreements, as further discussed in Note 6.

Net deferred tax asset

$374

$389

$349

102

146

(50)

664

410

85
38

533

$131

102

162

100

(43)

710

471

160
35

666

103

164

179

(34)

761

473

188
13

674

$ 44

$ 87

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. and international jurisdictions. In the opinion of management,

the company has made adequate provisions for tax expenses

for all years subject to examination.

Income tax expense rate reconciliation

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

2000

$331

1999

$368

(147)

(134)

1998

$172

(120)

–

(16)

$208

–

(2)

(3)

(5)

Mammary implant litigation
The company, together with certain of its subsidiaries, is a

defendant in various courts in a number of lawsuits brought by

individuals, all seeking damages for injuries of various types

allegedly caused by silicone mammary implants formerly

manufactured by the Heyer-Schulte division (Heyer-Schulte) of

American Hospital Supply Corporation (AHSC). AHSC, which

was acquired by the company in 1985, divested its Heyer-Schulte

division in 1984.

$273

$218

Settlement of a class action on behalf of all women with

silicone mammary implants was approved by the U.S. District

The company has received a tax-exemption grant from Puerto

Court (U.S.D.C.) for the Northern District of Alabama in

Rico, which provides that its manufacturing operations will be

December 1995. The monetary provisions of the settlement

partially exempt from local taxes until the year 2013.

provide compensation for all present and future plaintiffs and

Appropriate taxes have been provided for these operations

claimants through a series of speciﬁc funds and a disease-

assuming repatriation of all available earnings. In addition, the

compensation program involving certain specified medical

company has other manufacturing operations outside the

conditions. In addition to the class action, there are a large

United States, which beneﬁt from reductions in local tax rates

number of individual suits currently pending against the

under tax incentives that will continue at least until 2002.

company, primarily consisting of plaintiffs who have opted out

U.S. federal income taxes, net of available foreign tax credits,

of the class action.

on unremitted earnings deemed permanently reinvested would

The mammary implant litigation includes issues related to

be approximately $424 million as of December 31, 2000.

which of Baxter’s insurers are responsible for covering each matter

Legal Proceedings, Commitments
and Contingencies

and the extent of the company’s claims for contribution against

third parties. Baxter believes that a substantial portion of its liability

and defense costs for mammary implant litigation will be covered

by insurance, subject to self-insurance retentions, exclusions,

conditions, coverage gaps, policy limits and insurer solvency.

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

Plasma-based therapies litigation
Baxter is a defendant in a number of claims and lawsuits brought

now or formerly manufactured or sold by the company or by

by individuals who have hemophilia, all seeking damages for

companies that were acquired by the company. These cases and

injuries allegedly caused by antihemophilic factor concentrates

claims raise difﬁcult and complex factual and legal issues and

VIII or IX derived from human blood plasma (factor concentrates)

are subject to many uncertainties and complexities, including,

processed by the company from the late 1970s to the mid-1980s.

but not limited to, the facts and circumstances of each particular

The typical case or claim alleges that the individual was infected

case and claim, the jurisdiction in which each suit is brought,

with the HIV virus by factor concentrates, which contained the

and differences in applicable law. Accordingly, in many cases,

HIV virus. None of these cases involves factor concentrates

the company is not able to estimate the amount of its liabilities

currently processed by the company.

with respect to such matters.

In addition, Immuno has unsettled claims for damages for

Upon resolution of any pending legal matters, Baxter may

injuries allegedly caused by its plasma-based therapies. A portion

incur charges in excess of presently established reserves. While

of the liability and defense costs related to these claims will be

such a future charge could have a material adverse impact on

covered by insurance, subject to exclusions, conditions,

the company’s net income and net cash ﬂows in the period in which

policy limits and other factors. Pursuant to the stock purchase

it is recorded or paid, management believes that no such charge

agreement between the company and Immuno, as revised in

would have a material adverse effect on Baxter’s consolidated

April 1999 for consideration by the company of a 29 million

ﬁnancial position.

