Baxter International Annual Report 2002

FY2002 Annual Report · Baxter International

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living proof

Baxter International Inc.
Annual Report 2002

Baxter’s vision is to be the global leader in
providing critical therapies to people with life-
threatening conditions. In pursuit of this goal,
Baxter is continuing a rich tradition of innovation,

having pioneered products and therapies that

have saved and enhanced the lives of millions. The

patients featured in this report are living proof of

how Baxter is making a meaningful difference in

patients’ lives. These efforts also are accelerating
Baxter’s growth, positioning the company for
continued success now and into the future.

Dear Fellow Shareholders:

The theme of this year’s annual report – living proof – reﬂects

how Baxter is making an important difference in the lives
of people with complex medical conditions such as hemo-

philia, kidney disease and cancer, while also contributing

to better public health with new vaccines and technologies

that improve the safety of the blood supply. The patients

proﬁled in this report are examples of the millions of people

around the world who depend on Baxter products and

services to lead productive and satisfying lives. Our entire

Baxter team is very privileged to have a positive impact on

the lives of so many people. It is the classic philosophy of

our Chairman Emeritus William B. Graham, who stated

the importance of “doing well by doing good.” I believe
this summarizes the essence of what we do. Our 55,000

team members in more than 100 countries are dedicated

to advancing the best in health care, working together to

develop medical innovations that help health-care profes-

sionals enhance the effectiveness and delivery of therapies

to patients worldwide.

02/03 Baxter International Inc. 2002 Annual Report

The year 2002 was a very challenging year for Baxter. While our compounded annual
return to shareholders increased 25 percent from 1993 to 2001, our stock price declined
47 percent in 2002. In comparison, the Dow Jones Industrial Average fell 17 percent, the
S&P 500 declined 23 percent and the S&P 500 Health Care Index declined 20 percent.

A number of factors impacted Baxter’s performance in 2002. Like many companies across
all industries, we were affected by volatility in the stock market. We also experienced
a more competitive environment in the United States for our plasma-derived thera-
peutic products and a slower growth rate in our Renal business. As a result, during 2002
we lowered our sales-growth expectation from the low teens to the low double digits.

I want to assure all shareholders that we take our responsibility of generating strong
returns for our shareholders very seriously. Given our 2002 performance, our corporate
ofﬁcers did not receive salary increases for 2003, and the number of stock options
granted to them declined by approximately 50 percent. We are taking several actions to
improve our performance, such as increasing our marketing efforts to further showcase
the differentiation of our products, increasing our focus on operational excellence
and quality in everything we do, and continuing to enhance the level of talent in
the organization.

The year 2002 also brought with it a number of important successes for Baxter. Our
financial accomplishments included sales growth from continuing operations of 10 per-
cent; growth in earnings per diluted share from continuing operations (excluding charges)
of 13 percent; and cash ﬂows from operations of $1.25 billion (or operational cash ﬂow
after capital expenditures of $468 million). In addition to our ﬁnancial performance,
we introduced several new products and services that enhanced the effectiveness and
delivery of therapies to patients worldwide. These successes remind us of why we are proud
to be Baxter shareholders. Equally important, the progress we made in 2002 positions
us well for 2003 and beyond. For example:

• We met our commitment to our partner, Acambis PLC, for the production of the
smallpox vaccine for the U.S. government to protect citizens in the event of a bioter-
rorist threat.

• We received approval in Europe for INTERCEPT Platelets — an innovative tech-
nology that makes it possible to inactivate known and potentially unknown viruses,
bacteria and parasites that may be present in collected blood components — and
began the regulatory submission process for INTERCEPT Platelets in the United
States. This represents a revolutionary advance for further ensuring the safety of the
blood supply.

• We received approval in the United States for our ALYX automated blood-component
collection system, which enables blood centers to collect two units of red blood cells
from a donor versus one unit using current manual blood-collection methods. This
technology will make it possible to increase the supply of critically needed therapeutic
blood components despite a lower number of blood donors.

• We launched our NeisVac-C vaccine for the prevention of meningitis C in a number
of European countries, as well as Argentina, Australia and Brazil, ensuring that children
grow up safe from the effects of this potentially fatal disease.

• We ﬁled for approval in the United States, Canada and Europe for ADVATE, our
next-generation recombinant Factor VIII for the treatment of hemophilia, which we
expect to introduce in 2003. It will be the most advanced clotting factor on the market,
the ﬁrst and only product to be produced without the addition of human or animal
protein in the cell-culture process, puriﬁcation or ﬁnal therapeutic.

• We continued to expand our drug delivery platforms, adding new technologies for
the formulation and packaging of controlled-release proteins and for drugs that
are not soluble in their traditional formulation, as well as lyophilized compounds.
In addition, we launched new technologies, including advanced bar-coding and a
computerized, wireless patient information and medication management system, to
further enhance the safety of the medication delivery process. We also launched our
first new oncology product, an oral form of our leading chemotherapy drug Mesnex.

• We received approval from the U.S. Food and Drug Administration (FDA) for
Extraneal (icodextrin) peritoneal dialysis (PD) solution, which offers the potential
for increased removal of ﬂuid from the bloodstream during dialysis. This product is
already available in Europe, and we expect to launch Extraneal in Japan later in
2003. We also introduced a new pediatric version of our HomeChoice automated
PD system for patients who require low ﬂuid volumes, and a new instrument called
Accura that provides continuous renal replacement therapy (CRRT) for patients
with acute renal failure.

• We completed or announced a number of acquisitions that build on our existing
core competencies and capabilities. These include ESI Lederle, a leading manufacturer
and distributor of injectable drugs; Epic Therapeutics, a developer of controlled-
release protein therapeutics for injection or inhalation; and certain assets from Alpha
Therapeutic Corporation, including the company’s plasma-derived Alpha-1 Antitrypsin
product, Aralast, which received FDA approval in January 2003 for the treatment
of hereditary emphysema.

We are very focused on driving innovation through product development. The product
pipeline that appears on Page 21 of this Annual Report summarizes the range of med-
ical products we are pursuing and their relative stages of development. Since appointing
a chief scientiﬁc ofﬁcer two years ago, we have focused more strategically on research and
development in terms of prioritization, resource allocation and return on investment.
The result is a strong balance of both short- and long-term opportunities, including

04/05 Baxter International Inc. 2002 Annual Report

both enhancements of current products and new product opportunities. In 2002, we
invested $501 million in research and development, an increase of 18 percent over the
prior year, and we will continue to increase our spending in the years ahead. I expect
that investment in research and development and our relentless pursuit of new and
better technologies in various ﬁelds of medicine will result in accelerated sales growth
and increased shareholder value.

While ﬁnancial returns are important, how we conduct our business is also critical. As
I mentioned earlier, we are fortunate to be in the health-care industry, where “doing
good” can result in “doing well.” Like everything else in life, it is all about balance. At
Baxter, we achieve balance by living our Shared Values of respect, responsiveness and
results each and every day. We also achieve this balance by acting transparently, engaging
in dialogue with all of our stakeholders, communicating openly with each other, and
taking a proactive approach toward corporate governance.

Baxter was one of the ﬁrst companies to adopt formal corporate governance guidelines
almost 10 years ago to address the role of the company’s board of directors in areas such
as ﬁduciary oversight, board-member qualiﬁcations, director independence, succession
planning, and creating an open environment that encourages the active engagement
of board members. Since then, we have continually reﬁned, improved and strength-
ened these policies, developed an equally strong business practices infrastructure, and
most notably, built a very strong “values-based” culture throughout Baxter worldwide.

This values-based culture encourages constant learning, challenging and communica-
tion. It is a culture that promotes integrity in a world in which business ethics are not
always taken seriously. It is also a culture in which “doing the right thing” is a way of
life and the standard to which we aspire. I am proud of the example that Baxter sets.
Our team members around the world demonstrate our culture externally through vol-
unteerism, community relations, environmental performance and other activities
related to corporate sustainability and social responsibility.

With our strong cultural foundation; our broad capabilities in medical devices and
supplies, pharmaceuticals and biotechnology; our leadership positions in several key
areas of health care; our global presence; and our balanced focus on both the short
term and long term, I believe Baxter is well-positioned to achieve the following three
ﬁnancial goals in 2003:

• Sales growth in the 10-12 percent range;

• Earnings per diluted share of $2.22 – $2.29; that is, growth of 11 – 15 percent;

• $1.3 – $1.5 billion in cash ﬂows from operations.

I would like to close this letter by personally thanking each and every shareholder
for your support. I want you to know that our vision — to be the global leader in
providing critical therapies for people with life-threatening conditions — inspires
everyone on the Baxter team to do their best because of the impact we have on
patients’ lives. You have a dedicated, talented and ethical team working on your behalf
to ensure that Baxter continues to be a global health-care leader. With an aging and
growing worldwide population creating a greater-than-ever need for quality health
care, and our unique capabilities and approach to doing business, Baxter is well-posi-
tioned for future success. We will continue to focus on bringing together the best of
science and technology to introduce new medical devices and supplies, pharmaceuticals
and biotechnology products to improve the lives of patients. The pages that follow are
living proof of how we are making it happen today, and how we will continue to make
it happen in the years ahead.

Best regards,

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

$8.1

$7.4

$6.7

02 $1,236

01 $1,074

$931

02 $1,251

01 $1,181

00 $1,259

02 $28.00

01 $53.63

00 $44.16

9yrs

5yrs

3yrs

14%

-1%

1yr -47%

00 01 02

9 5 3 1
(in years)

NET SALES 1

($ in billions)

NET INCOME 1, 2

($ in millions)

CASH FLOWS
FROM OPERATIONS 1

($ in millions)

STOCK PRICE 3

(as of 12/31/02)

COMPOUND
ANNUAL RETURN 3
(through 12/31/02)

1 Excludes discontinued operations.
2 Net income from continuing operations excludes the cumulative effect of an accounting change, in-process research and development, a charge relating to the

A, AF and AX series dialyzers and other special charges.

3 Stock price is adjusted for the company’s dividends and stock split that occurred in May 2001.

This annual report contains forward-looking statements that may involve risks and uncertainties. Please see page 25 for more details.

06/07 Baxter International Inc. 2002 Annual Report

vision

hope ﬂetcher > age 2 > infant with end-stage renal disease

A VISION
OF HOPE

Hope Fletcher is one of more than a million

people with end-stage renal disease (ESRD)

speciﬁcally to deliver a lower volume of ﬂuid

to patients such as small adults or children

during dialysis. The system also features

advanced software that enables the physi-

cian to remotely monitor and analyze the

patient’s data and make any necessary pre-

scription adjustments. It is the only APD

system approved for both pediatric and

adult use.

worldwide who must undergo dialysis to

The HomeChoice Pediatric APD system was

cleanse their blood of toxins, waste and excess

welcomed by Beth Fletcher, Hope’s mom.

water normally removed by healthy kidneys.

“Before we heard about this new technology,

Born prematurely, Hope weighed less than

Hope’s treatment involved a much larger

five pounds at birth, making hemodialysis

machine that was not nearly as conducive to

(HD) difﬁcult to perform because of her small

home use,” Beth says. “It was very impor-

size. Her physicians prescribed peritoneal

tant to us that Hope be treated at home. The

dialysis (PD), which uses the body’s own

HomeChoice system is easy to use, and

peritoneal membrane to filter wastes from

because it is small and discreet, it doesn’t

the blood rather than pumping the blood

constantly remind us of Hope’s condition.”

outside the body to be cleansed through an

external ﬁlter.

Baxter is a pioneer and global leader in prod-

ucts and services for PD and continues to

PD enables patients to administer daily dial-

pursue advancements to improve the therapy

ysis therapy at home rather than going to a

for all kidney-disease patients.

hospital or clinic several times a week, pro-

viding signiﬁcant lifestyle beneﬁts. Automated

peritoneal dialysis (APD) systems, like Baxter’s

compact and portable HomeChoice system,

cleanse patients’ blood overnight while they

sleep, offering even more convenience and

fewer interruptions in daily routines.

“I’ve always wanted us to feel like a normal

family,” says Beth, who was able to take Hope

along on the Fletchers’ first family vacation

last summer thanks to the portable Home-

Choice Pediatric system. “We never dreamt

of doing that before this technology came

along. Baxter has given us hope – in more

Last year, Baxter introduced the HomeChoice

ways than one – despite our daughter’s life-

Pediatric APD system, which is designed

threatening condition.”

10/11 Baxter International Inc. 2002 Annual Report

pursuit

natalina melchioni > age 40 > short-bowel syndrome

PURSUING
LIFE TO THE
FULLEST

Nine years ago, a circulatory disorder in her

intestine caused Natalina Melchioni to have

most of her intestine removed, resulting in

short-bowel syndrome. People with this condi-

tion are unable to receive all of the nutrients

they need from the food they eat. Many, like

Natalina, must receive the majority of their

nutrition intravenously – a therapy known as

compounding facility in Sesto Fiorentino,

Italy, and delivers them to her home. The

solutions contain just the right mix of nutrients

prescribed by her doctor. Natalina adminis-

ters the solutions herself using an automated,

overnight infusion device. Baxter nurses

train and support TPN home patients in

Italy and elsewhere to ensure the quality of

their therapy.

There was a time when people with Natalina’s

condition spent their entire lives in a hospital

to receive such therapy. Natalina so appre-

ciates being able to receive her therapy at

home that in 1996, she co-founded the

Associazione Italiana Nutrizione Artificiale

Domiciliare (Italian Association of Home-

based Artificial Nutrition), based in San

Giovanni Baptista Hospital in Turin, Italy.

total parenteral nutrition (TPN).

“The aim of the association is to help other

“Baxter’s TPN products and services provide

essential nutrition to keep me alive and enable

patients expand their knowledge and make

them aware of this at-home therapy,” she says.

me to lead an active and productive life,”

In the meantime, Natalina is pursuing life to

says the 40-year-old Natalina, who operates

the fullest – swimming, dancing, even enjoying

her own clothing boutique in her native Italy,

Italy’s bountiful cuisine.

near Milan, where she lives with her husband.

“I don’t receive all my nutrition through TPN,

Because the different nutrients to be admin-

just about 80 percent,” she says. “I usually

istered parenterally – proteins, carbohydrates,

reserve the weekends to go out to my

lipids (fats) and other elements – cannot be

favorite restaurants. I’m able to eat every-

premixed at the factory, Baxter custom-

thing and I enjoy it very much. I don’t know

mixes Natalina’s TPN solutions at its TPN

what I would do without this therapy.”

14/15 Baxter International Inc. 2002 Annual Report

growth

arthur scott & alfred coleman > age 15 and 8 > brothers living with hemophilia A

GROWING
CLOSER

You wouldn’t know it watching them play

basketball at the Los Angeles YMCA or per-

forming rap music at the Kodak Theater in

front of celebrities like Paul Newman and

Julia Roberts, but Arthur and Alfred have

hemophilia. Today, Arthur, 15, and Alfred, 8,

lead active lives thanks to Baxter’s Recom-

binate Factor VIII concentrate.

Factor VIII is the clotting factor missing from

the blood of people with hemophilia A, the

most common form of hemophilia. Baxter is

the world’s leading provider of clotting factor

for hemophilia, which afflicts one in every

10,000 males born around the world.

about were people with hemophilia dying of

AIDS. I felt like all my hopes and dreams for

my son were gone.”

At first, Karen rushed Arthur to the hospital

every time he had a bleed to receive an infu-

sion of Factor VIII. “It got to where he wouldn’t

tell me when he had a bleed,” she says.

“Today he has arthritis in his arm because

he would endure the pain for so long.”

When Arthur was seven, Karen learned about

home infusion and began infusing Arthur

herself. Today, Arthur self-infuses several

times a week to prevent bleeds and Karen

infuses Alfred.

When Baxter introduced Recombinate in

1992, it was the ﬁrst recombinant Factor VIII

on the market, i.e., the first Factor VIII pro-

duced genetically in cell culture rather than

derived from plasma. Baxter is now growing

closer to introducing ADVATE, its next-gen-

eration recombinant Factor VIII, which will be

the ﬁrst to be prepared without the addition of

any human or animal protein in the cell-culture

Karen Coleman, the boys’ mother, knew

process, puriﬁcation or ﬁnal formulation. The

nothing about hemophilia when Arthur was

company is anticipating regulatory approval

born. Then one day Arthur hit his head riding

in 2003.

a tricycle and cut his eye. “I put a bandage

on it and put him to bed,” Karen says. “He

woke up that night in a puddle of blood.”

“I never thought I’d be able to see my sons

grow,” Karen says. “I’ve since learned that

they can be normal, active boys as long as they

Karen says she “felt like my life ended”

have their clotting factor. Thanks to Baxter,

when Arthur was diagnosed with hemophilia.

they’re really able to enjoy their lives, and

“This was at a time when all you heard

have grown very close in the process.”

18/19 Baxter International Inc. 2002 Annual Report

future

Technology Review

With more than 70 years of innovation and leadership in health care, Baxter
has pioneered many medical breakthroughs we take for granted today —
intravenous infusion, kidney dialysis and modern hemophilia therapy, to name
a few. Baxter continues to introduce new products and therapies to help
people with kidney disease, cancer, hemophilia and other complex medical
conditions lead productive and fulﬁlling lives. The future will bring new recom-
binant proteins to treat a range of diseases, new vaccines and cancer drugs,
and advanced medication delivery, dialysis and blood-collection and trans-
fusion systems that will further improve the practice and safety of medicine.
A growing and aging population is combining with other factors to fuel an
ever-increasing need for quality health care around the world. With a unique
depth of expertise in medical devices and supplies, pharmaceuticals and
biotechnology, along with an unmatched global presence, Baxter is poised to
meet this need — today and into the future.

Development Pipeline

D E S C R I P T I O N*

P R E C L I N I C A L

P H A S E I

P H A S E I I

P H A S E I I I

P R E PA R I N G
R E G U L AT O R Y
F I L E

U N D E R
R E G U L AT O R Y
R E V I E W

C L E A R A N C E /
A P P R O V E D

Accura CRRT Hemodialysis Machine 1

ALYX RBC Collection System (US) 1

Milrinone

Propofol (Europe)

Mesnex Tablets (US)

Extraneal PD Solution (US)

INTERCEPT Platelets (Europe)

Inﬂuenza Vaccine (Netherlands)

Tick-Borne Encephalitis Vaccine (Germany)

Adenosine

Arena HD Machine 1

ADVATE (rAHF-PFM)

Extraneal PD Solution (Japan)

Gammabulin Solvent Detergent (Europe)

Inﬂuenza Vaccine (Europe)

Mening C Vaccine (Latin America & Asia) 2

Partobulin Solvent Detergent

Physioneal 35 PD Solution (Europe)

Next-Generation PCA Syringe Pump 1

INTERCEPT Platelets (US)

Syntra Plus Dialyzer 1

BNP7787–Chemo Agent (Europe)

Immunate Solvent Detergent (Europe)

INTERCEPT Plasma

INTERCEPT Red Blood Cells

Next-Generation IVIG

BPI/NEUPREX

Epoietin Omega (W. Europe & Japan)

Alpha-1 Antitrypsin (recombinant AAT)

D63153 (Hormonal Drug–Prostate Cancer)

Recombinant Hemoglobin Therapeutic

Ceprotin (US)

Cytostatic Chemotherapeutic Drugs

Flex Albumin

Group A Strep Vaccine

Hemoﬁl M Double Viral Inactivated

Inﬂuenza Vaccine (US)

Mening CYW Vaccine

Motilin (Hormonal Therapy)

Next-Generation FEIBA

BioScience

Renal

Medication Delivery

Notes:
Regulatory Clinical Status as of December 31, 2002.

* This pipeline excludes vaccine partnerships with Acambis and other programs under development. Products described

are in various stages of clinical development in multiple geographies unless speciﬁcally indicated.

1 Indicates status of 510(k) clearance in the United States.

2 Received licenses in several countries including: Argentina, Australia, Brazil, Canada, India, Netherlands,

the United Kingdom and several other countries in Europe.

Business Proﬁle

BioScience
2002 Sales: $3.1 billion

Medication Delivery
2002 Sales: $3.3 billion

Renal
2002 Sales: $1.7 billion

22/23 Baxter International Inc. 2002 Annual Report

BUSINESS DESCRIPTION

Baxter is a leading producer of plasma-based and recombinant
clotting factor for hemophilia, and other biopharmaceuticals
to treat immune deﬁciencies and other blood-related disorders.
The company also develops and manufactures vaccines for
the prevention of a variety of diseases, biosurgery products
used in hemostasis and wound-sealing in surgery, and man-
ual and automated blood-collection, processing and storage
systems for transfusion therapies. Baxter’s longstanding lead-
ership in this business is based on a number of competitive
advantages that distinguish the company from its competi-
tors. These include continued innovation of differentiated
products and services; cutting-edge technology platforms;
global presence and infrastructure; strong customer relation-
ships; reliability and consistency of supply; and an excellent
track record in the safety and efﬁcacy of its products.

Baxter develops and manufactures a wide range of products
focused on delivering critical ﬂuids and drugs to patients.
These include basic intravenous (IV) solutions as well as
higher-margin specialty products made up of pharmaceuticals
and delivery devices. The pharmaceutical portfolio includes
premixed drugs, critical care generics, anesthetic agents, nutri-
tion and oncology products. These products work in com-
bination with the delivery devices, such as drug-reconstitution
systems and infusion pumps, to provide ﬂuid replenishment,
general anesthesia, nutrition therapy, pain management,
antibiotic therapy, chemotherapy and other therapies. Baxter
also is a pioneer in forming alliances with traditional phar-
maceutical companies to formulate and package their drugs
for delivery, providing more than 50 different compounds in
ready-to-use or ready-to-mix formulations.

Baxter is a leading provider of dialysis-related products and
services designed to assist patients with kidney disease
throughout the continuum of their care. The company is the
world’s leading manufacturer of products for peritoneal
dialysis (PD), a self-administered home-based therapy that
Baxter helped pioneer in the early 1970s. PD offers a number
of lifestyle advantages over the more conventional hemodial-
ysis (HD) therapy, which generally requires patients to visit
a hospital or clinic several times each week to receive their
therapy. Baxter’s PD products include solutions, container
systems and automated cyclers. Baxter also has a compre-
hensive portfolio of HD products, including HD machines
and dialyzers, and instruments for acute kidney care. Renal
is Baxter’s most global business, with more than 70 percent
of its sales outside the United States.

GROWTH STRATEGY

PRODUCT DEVELOPMENT

This business is focused on increasing production to meet
current and future demand for its plasma-based and recom-
binant therapeutic products and vaccines, and on continuing
to enhance production and safety in the blood supply through
automation, leukoreduction and pathogen inactivation. The
business also is focused on entering new markets for its ther-
apeutic products outside the United States and Europe, where
patients have been underserved, and on pursuing acquisitions
and alliances to bring new technologies to market. In 2002,
Baxter announced an agreement to acquire Alpha Therapeutic
Corporation’s Aralast, its plasma-derived Alpha-1 Antitrypsin
product, recently approved by the FDA for treatment of hered-
itary emphysema, and completed its acquisition of Fusion
Medical Technologies, which broadens the capabilities of
the company in hemostasis and tissue sealing.

In 2002, Baxter received approval for its tick-borne enceph-
alitis vaccine in Germany; additional approvals for its
NeisVac-C vaccine for meningitis C in Europe and several
other countries; approval in Europe for the INTERCEPT
Blood System for platelets, a pathogen-inactivation technol-
ogy for transfusable blood components; and clearance in the
United States for its ALYX Component Collection System.
The company also ﬁled for approval in the United States,
Canada and Europe for ADVATE, its next-generation
recombinant Factor VIII for the treatment of hemophilia
A; began phase III clinical trials in the United States and
Europe on a new liquid immune globulin product for peo-
ple with immune deﬁciencies; and began the regulatory
submission process for the INTERCEPT Blood System
for platelets in the United States.

This business expects continued growth through geographic
expansion of specialty products, building on its strong base
in IV solutions; reducing manufacturing costs to improve
proﬁtability; entering new market segments; and launching
new products through internal development, acquisitions
and alliances. In 2002, Baxter introduced bar-code tech-
nology and an advanced, computerized patient-care system
that will link with its COLLEAGUE CX infusion pump to
provide a comprehensive, integrated approach to the safe
delivery of medications in hospitals, and introduced Mesnex
Tablets, an oral form of its leading chemoprotectant drug
Mesnex. Acquisitions included ESI Lederle, a leading man-
ufacturer and distributor of injectable drugs, and AUTROS
Healthcare Solutions, a developer of information technologies
that enhance the safety of medication delivery.

Baxter continues to develop new products that promote
efﬁciency, ease-of-use and enhanced patient safety, and tech-
nologies that enable its pharmaceutical partners to develop
drugs with challenging formulation or delivery needs. The
company added controlled-release protein and pulmonary-
delivery formulation technologies with the acquisition of Epic
Therapeutics in 2002, increasing its portfolio of injectable
formulation technologies for poorly soluble drugs. Other
delivery presentations include preﬁlled syringes for intra-
muscular and subcutaneous injections, and ready-to-mix
reconstitution, vial ﬁlling and lyophilization technologies.
Baxter continually seeks to improve its plastics technology
for IV containers and sets to provide customers with a range
of options, including non-polyvinyl chloride, to best
address the complexity of drug compatibility requirements.

Increasing PD usage remains the top priority for the Renal
business. Baxter continues to introduce new products to
improve PD therapy, and to support and communicate new
research on the beneﬁts of PD. Baxter also is growing its
presence in renal care by providing pharmaceuticals for renal-
related conditions. In addition, the company expects to
strengthen its HD business through the introduction of new
products, including Accura, a new system approved by the
FDA in 2002 for delivering continuous renal replacement
therapy (CRRT) to acute patients, the fastest-growing seg-
ment of the HD market. Also in 2002, Baxter announced
plans to divest most of its renal services businesses, including
U.S.-based RMS Disease Management and RMS Lifeline,
as well as most of its Renal Therapy Services dialysis centers,
which are located outside the United States.