Swiss Franc payment to Immuno as additional purchase price,

Following is a summary of certain legal matters pending against

approximately 26 million Swiss Francs of the purchase price

the company. For a more extensive description of such matters

is being withheld to cover these contingent liabilities.

and other lawsuits, claims and proceedings against the company,

Baxter is also a defendant in a number of claims and lawsuits,

see Baxter’s Form 10-K for the year ended December 31, 2000.

including one certiﬁed class action in the U.S.D.C. for the Central

District of California, brought by individuals who infused the

company’s Gammagard® IVIG (intravenous immunoglobulin), all

of whom are seeking damages for Hepatitis C infections allegedly

caused by infusing Gammagard® IVIG. In September 2000,

at the option of the holders into common stock of Nexell at $11

the U.S. D.C. for the Central District of California approved a

per share at any time until November 2006. The put rights provide

settlement of the class action that would provide ﬁnancial

the holders of the preferred stock with the ability to cause

compensation for U.S. individuals who used Gammagard® IVIG

Baxter to purchase the preferred stock from November 2002

between January 1993 and February 1994.

until November 2004. The purchase price to be paid by Baxter

Baxter believes that a substantial portion of the liability and

would reﬂect a per annum compounded return to the holders

defense costs related to its plasma-based therapies litigation

of the preferred stock of 5.91%.

will be covered by insurance, subject to self-insurance retentions,

In connection with the spin-off of its cardiovascular business,

exclusions, conditions, coverage gaps, policy limits and insurer

Baxter obtained a ruling from the Internal Revenue Service to

solvency.

Net litigation charges
Baxter began accruing for its estimated liability resulting from

the effect that the distribution should qualify as a tax-free

spin-off in the United States. In many countries throughout the

world, Baxter has not sought similar rulings from the local tax

authorities and has taken the position that the spin-off was a

the settlement of the mammary implant-related class action and

tax-free event to Baxter. In the event that one or more countries’

to litigate or settle cases and claims involving opt-outs in 1993.

taxing authorities successfully challenge this position, Baxter

In 1998, the company accrued an additional $250 million for its

would be liable for any resulting liability. Baxter believes that it

estimated liability resulting from the class action settlement and

has established adequate reserves to cover the expected tax

remaining opt-out cases and claims, and recorded a receivable

liabilities. There can be no assurance, however, that Baxter will

for related estimated insurance recoveries of $121 million,

not incur losses in excess of such reserves.

resulting in an additional net charge of $129 million.

Baxter began accruing for its estimated worldwide liability for

litigation and settlement costs involving plasma-based therapies in

Segment Information

1993. The company revised its estimate of liabilities and insurance

recoveries in 1998, and accrued an additional $180 million for its

Baxter operates in three segments, each of which are strategic

estimated liability for plasma-based therapies litigation and other

businesses that are managed separately because each business

litigation and recorded a receivable for related estimated insurance

develops, manufactures and sells distinct products and

recoveries of $131 million, for a net charge of $49 million.

services. The segments are as follows: Medication Delivery,

In 2000, the company recorded $29 million of income relating

medication delivery products and services, including intravenous

to its mammary implant and plasma-based therapies litigation.

infusion pumps and solutions, anesthesia-delivery devices and

The income was principally a result of favorable adjustments to

pharmaceutical agents; BioScience, biopharmaceutical and

the mammary implant insurance receivables due to settlements

blood-collection, separation and storage products and technologies;

negotiated with certain insurance companies during 2000.

and Renal, products and services to treat end-stage kidney

Other

disease. As discussed in Note 2, the company spun off Edwards

on March 31, 2000. Financial information for Edwards, which is

Allegiance Corporation (Allegiance) was spun off from the company

substantially the same as the former CardioVascular segment, is

in a tax-free distribution to shareholders on September 30, 1996.

reﬂected in the consolidated ﬁnancial statements as a discontinued

As of September 30, 1996, Allegiance assumed the defense of

operation.

litigation involving claims related to its businesses, including

Management utilizes more than one measurement and multiple

certain claims of alleged personal injuries as a result of exposure

views of data to measure segment performance and to allocate

to natural rubber latex gloves. Although Allegiance has not been

resources to the segments. However, the dominant measurements

named in all of this litigation, it will be defending and indemnifying

are consistent with the company’s consolidated financial

Baxter pursuant to certain contractual obligations for all expenses

statements and, accordingly, are reported on the same basis

and potential liabilities associated with claims pertaining to

herein. Management evaluates the performance of its segments

latex gloves.

and allocates resources to them primarily based on pretax

In addition to the cases discussed above, Baxter is a defendant

income along with cash ﬂows and overall economic returns.

in a number of other claims, investigations and lawsuits, including

Intersegment sales are generally accounted for at amounts

certain environmental proceedings. Based on the advice of

comparable to sales to unafﬁliated customers, and are eliminated

counsel, management does not believe that, individually or in

in consolidation. The accounting policies of the segments

the aggregate, these other claims, investigations and lawsuits

are substantially the same as those described in the summary of

will have a material adverse effect on the company’s results of

signiﬁcant accounting policies, as discussed in Note 1.

operations, cash ﬂows or consolidated ﬁnancial position.