Baxter continues to develop new PD solutions for special
patient needs. In 2002, Baxter received approval from the FDA
for Extraneal (icodextrin) PD solution. Extraneal offers the
potential for increased ﬂuid removal from the bloodstream
during dialysis. Also in 2002, Baxter launched its Home-
Choice Pediatric System for PD patients who require low ﬂuid
volume, and ﬁled for European Union approval for Physioneal
35 PD solution, which helps reduce pain on infusion in
some patients. The company is introducing its erythropoi-
eten drug for treatment of anemia, called EPOMAX, in Latin
America and Asia, and is beginning the clinical trials to
support the registration of the drug in Western Europe and
Japan. In 2003, the company expects to launch Extraneal in
the U.S. and Japan, and Arena, an advanced HD machine,
and Syntra Plus, a new synthetic dialyzer, in several countries.

25 Management’s Discussion and Analysis
42 Report of Management
43 Report of Independent Accountants
44 Consolidated Balance Sheets
45 Consolidated Statements of Income
46 Consolidated Statements of Cash Flows
47 Consolidated Statements of Stockholders’ Equity and Comprehensive Income
48 Notes to Consolidated Financial Statements
74 Directors and Executive Ofﬁcers
75 Company Information
76 Five-Year Summary of Selected Financial Data

ﬁnancials

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, 2002, and the company’s ﬁnancial position at that
date. The information below pertains to continuing operations only. As further discussed below and in Note 2 to the consolidated
ﬁnancial statements, during the fourth quarter of 2002, management decided to divest certain businesses, principally the majority
of the services businesses previously included in the Renal segment. On March 31, 2000, the cardiovascular business was distributed
to shareholders. The company’s consolidated statements of income and cash ﬂows have been restated to reﬂect the results of operations
and cash ﬂows of the businesses to be divested and the former cardiovascular business as discontinued operations. The consolidated
balance sheets have not been restated as the assets and liabilities of the businesses to be divested are immaterial to the consolidated
balance sheets.

The matters discussed in this Annual Report that are not historical facts include forward-looking statements that involve risks and
uncertainties. Actual results could differ materially. Factors that could cause actual results to differ include but are not limited to
currency exchange rates; interest rates; technological advances in the medical ﬁeld; economic conditions; demand and market
acceptance risks for new and existing products, technologies and health-care services; the impact of competitive products and pricing;
manufacturing capacity; availability of acceptable raw materials and component supply; new plant start-ups; global regulatory, trade
and tax policies; regulatory, legal or other developments relating to the company’s A, AF and AX series dialyzers; the ability to obtain
adequate insurance coverage at reasonable cost; continued price competition; product development risks, including technological
difﬁculties; ability to enforce patents; patents of third parties preventing or restricting the company’s manufacture, sale or use of affect-
ed products or technology; actions of regulatory bodies and other government authorities; reimbursement policies of government
agencies and private payers; commercialization factors; results of product testing; unexpected quality or safety concerns, whether
or not justiﬁed, leading to product launch delays, recalls, withdrawals, or declining sales; and other factors described elsewhere in
this report or in the company’s ﬁlings with the Securities and Exchange Commission (SEC).

Management’s ﬁnancial objectives for 2002 were outlined in last year’s Annual Report. The table below reﬂects these objectives, as
well as management’s revised expectations, and the company’s results.

KEY FINANCIAL OBJECTIVES AND RESULTS

2002 Objectives per 2001 Annual Report

Results

Accelerate sales growth to the low-teens.

Grow earnings per share in the mid-teens.

Generate at least $500 million in “operational cash ﬂow.”
Management also expects to invest more than $1.3 billion
in capital expenditures and research and development.

The company’s Form 10-Q for the quarterly period ended September 30,
2002 included management’s revised expectation that sales growth for
full-year 2002 would be in the low-double digits. Actual net sales
increased 10% in 2002.

Net earnings per diluted share increased 26% in 2002. Net earnings
per diluted share from continuing operations before the cumulative
effect of an accounting change increased 50% in 2002. Earnings
from continuing operations in 2002 included charges for in-process
research and development (IPR&D) and other special charges,
which in total reduced 2002 earnings by $0.33 per diluted share.
Earnings from continuing operations in 2001 also included charges
for IPR&D and other special charges, as well as a charge relating to
the discontinuance of the company’s A, AF and AX series dialyzers,
which in total reduced 2001 earnings by $0.66 per diluted share.
Excluding these 2002 and 2001 charges, earnings from continuing
operations before cumulative effect of accounting change per diluted
share grew 13% in 2002.

The company generated “operational cash ﬂow” of $427 million dur-
ing 2002, with continuing operations generating cash inﬂows of $468
million, and discontinued operations generating cash outﬂows of $41
million. The total of capital expenditures and research and development
expenses (excluding the charges for IPR&D and research and devel-
opment (R&D) prioritization costs discussed below) was $1.4 billion,
of which more than $1.3 billion was from continuing operations.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Refer to the consolidated ﬁnancial statements and accompanying notes for information regarding the company’s ﬁnancial position,
results of operations and cash ﬂows prepared in accordance with generally accepted accounting principles (GAAP). See below for
a quantiﬁcation of the IPR&D and other special charges, and the charge relating to the A, AF and AX series dialyzers, along with
a tabular reconciliation of the adjusted earnings per diluted share to earnings per diluted share calculated in accordance with
GAAP. In addition, see below for a tabular reconciliation of “operational cash ﬂow,” which is not a ﬁnancial measure deﬁned by
GAAP, to cash ﬂows from continuing operations per the consolidated statements of cash ﬂows.

COMPANY AND INDUSTRY OVERVIEW

Baxter is a global medical products and services company with expertise in medical devices and supplies, pharmaceuticals and
biotechnology that, through its subsidiaries, assists health-care professionals and their patients with the treatment of complex medical
conditions, including hemophilia, immune deﬁciencies, infectious diseases, cancer, kidney disease, trauma and other conditions. The
company generates approximately 50% of its revenues outside the United States. While health-care cost containment continues to
be a focus around the world, with the aging population and the availability of new and better medical treatments, demand for
health-care products and services continues to be strong worldwide, particularly in developing markets. The company’s strategies
emphasize global expansion and technological innovation to advance medical care worldwide.

The company’s primary markets are highly competitive and subject to substantial regulation. There has been consolidation in the
company’s customer base and by its competitors, which has resulted in pricing and market share pressures. The company has expe-
rienced 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. In addition, there are
foreign currency ﬂuctuation and other risks associated with operating on a global basis, such as price and currency-exchange controls,
import restrictions, and volatile economic, social and political conditions in certain countries, particularly in the Latin American
region. Management expects these trends and risks 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. The company
will also continue to hedge foreign currency risks where appropriate, and seek opportunities where appropriate to limit any poten-
tial unfavorable impacts of operating in countries with weakened economic conditions.

RESULTS OF CONTINUING OPERATIONS

Net Sales

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

2002

$3,317
3,096
1,697

$8,110

2002

$3,974
4,136

$8,110

2001

$2,905
2,786
1,665

$7,356

2001

$3,721
3,635

$7,356

2000

$2,703
2,353
1,641

$6,697

2000

$3,120
3,577

$6,697

Percent increase

2002

14%
11%
2%

10%

2001

7%
18%
1%

10%

Percent increase

2002

7%
14%

10%

2001

19%
2%

10%

Fluctuations in currency exchange rates did not have a material impact on consolidated sales growth in 2002. Such ﬂuctuations
unfavorably impacted sales growth in 2001 by approximately 4 points, and affected all three segments. The unfavorable impact
was principally due to the weakening of the Euro and the Japanese Yen relative to the U.S. Dollar.

Medication Delivery The Medication Delivery segment generated 14% and 7% sales growth in 2002 and 2001, respectively.
Approximately 4 points of growth in 2002 and 2 points in 2001 were generated by recent acquisitions. Refer to Note 3 for further
information on the company’s signiﬁcant acquisitions. Excluding the impact of acquisitions, increased sales of certain generic and
branded pre-mixed drugs and drug delivery products contributed 3 points and less than 1 point of sales growth in 2002 and 2001,
respectively. Anesthesia and critical care products contributed 2 points and 3 points of growth in 2002 and 2001, respectively, pri-
marily due to increased sales of inhaled anesthetics and certain generic drugs, as well as geographic expansion in this business. A

26 Baxter International Inc. 2002 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

signiﬁcant contributor to the growth rate in both years was increased sales of propofol, an intravenous drug used for the induction
or maintenance of anesthesia in surgery, and as a sedative in monitored anesthesia care. Sales of electronic infusion pumps and sets
contributed approximately 1 point of sales growth in both 2002 and 2001. The majority of the remaining sales growth in 2002
and 2001 was driven by increased sales of intravenous therapies (which are described in Note 13), which was largely due to con-
tinued geographic expansion. Sales in the United States and Western Europe have been impacted by competitive pricing pressures
and cost pressures from health-care providers. These factors are expected to continue to be more than offset by expansion of higher-
margin specialty products outside the United States, as well as increased sales and a broadening of the portfolio of products and
technologies for medication delivery as a result of internal development, new distribution and alliance agreements, and acquisitions.
As further discussed in Note 3, in late December 2002, the company acquired the majority of the assets of ESI Lederle (ESI), a
division of Wyeth, a manufacturer and distributor of injectable drugs used in the U.S. hospital market, for approximately $308
million. This acquisition is expected to contribute signiﬁcantly to sales of anesthesia and critical care products in 2003.

BioScience Sales in the BioScience segment increased 11% and 18% in 2002 and 2001, respectively. Approximately 7 points and
8 points of growth in 2002 and 2001, respectively, were due to increased sales of recombinant therapies, particularly Recombinate
Antihemophilic Factor (rAHF) (Recombinate), with such growth principally a result of yield and cycle time improvements,
improved pricing, continued strong demand for this product and, in 2001, increased capacity. In late 2002, the BioScience segment
experienced a decrease in supply of bulk recombinant due to a third-party supplier’s lower than expected manufacturing yields.
This decrease in supply unfavorably impacted the sales growth for Recombinate during the fourth quarter of 2002, but is not
expected to continue to impact sales growth in 2003. During both 2002 and 2001, sales of products that provide for leukoreduc-
tion, which is the removal of white blood cells from blood products used for transfusion, contributed approximately 1 point to
the segment’s growth rate. Sales of vaccines contributed 5 points to the segment’s growth rate in 2002, principally due to sales of
NeisVac-C vaccine for the prevention of meningitis C and sales of crude bulk vaccine to Acambis, Inc. (Acambis) in conjunction
with its smallpox vaccine contract with the U. S. Government. Reduced sales of vaccines in 2001 decreased the segment’s growth
rate by 3 points in 2001, principally due to the company not receiving a license for its tick-borne encephalitis product in Germany,
and a nonrecurring sale of a vaccine in 2000. Sales of plasma-based products (which are described in Note 13) had an insigniﬁcant
impact on the segment’s sales growth rate in 2002, primarily due to the re-entry of certain competitors in the United States who were
out of the market in the prior year, increased pricing pressures, and a continuing shift in the market from plasma to recombinant
hemophilia products. During 2001, sales of plasma-based products increased the segment’s growth rate by 9 points principally due
to strong sales of plasma-based Factor VIII as a result of a shortage of recombinant Factor VIII products in the marketplace, the
February 2001 acquisition of Sera-Tec Biologicals, L.P. (Sera-Tec), and improved raw material supply. The effects of regulatory, sup-
ply, 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, product differentiation, increases in manufacturing capacity, yield
and cycle time improvements, and strategic alliances, joint ventures and acquisitions. Sales of the segment’s advanced recombinant
therapy, ADVATE, Antihemophilic Factor (Recombinant), Plasma/Albumin-Free Method (rAHF-PFM), which is subject to approval
by regulatory authorities, is expected to contribute to the segment’s future sales growth rate. The impact on sales growth in 2003 is
dependent on the timing of regulatory approvals for this therapy in the United States and Europe.

Renal Sales from continuing operations in the Renal segment increased 2% and 1% in 2002 and 2001, respectively. The sales
growth in 2002 was driven principally by continued penetration of products for peritoneal dialysis. The penetration continues to
be strongest in emerging markets such as Latin America and Asia, where many people with end-stage renal disease are currently
under-treated. This sales growth was partially offset by a decline in sales of hemodialysis products, primarily due to decreased sales
outside the United States. The growth in 2001 was principally due to the acquisition of Althin Medical A.B. (Althin), a manu-
facturer of hemodialysis products, in March 2000. Sales in certain geographic markets continue to be affected by strong pricing
pressures and the effects of market consolidation. These issues are expected to be offset in the future by increased penetration of
peritoneal dialysis, growth in sales of hemodialysis products, continuous renal replacement therapy and renal-related pharmaceu-
ticals, product innovation, and acquisitions and alliances.