Certain items are maintained at the company’s corporate

In November 1999, the company and Nexell Therapeutics Inc.

headquarters (Corporate) and are not allocated to the segments.

(Nexell) entered into an agreement whereby Baxter agreed to

They primarily include most of the company’s debt and cash

issue put rights in connection with a $63 million private placement

and equivalents and related net interest expense, corporate

by Nexell of preferred stock. This preferred stock is convertible

headquarters costs, certain non-strategic investments and

nonrecurring gains and losses, deferred income taxes, certain

Assets reconciliation

foreign currency ﬂuctuations, hedging activities, and certain

as of December 31 (in millions)

litigation liabilities and related insurance receivables. With

Total segment assets

respect to depreciation and amortization, and expenditures for

Unallocated assets

2000

1999

1998

$6,979

$6,421

$6,265

long-lived assets, the difference between the segment

totals and the consolidated totals principally related to assets

maintained at Corporate.

Segment information

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

Medication
Delivery

BioScience

Renal

Other

Total

$2,719

$2,353

$1,824

$ –

$6,896

147

426

125

533

310

(323)

405

946

2,453

2,935

1,591

1,754

8,733

2000
Net sales

Depreciation

and amortization

Pretax income

Assets

Expenditures for

1999

Net sales

Depreciation

and amortization

Pretax income

Assets

Expenditures for

$2,524

$2,176

$1,680

$ –

$6,380

145

424

114

435

318

(125)

2,447

2,632

1,342

3,223

372

1,052

9,644

long-lived assets

175

235

125

631

Cash and equivalents

Deferred income taxes

Insurance receivables

Net assets of discontinued operation
Other Corporate assets

579

308

277

–
590

606

417

1,231
552

709

583

639

1,275
402

Consolidated total assets

$8,733

$9,644

$9,873

Geographic information
Net sales are based on product shipment destination and long-

lived assets are based on physical location.

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

Net sales
United States

Japan

Consolidated net sales

Long-lived assets
United States

Austria

Other countries

2000

1999

1998

$3,194

$2,921

$2,609

485

3,217

482

2,977

405

2,692

$6,896

$6,380

$5,706

$1,543

$1,361

$1,250

294

970

344

945

326

869

Consolidated long-lived assets

$2,807

$2,650

$2,445

long-lived assets

185

248

126

648

Other countries

1998

Net sales

Depreciation

and amortization

Pretax income

Assets

Expenditures for

$2,314

$1,862

$1,530

$ –

$5,706

Subsequent Event

137

392

101

404

223

(526)

344

493

On February 27, 2001, Baxter’s board of directors approved a

2 for 1 stock split of the company’s common shares. This approval

2,257

2,655

1,353

3,608

9,873

is subject to shareholder approval of the authorization of additional

shares at the company’s annual meeting to be held on May 1, 2001.

long-lived assets

146

212

129

556

Baxter’s historical earnings per share for the years ended

Pretax income reconciliation

for the years ended
December 31 (in millions)

December 31, on a pro forma basis assuming the stock split had

occurred as of January 1, 1998, would be as follows (unaudited).

2000

1999

1998

2000

1999

1998

Total pretax income from segments

$1,269

$1,177

$1,019

Pro forma earnings per basic

Unallocated amounts:

In-process research and

development expense and

acquisition-related costs

(286)

Charge for exit and other

reorganization costs

Net litigation income (costs)

Interest expense, net

Certain currency exchange

rate ﬂuctuations

Other Corporate items

Consolidated income from continuing

operations before income taxes

and cumulative effect of
accounting change

–

(85)

–

(87)

(63)

common share

Continuing operations

Discontinued operation

(116)

Cumulative effect of

(122)

(178)

(124)

(13)

accounting change

Net income

Pro forma earnings per diluted

common share

Continuing operations

Discontinued operation

Cumulative effect of

accounting change

Net income

$1.26

0.01

–

$1.27

$1.23

0.01

–

$1.24

$1.35

0.08

$0.49

0.07

(0.05)

$1.38

–

$0.56

$1.32

0.08

$0.48

0.07

(0.05)

$1.35

–

$0.55

$ 946

$1,052

$ 493

Quarterly Financial Results and Market for the Company’s Stock (Unaudited)

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

First
quarter

Second
quarter

Third
quarter

Fourth
quarter

Total
year

2000
Net sales

Gross proﬁt
Income from continuing operations1
Net income1
Per common share

Income from continuing operations1

Basic

Diluted
Net income1
Basic

Diluted

Dividends declared

Market price

High

Low

1999

Net sales

Gross proﬁt

Income from continuing operations before cumulative

effect of accounting change

Net income2
Per common share

Income from continuing operations before cumulative

effect of accounting change

Basic

Diluted
Net income2
Basic

Diluted

Dividends declared

Market price

High

Low

$1,583

$1,694

$1,687

$1,932

687

191

.66

.65

.66

.65

–

67.56

51.81

$1,462

625

162

151

.56

.55

.53

.52

747

.15

.16

–

72.00

56.44

$1,560

690

189

207

.65

.64

.71

.70

762

231

.78

.77

.78

.77

–

84.75

69.50

$1,589

713

197

210

.67

.72

.71

867

270

.92

.90

.92

.90

1.164

88.62

75.75

231

229

.80

.78

.79

.77

.2910

75.94

62.56

68.63

60.38

70.75

58.69

68.75

59.31

$6,896

3,063

738

740

2.52

2.47

2.53

2.48

1.164

88.62

51.81

779

797

2.69

2.64

2.75

2.70

1.164

75.94

58.69

$1,769

784

$6,380

2,812

1. The second quarter of 2000 includes a $286 million charge for in-process research and development and acquisition-related costs.

The fourth quarter of 2000 includes income of $29 million relating to litigation.

2. The ﬁrst quarter of 1999 includes a $27 million charge for the cumulative effect of an accounting change. The fourth quarter of 1999

includes a $19 million in net costs associated with effecting the distribution of the cardiovascular business.

Baxter common stock is listed on the New York, Chicago and Paciﬁc Stock Exchanges, on the London Stock Exchange and on the

Swiss stock exchanges of Zurich, Basel and Geneva. The New York Stock Exchange is the principal market on which the company’s

common stock is traded. At January 31, 2001, there were approximately 58,800 holders of record of the company’s common stock.

Directors and Executive Ofﬁcers

Board of Directors

Executive Ofﬁcers

Baxter International Inc.

Baxter World Trade Corporation

Baxter Healthcare Corporation

Walter E. Boomer
President and
Chief Executive Ofﬁcer
Rogers Corporation

Pei-yuan Chia
Retired Vice Chairman
Citicorp and Citibank, N.A.

John W. Colloton
Director Emeritus
University of Iowa
Hospitals & Clinics

Susan Crown
Vice President
Henry Crown and Company

Brian D. Finn
Partner
Clayton, Dubilier & Rice, Inc.

Frank R. Frame
Retired Deputy Chairman
The Hongkong and Shanghai
Banking Corporation Limited

Eric A. Beard
Corporate Vice President
and President – Europe, Africa
and Middle East

Carlos del Salto
Senior Vice President
Intercontinental / Asia
and President – Latin America

Thomas H. Glanzmann 1
Corporate Vice President
and President–Hyland Immuno

Brian P. Anderson 1,2
Senior Vice President
and Chief Financial Ofﬁcer

Timothy B. Anderson 1,2
Group Vice President
Corporate Strategy and
Development

Neville J. Jeharajah
Corporate Vice President
Investor Relations and
Financial Planning

Harry M. Jansen Kraemer, Jr. 1,2
Chairman and
Chief Executive Ofﬁcer

Karen J. May
Corporate Vice President
Human Resources

Steven J. Meyer 1,2
Treasurer

David F. Drohan
Corporate Vice President and
President – Medication Delivery

J. Michael Gatling
Corporate Vice President
Global Manufacturing
Operations

Alan L. Heller 2
Group Vice President
and President – Global Renal

David C. McKee 2
Corporate Vice President
and Deputy General Counsel

Gregory P. Young
Corporate Vice President
and President – Fenwal

1. Also an executive ofﬁcer of

Baxter Healthcare Corporation

2. Also an executive ofﬁcer of

Baxter World Trade Corporation

As of February 28, 2001

Martha R. Ingram
Chairman of the Board
Ingram Industries Inc.

J. Robert Hurley
Corporate Vice President
Integration Management

John L. Quick
Corporate Vice President
Quality/Regulatory

Jan Stern Reed 1,2
Corporate Secretary and
Associate General Counsel

Thomas J. Sabatino, Jr. 1,2
Corporate Vice President
and General Counsel

Michael J. Tucker
Senior Vice President
Human Resources and
Communications

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

Arnold J. Levine, Ph.D.
President
The Rockefeller University

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.