Gross Margin and Expense Ratios
years ended December 31 (as a percent of sales)

Gross margin
Marketing and administrative expenses

2002

46.8%
19.3%

2001

46.4%
19.6%

2000

45.6%
19.9%

MANAGEMENT’S DISCUSSION AND ANALYSIS

The improvement in the gross margin in both 2002 and 2001 was primarily due to changes in the products and services mix, with
sales of the company’s higher-margin products, such as Recombinate, generating strong growth across the company’s businesses.

The company has been increasing its investments in sales and marketing programs in conjunction with the launch of new products,
and to continue to drive overall sales growth. Management is also making other investments in order to enhance the technological
infrastructure of the company and attract and retain a highly talented workforce. These increased costs were partially offset by more
favorable insurance recoveries related to plasma-based therapies and mammary implant litigation that, as a percentage of net sales,
beneﬁted the expense ratio by 0.7% in 2002 and 0.3% in 2001.

In late 2002, the company changed its employee vacation policy, which will result in a reduction of expenses in 2003 of approxi-
mately $30 million. This reduction is expected to be offset by increased expenses in 2003 related to certain of the company’s other
beneﬁt plans. The increased beneﬁt plan expenses are resulting from a reduction in the long-term rate of return expected on pension
assets and a lower discount rate assumption used to calculate pension and other postretirement beneﬁt costs. Refer to the Critical
Accounting Policies discussion below for further information on these assumptions. Management is also leveraging recent acqui-
sitions and aggressively managing costs throughout the company.

Research and Development

years ended December 31 (in millions)

Research and development expenses
as a percent of sales

2002

$501
6.2%

2001

$426
5.8%

2000

$378
5.6%

Percent increase

2002

18%

2001

13%

R&D expenses above exclude charges for R&D prioritization costs and IPR&D relating to acquisitions, which are further discussed
below and in Note 3. R&D expenses increased across all three segments in both 2002 and 2001. The overall increase was primarily
due to spending in the BioScience segment, principally relating to the development of ADVATE, a next-generation oxygen-ther-
apeutics program, the pathogen inactivation program, and initiatives in the biosurgery and plasma-based products areas. Also con-
tributing to the growth rate in 2002 was the Medication Delivery segment’s October 2001 acquisition of a subsidiary of Degussa
AG, ASTA Medica Onkologie GmbH & CoKG (ASTA). The status of development, stage of completion, nature and timing of
remaining efforts for completion, risks and uncertainties, and other key factors vary by R&D project. In many cases, substantial
further R&D will be required to determine the technical feasibility and commercial viability of the projects. At December 31,
2002, the company had approximately 30 signiﬁcant R&D projects in its pipeline, with the projects in various stages of develop-
ment, from the development or pre-clinical stage through the ﬁnal regulatory review stage. Management’s growth strategy is to
continue to make signiﬁcant investments in R&D initiatives.

In 2002, the company recorded a pre-tax charge of $26 million to prioritize its investments in cer-
R&D Prioritization Costs
tain of its R&D programs. The decision was based on management’s comprehensive assessment of the company’s R&D pipeline
with the goal of having a more focused and balanced strategic portfolio, which maximizes the company’s resources and generates
the most signiﬁcant return on the company’s investment. The charge principally included severance costs and certain non-cash
costs, primarily to write down certain property, plant and equipment, intangible assets and other assets due to impairment.
Approximately 160 R&D positions were eliminated and $2 million of cash costs were paid during the fourth quarter of 2002. The
remaining cash costs are expected to be paid in early 2003. Management believes the established reserve is adequate to complete
the contemplated actions. Total cash expenditures for this plan are being funded with cash generated from operations.

IPR&D The IPR&D charges in 2002 principally consisted of $51 million relating to the BioScience segment’s acquisition of Fusion
Medical Technologies, Inc. (Fusion), $52 million relating to the Medication Delivery segment’s November 2002 acquisition of Epic
Therapeutics, Inc. (Epic), a drug delivery company specializing in the formulation of drugs for injection or inhalation, and $56 mil-
lion relating to the December 2002 acquisition of ESI. The IPR&D charge in 2001 principally consisted of $250 million relating
to the Medication Delivery segment’s acquisition of ASTA. The IPR&D charge in 2000 principally consisted of the $250 million
charge relating to North American Vaccine, Inc. (NAV), which is included in the BioScience segment.

The nature of the acquired R&D projects, timing of projected material net cash inﬂows, assumptions used in the valuation, risks
associated with the projects, and other key information, are described in Note 3. The projects are at various stages of completion,
and material net cash inﬂows are projected to commence between 2003 and 2009, depending on the particular project. Estimated
additional R&D expenditures prior to the dates of the initial product introductions totaled over $200 million at the respective

28 Baxter International Inc. 2002 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

acquisition dates. Risk-adjusted discount rates ranging from 16% to 30% were used to discount projected cash ﬂows. Two of the
projects included in the ASTA IPR&D charge and several of the projects included in the NAV IPR&D charge have been terminated
during 2002, partially in conjunction with the company’s above-mentioned overall assessment and prioritization of its R&D pro-
grams. The in-process values assigned at the 2001 acquisition date and the 2000 acquisition date to these subsequently terminat-
ed ASTA and NAV projects were $53 million and $216 million, respectively. With respect to NAV, while the acquired projects
were terminated, a considerable portion of the acquired technology is being utilized in new R&D projects initiated subsequent to
the acquisition date. These ASTA and NAV project terminations, as well as modiﬁed timetables for certain other projects acquired
in recent acquisitions, have been due to post-acquisition evaluations and prioritizations, which were inﬂuenced by cost management
considerations, marketplace trends and competitive factors occurring subsequent to the respective acquisition dates. However,
except for the terminations discussed above, the majority of the acquired R&D projects are proceeding substantially in accordance
with original projections. There can be no assurance, however, that these efforts will be successful. Delays in the development,
introduction or marketing of a product can result either in such product being marketed at a time when its cost and performance
characteristics might not be competitive in the marketplace or in a shortening of its commercial life. If a product is not completed
on time, the expected return on the company’s investments could be signiﬁcantly and unfavorably impacted.

Charge Relating to A, AF and AX Series Dialyzers
As further discussed in Note 4, in October 2001, the company recorded a $189 million pre-tax charge ($156 million on an after-
tax basis) related to the decision to initiate a global recall and permanently cease manufacturing its Renal segment’s A, AF and AX
series dialyzers. Testing led the company to conclude that a processing ﬂuid used during the manufacturing of a limited number
of dialyzers produced in the company’s Ronneby, Sweden facility may have played a role in patient deaths reported in Croatia and
other countries.

Included in the pre-tax charge was $116 million related to non-cash costs. These asset impairment charges principally related to
goodwill and other intangible assets, inventory and property, plant and equipment, and were required based on management’s
estimates of the fair values (less costs to sell, as applicable) of the assets. Also included in the charge was $73 million related to cash
costs, principally pertaining to legal costs, recall costs, contractual commitments, and severance and other employee-related costs
associated with the elimination of approximately 360 positions. During 2002, the company increased its reserve for cash costs by
$41 million, which was offset by a $41 million increase in expected insurance recoveries. Of the total reserve for cash costs of $114
million, $13 million was paid during the fourth quarter of 2001, and $63 million was paid during 2002. Refer to Note 4 for a
summary of the activity in the reserve. Remaining cash costs, which principally pertain to legal matters, are expected to be paid in
2003 and 2004. Management believes the established reserve for this exit program is adequate to complete the contemplated
actions. Total cash expenditures for this exit program are being funded with cash generated from operations. The operating results
relating to the A, AF and AX series dialyzers were not signiﬁcant.

Goodwill Amortization
In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” (SFAS
No. 142), effective January 1, 2002, goodwill is no longer amortized, but is subject to periodic impairment reviews. Management
is increasing R&D and marketing spending to drive the company’s future sales growth, offsetting the reduced expense due to the
elimination of goodwill amortization.

Net Interest Expense
Net interest expense decreased in both 2002 and 2001, principally due to the effect of lower interest rates, partially offset by the
effect of higher average net debt balances. Contributing to the decrease in net interest expense in both years was the May 2001
issuance of convertible debt, which bears a lower interest rate than the debt balances repaid with the proceeds from the issuance.

Other Expense (Income)
As further discussed in Note 10, other expense in 2002 included a $70 million pre-tax charge for two investments with declines
in value deemed to be other than temporary. Other income in 2001 included a pre-tax gain from the disposal of an investment
which was substantially offset by impairment charges for other assets and investments with declines in value deemed to be other
than temporary. Other income in 2000 consisted principally of net gains relating to foreign currency hedging instruments, partially
offset by losses relating to the early termination of debt. Also included in other income and expense in 2002, 2001 and 2000 were
amounts relating to minority interests and ﬂuctuations in currency exchange rates.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Pre-Tax Income
Refer to Note 13 for a summary of ﬁnancial results by segment. Certain items are maintained at the company’s corporate head-
quarters and are not allocated to the segments. They primarily include the majority of the foreign currency and interest rate hedging
activities, certain foreign currency ﬂuctuations, net interest expense, income and expense related to certain non-strategic investments,
corporate headquarters costs, and certain nonrecurring gains and losses (including charges relating to IPR&D, the R&D prioriti-
zation, the A, AF and AX series dialyzers and the impaired investments). The following is a summary of signiﬁcant factors impacting
the segments’ ﬁnancial results.

Medication Delivery Growth in pre-tax income of 25% and 9% in 2002 and 2001, respectively, was primarily the result of strong
sales growth, particularly in 2002, an improved gross margin due to a change in product mix, the close management of costs, and
the leveraging of expenses in conjunction with recent acquisitions, partially offset by increased R&D spending, which was prima-
rily related to the October 2001 acquisition of ASTA, and the impact of ﬂuctuations in currency exchange rates.

BioScience The 19% and 4% growth in pre-tax income in 2002 and 2001, respectively, was primarily the result of strong sales
growth, an improved gross margin primarily due to a change in product mix, and the continued leveraging of costs and expenses.
These increases were partially offset by the impact of foreign currency ﬂuctuations and increased R&D spending, particularly in
2001, as the business continues to make investments in R&D initiatives consistent with management’s growth strategy.

Renal Pre-tax income increased 13% in 2002 and declined 6% in 2001. Impacting the change in pre-tax income in both years
were unfavorable ﬂuctuations in currency exchange rates, particularly with respect to Latin American currencies, and increased
R&D spending. Offsetting these factors was the effect of an improved sales mix, particularly in 2002, and the close management
of expenses.

Income Taxes
The effective income tax rate relating to continuing operations was 26%, 31% and 22% in 2002, 2001 and 2000, respectively.
The change in the effective income tax rate from year to year is principally due to varying tax rates applicable to the above-men-
tioned charges for IPR&D, R&D prioritization costs and asset impairments in 2002, and IPR&D and other special charges and
the company’s A, AF and AX series dialyzers in 2001.

Income From Continuing Operations Before the Cumulative Effect of an Accounting Change and Related per
Diluted Share Amounts
Income from continuing operations, before the cumulative effect of an accounting change, was $1,033 million, $675 million and
$754 million in 2002, 2001 and 2000, respectively. Excluding special charges, income from continuing operations, before the
cumulative effect of an accounting change, was $1,236 million, $1,074 million and $931 million in 2002, 2001 and 2000, respec-
tively, and the growth rate was 15% in both 2002 and 2001. The following is a reconciliation of the earnings from continuing
operations adjusted for special charges to the earnings reported under GAAP.

years ended December 31 (in millions)

2002

2001

2000

Income from continuing operations before cumulative effect of

accounting change, before charges
IPR&D and other special charges
Charge relating to A, AF and AX series dialyzers
Asset impairment charges

Income from continuing operations before cumulative effect of

accounting change, per GAAP

$1,236
(155)
—
(48)

$1,074
(243)
(156)
—

$931
(177)
—
—

$1,033

$ 675

$754

Net earnings per diluted share from continuing operations, before the cumulative effect of an accounting change, was $1.67, $1.11
and $1.26 in 2002, 2001 and 2000, respectively. Excluding special charges, net earnings per diluted share from continuing operations,
before the cumulative effect of an accounting change, was $2.00, $1.77 and $1.56 in 2002, 2001 and 2000, respectively, and the
growth rate was 13% in both 2002 and 2001. The following is a reconciliation of net earnings per diluted share from continuing
operations adjusted for special charges to the earnings per diluted share reported under GAAP.

30 Baxter International Inc. 2002 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

years ended December 31

2002

2001

2000

Income from continuing operations before cumulative effect of

accounting change, before charges
IPR&D and other special charges
Charge relating to A, AF and AX series dialyzers
Asset impairment charges

Income from continuing operations before cumulative effect of

accounting change, per GAAP

$ 2.00
(0.25)
—
(0.08)

$ 1.77
(0.40)
(0.26)
—

$ 1.56
(0.30)
—
—

$ 1.67

$ 1.11

$ 1.26

Management believes the presentation and analysis of adjusted earnings and per-share earnings is useful to investors and others as
it provides a view of the results of the company’s operations without unusual or special items. Similar unusual or special items may
or may not occur in the future. Management believes that the presentation of these non-GAAP measures, along with reconcilia-
tions to the most directly comparable GAAP measures, facilitates a complete analysis of the company’s results of operations.

Loss From Discontinued Operations
As noted above and further discussed in Note 2, in 2002 management decided to divest certain businesses, principally the majority
of the services businesses included in the Renal segment. Management’s decision was based on an evaluation of the company’s business
strategy and the economic conditions in certain geographic markets. Management decided that the Renal segment’s long-term sales
growth and proﬁtability would be enhanced by increasing focus and resources on expanding the product portfolio in peritoneal
dialysis, hemodialysis, continuous renal replacement therapy and renal-related pharmaceuticals. Included in the loss from discon-
tinued operations in 2002 was a $294 million pre-tax charge ($229 million on an after-tax basis) associated with this decision. The
charge principally pertained to Renal Therapy Services (RTS), and the majority of the centers to be sold are located in Latin America
and Europe. Included in the pre-tax charge was $269 million for non-cash costs, principally to write down certain property and
equipment, goodwill and other intangible assets due to impairment. Also included in the pre-tax charge was $25 million for cash
costs, principally relating to severance and other employee-related costs associated with the elimination of approximately 75 posi-
tions, as well as legal and contractual commitment costs. Additional severance costs may be incurred in 2003 depending on the
ﬁnalization of the divestiture arrangements. The majority of the cash costs are expected to be paid in 2003. Management believes
the established reserve for this exit program is adequate to complete the contemplated actions. Total cash expenditures are being
funded with cash generated from operations. In each of the last three years, these businesses generated modest operating losses.

Changes in Accounting Principles
Refer to Note 1 regarding the company’s adoption in 2002 of SFAS No. 141, “Business Combinations,” SFAS No. 142, and SFAS
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

The company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133), and its
amendments at the beginning of 2001. In accordance with the transition provisions of SFAS No. 133, the difference between the
fair values and the book values of all freestanding derivatives at the adoption date was reported as the cumulative effect of a change
in accounting principle. In accordance with the standard, the company recorded a cumulative effect reduction to earnings of $52 mil-
lion (net of tax beneﬁt of $32 million), and a cumulative effect increase to other comprehensive income (OCI) of $8 million (net of
tax of $5 million).

CRITICAL ACCOUNTING POLICIES

The preparation of ﬁnancial statements in accordance with GAAP requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses. A summary of the company’s signiﬁcant accounting policies
is included in Note 1 to the consolidated ﬁnancial statements. Certain of the company’s accounting policies are considered critical,
as these policies are the most important to the depiction of the company’s ﬁnancial statements and require signiﬁcant, difﬁcult or
complex judgments by management, often employing the use of estimates about the effects of matters that are inherently uncertain.
The company uses outside experts where appropriate. The company applies estimation methodologies consistently from year to year.
Other than changes required due to the issuance of new accounting pronouncements, there have been no signiﬁcant changes in
critical accounting policies in the past year. The company’s critical accounting policies have been reviewed with the Audit Committee
of the Board of Directors. The following is a summary of accounting policies management considers critical to the company’s con-
solidated ﬁnancial statements.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Revenue Recognition and Related Provisions and Allowances
As further discussed in Note 1, the company’s policy is to recognize revenues from product sales and services when earned, as
deﬁned by GAAP. Speciﬁcally, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred (or
services have been rendered), the price is ﬁxed or determinable, and collectibility is reasonably assured. For product sales, which
represent the vast majority of the company’s consolidated net sales, revenue is not recognized until title and risk of loss have transferred
to the customer. The company also enters into certain arrangements in which it commits to provide multiple elements to its cus-
tomers. Revenue related to an individual element is deferred unless delivery of the element represents a separate earnings process.
Total revenue for these arrangements is allocated among the elements based on the fair value of the individual elements, with the
fair values determined based on objective evidence (generally sales of the individual element to other third parties).

The recognition of revenue requires application of accounting policies for which GAAP provides numerous models, and for which
management must use judgment to determine the most appropriate model to apply, given the particular facts and circumstances.
In evaluating these transactions, management assesses all relevant GAAP and chooses the model that most accurately reﬂects the nature
of the transactions. Management has not determined how reported amounts may differ based on the application of different models.

Provisions for discounts, rebates to customers, and returns are accrued at the time the related sales are recorded, and are reﬂected as a
reduction of sales. These estimates are reviewed periodically and, if necessary, revised, with any revisions recognized immediately as
adjustments to sales. The company periodically and systematically evaluates the collectibility of accounts receivable and determines
the appropriate reserve for doubtful accounts. In determining the amount of the reserve, management considers historical credit
losses, the past due status of receivables, payment history and other customer-speciﬁc information, and any other relevant factors
or considerations. Receivables are written off when management determines they are uncollectible. If the ﬁnancial condition of the
company’s customers were to deteriorate, additional reserves might be required. The company also provides for the estimated costs
that may be incurred under its warranty programs when the cost is both probable and reasonably estimable, which is at the time
the related revenue is recognized. The cost is determined based upon actual company experience for the same or similar products as
well as any relevant current information. Estimates of future costs under the company’s warranty programs could change based on
developments in the future. Management is not able to estimate the probability or amount of any future developments that could
impact its reserves, but believes its presently established reserves are adequate based on all currently available information.

Stock-Based Compensation
As further discussed in Note 1, the company has elected to apply the recognition and measurement principles of Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock-based
compensation plans. In accordance with this intrinsic value method, no compensation expense is recognized for the company’s ﬁxed
stock option plans and employee stock purchase plans. Included in Note 1 are disclosures of pro forma net income and earnings
per share as if the company had accounted for employee stock options and stock purchase plans based on the fair value method of
SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123). The fair value method requires management to
make assumptions, including estimated option and purchase plan lives and future volatilities. The use of different assumptions
would result in different pro forma amounts of net income and earnings per share. Management believes its assumptions are appro-
priate based on all presently available information.

Pension and Other Postretirement Beneﬁt Plans
As further discussed in Note 9, the company provides pension and other postretirement beneﬁts to certain of its employees. The
valuation of the funded status and net periodic pension and other postretirement beneﬁt costs are calculated using actuarial
assumptions, which are reviewed annually and include rates of increase in employee compensation, interest rates used to discount
liabilities, the long-term rate of return on plan assets, anticipated future health-care costs, and other assumptions. The selection of
assumptions is based on both short-term and long-term historical trends and known economic and market conditions at the time
of the valuation. The use of different assumptions would have resulted in different measures of the funded status and net periodic
pension and other postretirement beneﬁt expenses. Actual results in the future could differ from expected results. Management is
not able to estimate the probability of actual results differing from expected results, but believes its assumptions are appropriate
based on all presently available information.

The assumptions selected as of the 2002 measurement date, which are used in measuring pension and other postretirement beneﬁts
expense for 2003, are listed in Note 9. The most critical assumptions pertain to the plans covering domestic and Puerto Rican
employees, as these plans are the most signiﬁcant to the company’s consolidated ﬁnancial statements. The assumptions relating to
employee compensation increases and future health-care costs are based on historical experience, market trends, and anticipated

32 Baxter International Inc. 2002 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

future management actions. As of the 2002 measurement date, the company is using a discount rate of 6.75%, versus the 7.5%
used in the prior year. The discount rate represents the market return on high-quality ﬁxed-income investments. Baxter sets the
discount rate based on AA corporate bond yields, adjusted for differences in duration between the bonds and Baxter’s pension plan
liabilities. The change in the discount rate assumption from 2001 to 2002 reﬂects changes in market interest rates. As of the 2002
measurement date, the company is using a long-term rate of return of 10%, versus the 11% used in the prior year. Assets held by
the trusts of the plans consist primarily of equity securities. Management revised this long-term asset return assumption based on
a review of historical compound average asset returns, both company-speciﬁc and relating to the broad market (based on the com-
pany’s asset allocation), as well as an analysis of current market information and future expectations. In calculating net periodic
pension cost, the expected return on assets is developed by applying the assumed long-term rate of return to the market-related
value of the assets. The market-related value of assets is determined by recognizing the difference between actual returns (based on
the fair value of the assets) and expected returns over a period of ﬁve years.

Holding all other assumptions constant, for each 50 basis point increase in the discount rate, domestic pension and other postretirement
beneﬁt pre-tax expenses would decrease by approximately $8 million. For each 50 basis point decrease in the discount rate, domestic
pension and other postretirement beneﬁt pre-tax expenses would increase by approximately $12 million. For each 50 basis point
increase (decrease) in the assumed long-term asset rate of return, such expenses would decrease (increase) by approximately $8 million.

Legal Contingencies
Baxter is currently involved in certain legal proceedings, lawsuits and other claims, which are further discussed in Note 12. Manage-
ment assesses the likelihood of any adverse judgments or outcomes for these matters, as well as potential ranges of reasonably possible
losses, and has established reserves in accordance with GAAP for certain of these legal proceedings. Management also records any
insurance recoveries that are probable of occurring. The loss estimates are developed in consultation with outside counsel and are
based upon analyses of potential results. There is a possibility that resolution of these matters could result in an additional loss in
excess of presently established reserves. Also, there is a possibility that resolution of certain of the company’s legal contingencies
for which there is no reserve could result in a loss. Management is not able to estimate the amount of such loss or additional loss
(or range of loss or additional loss). It is possible, however, that future results of operations or net cash ﬂows could be materially
affected by changes in management’s assumptions or estimates related to these proceedings. Management believes that, while such
a future charge could have a material adverse impact on the company’s net income and net cash ﬂows in the period in which it is
recorded or paid, no such charge would have a material adverse effect on Baxter’s consolidated ﬁnancial position.

Tax Audits and Valuation Reserves
In the normal course of business, the company is regularly audited by federal, state and foreign tax authorities, and is periodically
challenged regarding the amount of taxes due. These challenges include questions regarding the timing and amount of deductions
and the allocation of income among various tax jurisdictions. Management believes the company’s tax positions comply with appli-
cable tax law and intends to defend its positions. In evaluating the exposure associated with various tax ﬁling positions, the company
records reserves for probable exposures, and management believes these reserves are adequate. The company’s effective tax rate in
a given ﬁnancial statement period could be impacted if the company prevailed in matters for which reserves have been established,
or were required to pay amounts in excess of established reserves.

The company maintains valuation allowances, which totaled $67 million and $58 million at December 31, 2002 and 2001, respec-
tively, where it is likely that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances are included
in the company’s tax provision in the period of change. In determining whether a valuation allowance is warranted, management
evaluates such factors as prior earnings history, expected future earnings, carry-back and carry-forward periods, tax strategies that
could potentially enhance the likelihood of realization of a deferred tax asset, and other factors.

Accounting for Business Combinations
Assumptions and estimates are employed in determining the fair value of assets acquired and liabilities assumed in a business com-
bination. A signiﬁcant portion of the purchase price of many of the company’s acquisitions is assigned to intangible assets, including
IPR&D. Management must use signiﬁcant judgment in determining the fair values of these acquired assets. Third-party valuation
consultants are generally used in this process. The income approach is used in estimating the fair value of IPR&D and other intangible
assets (excluding goodwill). The income approach requires management to make estimates of future cash ﬂows and to select an appro-
priate discount rate. Key factors that management considers are the status of development, stage of completion, nature and timing
of remaining efforts for completion, risks and uncertainties, and other factors. Management projects future cash ﬂows considering
the company’s historical experience and industry trends and averages. No value is assigned to any IPR&D project unless it is probable

MANAGEMENT’S DISCUSSION AND ANALYSIS

of being further developed. The use of alternative purchase price allocations and alternative estimated useful lives could result in
different intangible asset amortization expense in current and future periods. Intangible amortization expense is included in the
results of operations of the applicable segment. IPR&D charges are recorded at the corporate level, and are not included in the results
of operations of the segments.

Impairment of Assets
Pursuant to SFAS No. 142, goodwill is subject to impairment reviews at least annually, or whenever indicators of impairment arise.
Intangible assets other than goodwill and other long-lived assets are reviewed for impairment in accordance with SFAS No. 144.
Refer to Note 1 for further information. The company’s impairment review is based on a discounted cash ﬂow approach that
requires signiﬁcant management judgment with respect to future volume, revenue and expense growth rates, changes in working
capital use, foreign exchange rates, appropriate discount rates and other assumptions and estimates. The estimates and assumptions
used are consistent with the company’s business plans. The use of alternative estimates and assumptions could increase or decrease
the estimated fair value of the asset, and potentially result in different impacts to the company’s results of operations. Actual results
may differ from management’s estimates.

Hedging Activities
As further discussed below and in Note 6, the company utilizes derivative instruments to hedge certain of its risks. As Baxter operates
on a global basis, there is a risk to earnings associated with ﬂuctuations in currency exchange rates relating to the company’s ﬁrm
commitments and forecasted transactions expected to be denominated in foreign currencies. Compliance with SFAS No. 133 and
the company’s hedging policies requires management to make judgments as to the probability of anticipated hedged transactions.
In making these estimates and assessments of probability, management analyzes historical trends and expected future cash ﬂows
and plans. The estimates and assumptions used are consistent with the company’s business plans. The use of different estimates
and assumptions would result in different impacts to the company’s results of operations. If, based on these periodic and regular
analyses, management determines that anticipated hedged transactions are no longer probable, the hedges are immediately dedes-
ignated and discontinued, and the related net-of-tax gains or losses are immediately reclassiﬁed from accumulated OCI to earnings.
If management were to make different assessments of probability or make the assessments during a different ﬁscal period, the com-
pany’s results of operations for a given period would be different.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows
Cash ﬂows from continuing operations Cash ﬂows from continuing operations increased in 2002 and decreased in 2001. In
2002, the effect of increased earnings (before non-cash items) was partially offset by reduced cash ﬂows principally relating to
accounts receivable and inventories, as the company continues to grow its businesses, particularly outside the United States. In 2001,
higher earnings (before non-cash items) were offset by higher net cash outﬂows relating to accounts receivable, inventories and other
balance sheet accounts. Accounts receivable balances generally increase as the company generates sales growth in certain regions
outside the United States, which have longer collection periods. Inventory balances have increased partially in anticipation of the
launch of new products. As further discussed in Note 6, cash ﬂows beneﬁted from the sales of certain accounts receivable in each year.

Cash ﬂows from discontinued operations Cash ﬂows from discontinued operations increased in 2002 and decreased in 2001.
The increase in 2002 was principally due to management’s decision to reduce the level of acquisitions of RTS centers due to the
economic and currency volatility in Latin America, where RTS primarily operates. The level of acquisitions of RTS centers had
increased from 2000 to 2001. Also contributing to the decrease in cash ﬂows in 2001 was the spin-off of Edwards Lifesciences Cor-
poration (Edwards) on March 31, 2000.

Cash ﬂows from investing activities Cash ﬂows from investing activities increased in 2002 and decreased in 2001. Capital expen-
ditures (including additions to the pool of equipment placed with or leased to customers) increased 12% and 21% in 2002 and
2001, respectively, as the company increased its investments in various capital projects across the three segments. The increased
investments principally pertained to the BioScience segment, as the company is in the process of increasing manufacturing capacity
for vaccines, and plasma-based and recombinant products. Capital expenditures are made at a sufﬁcient level to support the strategic
and operating needs of the businesses. Management expects to invest approximately $850 million in capital expenditures in 2003.

Net cash outﬂows relating to acquisitions decreased in 2002 and increased in 2001. In 2002, net cash outﬂows relating to acquisitions
related primarily to acquisitions and investments in the Medication Delivery segment, with $308 million relating to the December
2002 acquisition of ESI, $59 million relating to the acquisition of Epic, $43 million relating to the July 2002 acquisition of Wock-
hardt Life Sciences Limited, an Indian manufacturer and distributor of intravenous ﬂuids, and $24 million relating to the January

34 Baxter International Inc. 2002 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

2002 acquisition of Autros Healthcare Solutions Inc., a developer of automated patient information and medication management
systems. The remainder of the outﬂows relating to acquisitions in 2002 consisted of individually small acquisitions. As further dis-
cussed in Note 3, in May 2002, the company acquired Fusion in a non-cash transaction, with the purchase price paid in Baxter
common stock.

In 2001, net cash outﬂows relating to acquisitions included $455 million related to the acquisition of ASTA and $111 million related
to the acquisition of Cook Pharmaceutical Solutions (Cook), formerly a unit of Cook Group Incorporated. Also included in the
2001 total was $38 million related to the Renal segment’s acquisition of assets and rights to technology pertaining to a proprietary
recombinant erythropoietin drug for the treatment of anemia. The remainder of the outﬂows relating to acquisitions in 2001 consisted
of individually small acquisitions. As further discussed in Note 3, the purchase price of Sera-Tec and a portion of the purchase
price of Cook were paid with Baxter common stock.

In 2000, net cash outﬂows relating to acquisitions included $55 million related to the Renal segment’s acquisition of Althin and
$63 million related to the BioScience segment’s acquisition of NAV, a company engaged in the research, development, production
and sales of vaccines for the prevention of human infectious diseases. A portion of the purchase price for both of these acquisitions
was paid in company common stock. Approximately $131 million of the total outﬂows in 2000 related to several acquisitions and
investments in the Medication Delivery segment, principally the acquisition of a domestic ambulatory and infusion pump busi-
ness 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. The remainder of the outﬂows relating to acquisitions in 2000 consisted of individually
insigniﬁcant acquisitions.

The cash inﬂows relating to divestitures and other asset dispositions in 2002 principally consisted of $41 million relating to the
sales of certain land and ofﬁce space, $15 million relating to the transfer of assets to Edwards, as further discussed in Note 2, and
a ﬁnal cash receipt related to a prior year divestiture in the Medication Delivery segment. These cash inﬂows were partially offset by
a payment made to extinguish the company’s liability relating to the Nexell put rights, as further discussed in Note 6. In 2001, the
company generated $44 million of cash relating to the sale and leaseback of certain assets. The cash ﬂows relating to divestitures
and other asset dispositions in 2000 principally related to the spin-off of Edwards on March 31, 2000.

Cash ﬂows from ﬁnancing activities Cash ﬂows from ﬁnancing activities increased in both 2002 and 2001. Debt issuances, net
of redemptions and other payments of debt, increased in both years. In December 2002, the company issued 25 million 7% equi-
ty units in an underwritten public offering and received net proceeds of $1.213 billion. Refer to Note 5 for a detailed description
of the equity units. As further described in Note 8, in conjunction with this issuance, the company issued 14.95 million shares of
common stock pursuant to an underwritten offering and received net proceeds of $414 million. The proceeds from these concur-
rent offerings were used to fund acquisitions, settle certain equity forward agreements and retire a portion of existing debt. In April
2002, the company issued $500 million of term debt, maturing in May 2007, and bearing a 5.25% coupon rate. The net proceeds
were used for working capital, to repay certain existing debt, for capital expenditures and for general corporate purposes.

As further described in Note 5, in May 2001 the company issued $800 million of callable convertible debentures, bearing an initial
1.25% coupon rate, and maturing in May 2021, in order to balance its capital structure and reduce net interest expense. The proceeds
of the debt were used to reﬁnance certain of the company’s short-term debt. As of December 31, 2002, the holders can require the
company to repurchase the debt in May of 2003, 2006, 2011 and 2016. The company also issued other debt during 2001, prin-
cipally to fund its investing activities.

In order to better match the currency denomination of its assets and liabilities, the company rebalanced certain of its debt during
2000, acquiring $878 million of its U.S. Dollar denominated debt securities and increasing its non-U.S. Dollar denominated debt.

The company’s net-debt-to-capital ratio was 40.3% and 35.9% at December 31, 2002 and 2001, respectively. The net-debt-to-capital
ratio is not a measure deﬁned by GAAP. The ratio is calculated as net debt (short-term and long-term debt and lease obligations,
net of cash and equivalents) divided by capital (the total of net debt and stockholders’ equity). The net-debt-to-capital ratio in 2002 was
calculated in accordance with the company’s primary credit agreements, which give 70% equity credit to the company’s equity units.

Common stock cash dividends increased in both 2002 and 2001. Effective at the beginning of 2000, the company changed from
a quarterly to an annual dividend payout schedule, resulting in lower cash dividends paid during 2000. Aside from this change,
common stock cash dividends increased in both 2002 and 2001 due to a higher number of shares outstanding. In November 2002,
the board of directors declared an annual dividend on the company’s common stock of $0.582 per share. The dividend, which was

MANAGEMENT’S DISCUSSION AND ANALYSIS

payable on January 6, 2003 to stockholders of record as of December 13, 2002, is a continuation of the current annual rate. Cash
received for stock issued under employee beneﬁt plans decreased in both 2002 and 2001. The decrease in 2002 was primarily due
to a lower level of stock option exercises. The decrease in 2001 was primarily due to an unusually high level of stock option exer-
cises in 2000 as employees transferring to Edwards as a result of the March 31, 2000 spin-off of that business were required to
exercise their options by June 30, 2000. In order to rebalance the company’s capital structure following the acquisition of ASTA,
the company issued 9,656,237 shares of Baxter common stock for $500 million in December 2001. Stock repurchases increased
in 2002 and decreased in 2001. The increase in repurchases in 2002 was principally related to the company’s decision to exit sub-
stantially all of its equity forward agreements, which is further discussed below.

“Operational cash ﬂow” 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. Management believes providing this supplemental non-
GAAP measure facilitates a complete analysis of the company’s cash ﬂows.

The following table reconciles cash ﬂows from continuing operations, as determined by GAAP, to “operational cash ﬂow,” which
is not a measure deﬁned by GAAP:

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

Cash ﬂows from continuing operations under GAAP
Capital expenditures
Net interest after tax
Other

“Operational cash ﬂow” – continuing operations

2002

2001

2000

$1,251
(848)
40
25

$ 468

$1,181
(759)
54
80

$ 556

$1,259
(625)
51
(48)

$ 637

Long-Term Debt, Credit Facilities, Access to Capital, Commitments and Contingencies
In the normal course of business, the company enters into contracts and commitments which obligate the company to make payments
in the future. The table below sets forth the company’s signiﬁcant future obligations by time period. Excluded from this table are
accounts payable and accrued expenses, and certain other short-term and long-term liabilities included in the consolidated balance
sheet, as well as the contingent liabilities discussed below.

years ended December 31 (in millions)

2003

Short-term debt
Long-term debt
Leases, principally operating
Total contractual cash obligations

$ 112
919 1
116
$1,147

2004

$ —
480
93
$573

2005

$ —
149
70
$219

2006

$ —
1,928
68
$1,996

2007

$ —
674
76
$750

Thereafter

Total

$ — $ 112
4,470
320
527
104
$5,109
$424

1 Includes $800 million of convertible debt which may be put to Baxter in May 2003 and $12 million of commercial paper. As reflected in the Future Minimum
Lease Payments and Debt Maturities table in Note 5, this debt is supported by existing credit facilities with funding expiration dates in 2004 and 2007, and man-
agement intends to reﬁnance this debt on a long-term basis.

The company intends to fund its short-term and long-term obligations as they mature through cash ﬂows from operations, by issuing
additional debt, by entering into other ﬁnancing arrangements or by issuing common stock. The company believes it has lines of
credit adequate to support ongoing operational requirements. Beyond that, the company believes it has sufﬁcient ﬁnancial ﬂexibility
to attract long-term capital on acceptable terms as may be needed to support its growth objectives. The company’s ability to generate
cash ﬂows from operations, issue additional debt, enter into other ﬁnancing arrangements, or raise additional long-term capital on
acceptable terms could be adversely affected in the event there is a material decline in the demand for the company’s products,
deterioration in the company’s key ﬁnancial ratios or credit ratings, or other signiﬁcantly unfavorable changes in conditions. While
a deterioration in the company’s credit rating could unfavorably impact the ﬁnancing costs associated with the credit arrangements
and debt outstanding, such a downgrade would not affect the company’s ability to draw on the credit arrangements, and would
not result in an acceleration of the scheduled maturities of the outstanding debt.

36 Baxter International Inc. 2002 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

Refer to Note 5 for further discussion of the company’s long-term debt, credit facilities and other commitments. The company
maintains two revolving credit facilities, which totaled $1.6 billion at December 31, 2002, and have funding expiration dates in
2004 and 2007. The facilities enable the company to borrow funds in U.S. Dollars, Euros or Swiss Francs on an unsecured basis
at variable interest rates and contain various covenants, including a maximum debt-to-capital ratio and a minimum interest coverage
ratio. The company has never drawn on these facilities and does not intend to do so in the foreseeable future. Baxter also maintains
other short-term credit arrangements, which totaled $722 million at December 31, 2002, of which $112 million of borrowings
were outstanding. As of December 31, 2002, the company can issue up to $70 million of securities, including debt, preferred stock,
common stock, warrants, purchase contracts and other securities, under effective registration statements ﬁled with the SEC. Man-
agement intends to ﬁle a registration statement in 2003 to increase the amount of the securities available for issuance. The company’s
debt ratings on senior debt are A3 by Moody’s, A by Standard & Poor’s and A by Fitch. The company’s debt ratings on short-term
debt are P2 by Moody’s, A1 by Standard & Poor’s and F1 by Fitch.

As further discussed in Note 5, the company periodically enters into off-balance sheet ﬁnancing arrangements where economical
and consistent with the company’s business strategy. At December 31, 2002 the company maintains operating lease agreements relat-
ing to facilities and equipment used in the operations of the company and its afﬁliates. Two of the lease agreements are with spe-
cial-purpose entities which, in accordance with GAAP, are not consolidated by the company. Under each lease, the company has
the right to renegotiate renewal terms, exercise a purchase option with respect to the leased property or arrange for the sale of the
leased property. In the event the leased property is sold on behalf of the lessor and the sales proceeds are less than the lessor’s invest-
ment in the property, the company is responsible for the shortfall, up to an aggregate maximum recourse amount under all of the
leases of $220 million. At December 31, 2002, management believes the fair values of the properties equal or exceed the lessors’
investments in the leased properties.

As further discussed in Note 6, the company has also entered into agreements with ﬁnancial institutions whereby it periodically
securitizes an undivided interest in certain pools of trade accounts receivable (including lease receivables). Pursuant to its primary
securitization agreement, a subsidiary of the company has irrevocably sold accounts receivable to a special-purpose bankruptcy-
remote entity that ﬁnances these purchases by issuing beneﬁcial interests in the receivables to third-party investors. Subject to certain
conditions, the subsidiary may sell additional eligible receivables from time to time in the future. In accordance with GAAP, the
special-purpose bankruptcy-remote entity is not consolidated by the company. Under the company’s other securitization facilities,
the company may transfer, on an ongoing basis, undivided ownership interests in eligible accounts receivables directly to certain third-
party investors. Certain of the arrangements include limited recourse provisions, which are not material to the consolidated ﬁnancial
statements. Neither the buyers of the receivables nor the investors in these transactions have recourse to assets other than the trans-
ferred receivables. The company continues to service the receivables under all of the arrangements, and retains a subordinated residual
interest in the receivables under certain of the arrangements. The carrying amount of the retained interests, which approximates fair
value, was $78 million at December 31, 2002. The amount of the retained interests and the costs of certain of the securitization
arrangements vary with the company’s credit rating. Under one of the agreements, the company is required to maintain compliance
with various covenants, including a maximum debt-to-capital ratio and a minimum interest coverage ratio. The company was in com-
pliance with all covenants at December 31, 2002. Another arrangement requires that the company post modest cash collateral in
the event of a speciﬁed unfavorable change in credit rating. The potential cash collateral, which was not required as of December
31, 2002, totals less than $20 million. The portfolio of receivables sold totaled $721 million and $683 million at December 31,
2002 and 2001, respectively. The proceeds from the receivable sales were used to reduce borrowings.

As further discussed in Note 6, in order to partially offset the dilutive effect of employee stock options, the company has period-
ically entered into forward agreements with independent third parties related to the company’s common stock. The forward agreements,
which have a fair value of zero at inception, require the company to purchase its common stock from the counterparties on speciﬁed
future dates and at speciﬁed prices. The company may, at its option, terminate and settle these agreements early at any time before
maturity. The agreements include certain Baxter stock price thresholds, below which the counterparty has the right to terminate
the agreements. If the thresholds were met in the future, the number of shares that could potentially be issued by the company
under all of the agreements is subject to contractual maximums, and the maximum at December 31, 2002 is 115 million shares.
The contracts give the company the choice of net-share, net-cash or physical settlement upon maturity or upon any earlier settlement
date. In accordance with GAAP, these contracts are not recorded in the ﬁnancial statements until they are settled. The settlements

MANAGEMENT’S DISCUSSION AND ANALYSIS

of these contracts (whether by net-share, net-cash or physical settlement) are classiﬁed within stockholders’ equity. At December
31, 2002, the company had outstanding forward agreements related to 15 million shares, which all mature in 2003, and have exercise
prices ranging from $33 to $52 per share, with a weighted-average exercise price of $49 per share (the company’s common stock
closed at $28 on December 31, 2002). In 2002, management decided to exit substantially all of the forward agreements and the
company completed a signiﬁcant amount of the terminations during 2002. Management expects to complete the exit strategy during
2003. As discussed above, a portion of the net proceeds from the December 2002 issuance of equity units was used to fund the exit of
the equity forward agreements.

As discussed in Note 5, the company has guaranteed repayment of certain shared investment plan participant obligations, in the amount
of $219 million at December 31, 2002. The plan also includes certain risk-sharing provisions whereby, after May 3, 2002, the
company shares 50% in any loss incurred by the participants relating to a stock price decline. The maximum loss under this risk-
sharing provision, assuming the company’s stock price declines to zero, is $90 million. The company may take actions relating to
participants and their assets to obtain full reimbursement for any amounts the company pays to the banks pursuant to the loan
guarantee, in excess of the obligation under the risk-sharing provision. No liability has been recorded relating to these contingencies.

As further discussed in Note 3, the company has contingent liabilities to pay additional purchase price on certain recent business
acquisitions of up to $292 million based on a percentage of future revenues and proﬁts and the achievement of certain regulatory
approval milestones.

As discussed in Note 5, in the normal course of business, Baxter enters into certain joint development and commercialization arrange-
ments with third parties, often with investees of the company. The arrangements are varied but generally provide that Baxter will
receive certain rights to manufacture, market or distribute a speciﬁed technology or product under development by the third party,
in exchange for payments by Baxter. At December 31, 2002, the unfunded milestone payments under these arrangements totaled less
than $150 million, and the majority of them were contingent upon the third parties’ achievement of contractually speciﬁed milestones.

As discussed in Note 5, as part of its ﬁnancing program, the company had commitments to extend credit, two of which were to
investees, of $180 million and $68 million at December 31, 2002 and 2001, respectively, of which $81 million and $30 million
was drawn and outstanding at December 31, 2002 and 2001, respectively. Included in the total commitment amount at December
31, 2002 was a commitment to extend a $50 million ﬁve-year loan to Cerus Corporation (Cerus). Baxter owns approximately 2%
of the common stock of Cerus. The loan commitment, which was completely funded in early 2003, bears a 12% interest rate, with
no interest or principal payments due until 2008. The loan is secured with ﬁrst-priority liens on Cerus’ accounts receivable arising
from the future sale of certain of Cerus’ products. Also included in the total commitment amount at both December 31, 2002 and
2001 was a commitment to Acambis to provide ﬁnancing of $40 million, of which approximately $21 million was drawn and out-
standing at both December 31, 2002 and 2001. Baxter owns approximately 17% of the common stock of Acambis. The ﬁnancing
arrangement includes an initial term of ﬁve years, and renewal options.

As discussed in Note 9, as a result of recent unfavorable asset returns and a decline in market interest rates, at December 31, 2002
the company recorded a net-of-tax reduction of $517 million to accumulated OCI, which is a component of stockholders’ equity, in
order to establish an additional minimum liability in the consolidated balance sheet for its deﬁned beneﬁt pension plans. This had
no impact on the company’s results of operations. As required by SFAS No. 87, “Employers’ Accounting for Pensions,” if the accu-
mulated beneﬁt obligation relating to a pension plan exceeds the fair value of the plan’s assets, the company’s established liability for
the plan must be at least equal to the unfunded accumulated beneﬁt obligation. Depending on market conditions and interest rate
movements in the future, additional charges to accumulated OCI might be required in the future based on valuations performed
on future measurement dates. Based on the 2002 measurement of plan assets and liabilities, management expects to have mini-
mal, if any, cash requirements related to the company’s plans during 2003. Cash requirements, if any, during 2004 and beyond,
will depend on future market conditions.

Refer to Note 12 for a discussion of the company’s legal contingencies. 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.

38 Baxter International Inc. 2002 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

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.

Stock Repurchase Program
As authorized by the board of directors, from time to time the company repurchases its stock on the open market to optimize its
capital structure, depending upon its operational cash ﬂows, net debt level and current market conditions. As further discussed in
Note 6, the company also periodically repurchases its stock from counterparty ﬁnancial institutions in conjunction with the set-
tlement of its equity forward agreements. Effective December 1, 2002, the company will no longer treat settlements of equity forward
agreements as repurchases under the board-authorized open market repurchase program, as such settlements are not open market
transactions. As of December 31, 2002, $243 million was remaining under the board of directors’ October 2002 authorization.
Total stock repurchases were $1,169 million, $288 million and $375 million in 2002, 2001 and 2000, respectively. The stock
repurchases in 2002 included $1,138 million to settle equity forward agreements.

Authorized Shares
In May 2002, shareholders of record on March 8, 2002 approved an amendment to the company’s Restated Certiﬁcate of Incor-
poration to increase the number of authorized shares of common stock to two billion shares from one billion shares. The additional
shares enhance the company’s ﬂexibility in connection with possible future actions, such as stock splits, stock dividends, acquisitions
of property and securities of other companies, ﬁnancings and other corporate purposes.

Stock Split
On February 27, 2001, Baxter’s board of directors approved a two-for-one stock split of the company’s common shares. This approval
was subject to shareholder approval of an increase in the number of authorized shares of common stock, which was received on
May 1, 2001. On May 30, 2001, shareholders of record on May 9, 2001 received one additional share of Baxter common stock
for each share held on May 9, 2001. All share and per share data in this report has been adjusted and restated to reﬂect the split.

FINANCIAL INSTRUMENT MARKET RISK

The company operates on a global basis, and is exposed to the risk that its earnings, cash ﬂows and stockholders’ equity could be
adversely impacted by ﬂuctuations in currency exchange rates, interest rates and the market price of the company’s common stock.
The company’s hedging policy attempts to manage these risks to an acceptable level based on management’s judgment of the
appropriate trade-off between risk, opportunity and costs. Refer to Note 6 for further information regarding the company’s ﬁnancial
instruments and hedging strategies.

Currency Risk
The company is primarily exposed to currency exchange-rate risk with respect to ﬁrm commitments, forecasted transactions and
net assets denominated in Japanese Yen, Euro, British Pound and Swiss Franc. The company manages its foreign currency exposures
on a consolidated basis, which allows the company to net exposures and take advantage of any natural offsets. In addition, the com-
pany utilizes derivative and nonderivative ﬁnancial instruments to further reduce the net exposure to currency ﬂuctuations. Gains
and losses on the hedging instruments are intended to offset losses and gains on the hedged transactions with the goal of reducing
the earnings and stockholders’ equity volatility resulting from ﬂuctuations in currency exchange rates.

The company principally uses forward and option contracts to hedge the risk to earnings associated with ﬂuctuations in currency
exchange rates relating to the company’s ﬁrm commitments and forecasted transactions expected to be denominated in foreign cur-
rencies. The company enters into foreign currency forward agreements and cross-currency swap agreements to hedge certain receiv-
ables, payables and debt denominated in foreign currencies. The company also periodically hedges certain of its net investments in
international afﬁliates using a combination of debt denominated in foreign currencies and cross-currency swap agreements. Certain
other ﬁrm commitments and forecasted transactions are also periodically hedged with forward and option contracts.

In adopting SFAS No. 133, management reassessed its hedging strategies, and, in some cases, increased the company’s use of deriv-
ative instruments or changed the type of derivative instrument used to manage currency exchange-rate risk, in part because the
new accounting standard allows for increased opportunities and different approaches for managing the volatility in earnings and
stockholders’ equity resulting from ﬂuctuations in currency exchange rates.

MANAGEMENT’S DISCUSSION AND ANALYSIS

As part of its risk-management program, the company performs sensitivity analyses to assess potential changes in the fair value of
its foreign exchange ﬁnancial instruments relating to hypothetical and reasonably possible near-term movements in currency
exchange rates. A sensitivity analysis of changes in the fair value of foreign exchange forward and option contracts outstanding at
December 31, 2002, while not predictive in nature, indicated that if the U.S. Dollar uniformly ﬂuctuated unfavorably by 10%
against all currencies, the net fair value of those contracts of $18 million would decrease by approximately $176 million. A similar
analysis performed with respect to forward and option contracts outstanding at December 31, 2001 indicated that the fair value
of such contracts of $163 million would decrease by $157 million. With respect to the company’s cross-currency swap agreements
used to hedge net investments in foreign afﬁliates, if the U.S. Dollar uniformly weakened by 10%, the fair value of the contracts,
which was a negative $498 million as of December 31, 2002, would decrease by approximately $389 million. A similar analysis
performed with respect to the cross-currency swap agreements outstanding at December 31, 2001 indicated that the fair value of such
contracts, which was a negative $1 million, would decrease by $72 million. Any increase or decrease in the fair value of cross-currency
swap agreements as a result of ﬂuctuations in currency exchange rates is substantially offset by the change in the value of the hedged
net investments in foreign afﬁliates. The models recalculate the fair value of the contracts outstanding by replacing the actual
exchange rates at December 31, 2002 and 2001, respectively, with exchange rates that are 10% unfavorable to the actual exchange
rates for each applicable currency. All other factors are held constant. These sensitivity analyses disregard the possibility that cur-
rency exchange rates can move in opposite directions and that gains from one currency may or may not be offset by losses from
another currency. The analyses also disregard the offsetting change in value of the underlying hedged transactions and balances.

Equity Risk
As further discussed above and in Note 6, in order to partially offset the potentially dilutive effect of employee stock options, the
company periodically enters into forward agreements with independent third parties related to the company’s common stock. The
forward agreements, which have a fair value of zero at inception, are not recorded in the ﬁnancial statements until they are settled,
and are classiﬁed within stockholders’ equity. As part of its risk-management program, the company performs sensitivity analyses
to assess potential changes in the fair value of its forward agreements relating to hypothetical and reasonably possible near-term
movements in the company’s stock price. If the company’s stock price as of December 31, 2002 were to decline by 10%, the fair
value of these contracts, which were in a negative position of $302 million at December 31, 2002 (based on a common stock price
of $28 at December 31, 2002), would be reduced by approximately $42 million. Performing a similar analysis as of December 31,
2001, if the company’s stock price as of December 31, 2001 were to decline by 10%, the fair value of these contracts, which were
in a positive position of $167 million at December 31, 2001 (based on a common stock price of $53.63 at December 31, 2001),
would be reduced by approximately $165 million.

Interest Rate and Other Risks
The company is also exposed to the risk that its earnings and cash ﬂows could be adversely impacted by ﬂuctuations in interest
rates. The company’s policy is to manage interest costs using a mix of ﬁxed and ﬂoating rate debt that management believes is
appropriate. To manage this mix in a cost efﬁcient manner, the company periodically enters into interest rate swaps, in which the
company agrees to exchange, at speciﬁed intervals, the difference between ﬁxed and ﬂoating interest amounts calculated by reference
to an agreed-upon notional amount. The company also uses forward-starting interest rate swaps and treasury rate locks to hedge
the risk to earnings associated with ﬂuctuations in interest rates relating to anticipated issuances of term debt.

As part of its risk-management program, the company performs sensitivity analyses to assess potential gains and losses in earnings
relating to hypothetical movements in interest rates. A 17 basis-point increase in interest rates (approximately 10% of the company’s
weighted-average interest rate during 2002) affecting the company’s ﬁnancial instruments, including debt obligations and related
derivatives, and investments, would have an immaterial effect on the company’s 2002 and 2001 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% movement in the assumed discount rate
would have an immaterial effect on the fair values of those assets and liabilities.

With respect to the company’s investments in afﬁliates, management believes any reasonably possible near-term losses in earnings,
cash ﬂows and fair values would not be material to the company’s consolidated ﬁnancial position.

40 Baxter International Inc. 2002 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

NEW ACCOUNTING AND DISCLOSURE STANDARDS

SFAS No. 149, “Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity,” which is expected
to be issued in 2003, will require that certain ﬁnancial instruments that have characteristics of both liabilities and equity be clas-
siﬁed as liabilities in the issuing company’s balance sheet. Many of these instruments were previously classiﬁed as equity. The new
rules will be effective immediately for all contracts created or modiﬁed after the date the pronouncement is issued, and will be otherwise
effective for Baxter at the beginning of the third quarter of 2003. The new rules are to be applied prospectively with a cumulative-
effect adjustment for contracts that were created before the pronouncement was issued and that still exist at the beginning of that
ﬁrst interim period. Under the new rules, the balance sheet classiﬁcation of the company’s equity forward agreements, which are
described above and in Note 6, will change from equity to liabilities. As discussed above, the company is in the process of exiting
these agreements and expects to complete the exit strategy during 2003. Management will analyze this accounting pronouncement,
and does not anticipate that the new standard will have a material impact on the company’s consolidated ﬁnancial statements.

Financial Accounting Standards Board (FASB) Interpretation No. 46, “Consolidation of Variable Interest Entities” (Interpretation
No. 46), was issued in January 2003. The Interpretation deﬁnes variable interest entities (VIE) and requires that the assets, liabili-
ties, noncontrolling interests, and results of activities of a VIE be consolidated if certain conditions are met. For VIE’s created on
or after January 31, 2003, the guidance will be applied immediately. For VIE’s created before that date, the guidance will be applied
at the beginning of the third quarter of 2003. The new rules may be applied prospectively with a cumulative-effect adjustment as
of the beginning of the period in which it is ﬁrst applied or by restating previously issued ﬁnancial statements for one or more
years with a cumulative-effect adjustment as of the beginning of the ﬁrst year restated. Management is in the process of analyzing
the potential effect of this recently issued accounting pronouncement on the company’s future consolidated ﬁnancial statements,
including the impact on certain of the company’s operating leases, which are described in Note 5, and the accounts receivable secu-
ritization arrangements, which are described in Note 6.

SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (SFAS No. 148), which amends SFAS No.
123, was issued in December 2002. The new standard provides alternative methods for transition for a voluntary change from the
intrinsic method of accounting to the fair value-based method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and frequent disclosures in ﬁnancial
statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions are effective
for 2002. The new interim disclosure provisions are effective beginning in the ﬁrst quarter of 2003. The company has implemented
the annual disclosure provisions in these consolidated ﬁnancial statements. Management does not have immediate plans for the
company to voluntarily elect to adopt the fair value-based method of accounting for stock-based employee compensation.

FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others” (Interpretation No. 45), was issued in November 2002. The initial recognition and measurement provi-
sions of this new standard, which require a guarantor to recognize a liability at inception of a guarantee at fair value, are effective
on a prospective basis to guarantees issued or modiﬁed on or after January 1, 2003. Management is in the process of analyzing the
recognition and measurement provisions of Interpretation No. 45, and has not estimated the potential impact on the company’s
future consolidated ﬁnancial statements, as the impact will depend on the nature and amount of future transactions. The disclosure
provisions, which increase the required disclosures relating to guarantees, have been adopted in these consolidated ﬁnancial statements.

Emerging Issues Task Force (EITF) No. 00-21, “Revenue Arrangements with Multiple Deliverables” (EITF No. 00-21), was issued
in November 2002. The EITF No. 00-21 consensus, which is effective for revenue arrangements entered into on or after July 1, 2003,
outlines the approach to be used to determine when a revenue arrangement for multiple deliverables should be divided into separate
units of accounting and, if separation is appropriate, how the arrangement consideration should be allocated to the identiﬁed
accounting units. Management is in the process of analyzing the new rules and has not determined the potential impact on the
company’s future consolidated ﬁnancial statements, as the impact will depend on the nature and amount of future transactions.

SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS No. 146), was issued in June 2002. SFAS No.
146 is effective for exit or disposal activities initiated on or after January 1, 2003, and requires that costs associated with exit or dis-
posal activities be recognized when they are incurred rather than on the date the company commits to an exit or disposal plan.
SFAS No. 146 also establishes that the liability should be measured and recorded at fair value. Accordingly, the new standard
changes the amount and timing of expense recognition related to any future exit or disposal activities.

REPORT OF MANAGEMENT

Management is responsible for the integrity and accuracy of the consolidated ﬁnancial statements of Baxter
International Inc. (Baxter) and other ﬁnancial data included in this Annual Report. The ﬁnancial statements
have been prepared in conformity with accounting principles generally accepted in the United States of
America and include amounts based on the best estimates and judgments of management with appropriate
consideration given to materiality.

Management believes that the foundation of an effective system of internal controls is a strong ethical company
culture. The Corporate Responsibility Ofﬁce, which was established in 1993 and reports to the Public Policy
Committee of the Board of Directors, is responsible for developing and communicating Baxter’s business
practice standards and policies; providing guidance and reporting potential business practice violations
through multiple channels, including a conﬁdential toll-free telephone number; and monitoring global
compliance through, among other processes, its structure of regional business practice committees. The
monitoring process includes an annual certiﬁcation of compliance with Baxter’s business practice standards
by senior managers and thousands of other employees worldwide. These activities are coordinated and
implemented by Baxter’s Business Practices staff.

Management maintains a system of internal controls designed to provide reasonable assurance that Baxter’s
assets are protected and that transactions are appropriately authorized and recorded to permit the preparation
of consolidated ﬁnancial statements in accordance with accounting principles generally accepted in the
United States of America. The concept of reasonable assurance is based on the recognition that there are
inherent limitations in all systems of internal controls, and the cost of such systems should not exceed the
beneﬁts derived. The system of internal controls, as well as Baxter’s other disclosure controls and procedures,
are supported by qualiﬁed personnel, organizational assignments that provide appropriate delegation of
authority and division of responsibility, written policies and procedures, and Baxter’s Disclosure Committee.
Internal controls are monitored by a staff of corporate auditors who recommend changes to the system in
response to changes in business conditions and operations.

The Audit Committee of the Board of Directors, which is composed entirely of independent directors, meets
periodically with management, the corporate auditors and the independent accountants to review audit
plans and results, internal controls, ﬁnancial reports and related matters. Both the corporate auditors and the
independent accountants report directly to the Audit Committee and periodically meet privately with the com-
mittee and have unrestricted access to its individual members. The Audit Committee has established policies
and practices consistent with the recently enacted corporate reform laws to ensure auditor independence.

PricewaterhouseCoopers LLP, independent accountants, are engaged by the Audit Committee to audit
Baxter’s consolidated ﬁnancial statements in accordance with auditing standards generally accepted in the
United States of America. Their opinion is based on procedures that they believe to be sufﬁcient to provide
reasonable assurance that the consolidated ﬁnancial statements contain no material errors.

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

Brian P. Anderson
Senior Vice President and
Chief Financial Ofﬁcer

42 Baxter International Inc. 2002 Annual Report

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, 2002
and 2001, and the results of their operations and their cash ﬂows for each of the three years in the period
ended December 31, 2002, 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 pres-
entation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the consolidated ﬁnancial statements, effective January 1, 2002, the company adopt-
ed Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal
of Long-Lived Assets.” The company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” on
January 1, 2002 for all goodwill and intangible assets acquired prior to July 1, 2001. Effective January 1,
2001, the company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

PricewaterhouseCoopers LLP
Chicago, Illinois
February 14, 2003

CONSOLIDATED BALANCE SHEETS

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

2002

2001

Current Assets

Cash and equivalents
Accounts and other current receivables
Inventories
Short-term deferred income taxes
Prepaid expenses and other
Total current assets

Property, Plant and Equipment, Net
Other Assets

Goodwill
Other intangible assets
Other
Total other assets
Total assets
Short-term debt
Current maturities of long-term debt and

Current Liabilities

lease obligations

Accounts payable and accrued liabilities
Income taxes payable
Total current liabilities

Long-Term Debt and Lease Obligations
Long-Term Deferred Income Taxes
Other Long-Term Liabilities
Commitments and Contingencies
Stockholders’ Equity

Common stock, $1 par value, authorized

$ 1,169
1,838
1,745
125
283
5,160
3,907
1,494
526
1,391
3,411
$12,478
$ 112

108
3,043
588
3,851
4,398
29
1,261

$ 582
1,622
1,341
82
350
3,977
3,306
1,349
349
1,362
3,060
$10,343
$ 149

52
2,432
661
3,294
2,486
218
588

2,000,000,000 shares in 2002 and 1,000,000,000 shares
in 2001, issued 626,574,109 shares in 2002 and
608,817,449 shares in 2001

Common stock in treasury, at cost, 27,069,808 shares

in 2002 and 9,924,459 shares in 2001

Additional contributed capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity

627

609

(1,326)
3,223
1,689
(1,274)
2,939
$12,478

(328)
2,815
1,093
(432)
3,757
$10,343

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

44 Baxter International Inc. 2002 Annual Report

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

Operations

Per Share Data

Net sales
Costs and expenses
Cost of goods sold
Marketing and administrative expenses
Research and development expenses
In-process R&D (IPR&D) and other

special charges

Charge relating to A, AF and

AX series dialyzers
Goodwill amortization
Interest expense, net
Other expense (income)

Total costs and expenses
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

Loss from discontinued operations,

including exit charge in 2002 of $229,
net of income tax beneﬁt

Income before cumulative effect of

accounting change

Cumulative effect of accounting change,

net of income tax beneﬁt

Net income
Earnings per basic common share

Continuing operations, before cumulative

effect of accounting change

Discontinued operations
Cumulative effect of accounting change

Net income
Earnings per diluted common share

Continuing operations, before cumulative

effect of accounting change

Discontinued operations
Cumulative effect of accounting change

Net income
Weighted average number of
common shares outstanding
Basic
Diluted

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

CONSOLIDATED STATEMENTS OF INCOME

2002

$8,110

2001

$7,356

2000

$6,697

4,318
1,562
501

189

—
—
51
92
6,713

1,397

364

1,033

(255)

778

3,944
1,440
426

280

189
43
68
(13)
6,377

979

304

675

(11)

664

3,641
1,330
378

286

—
28
84
(20)
5,727

970

216

754

(14)

740

—
$ 778

(52)
$ 612

—
$ 740

$ 1.72
(0.43)
—
$ 1.29

$ 1.67
(0.41)
—
$ 1.26

$ 1.15
(0.02)
(0.09)
$ 1.04

$ 1.11
(0.02)
(0.09)
$ 1.00

$ 1.29
(0.03)
—
$ 1.26

$ 1.26
(0.02)
—
$ 1.24

600
618

590
609

585
597

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

2002

2001

2000

Cash Flows from Operations

Income from continuing operations before
cumulative effect of accounting change

Adjustments

Depreciation and amortization
Deferred income taxes
Loss (gain) on asset dispositions and

impairments, net

IPR&D and other special charges
Charge relating to A, AF and AX

series dialyzers

Other
Changes in balance sheet items

Accounts receivable
Inventories
Accounts payable and accrued liabilities
Net litigation payable and other
Cash ﬂows from continuing operations
Cash ﬂows from discontinued operations
Cash ﬂows from operations

Cash Flows from Investing Activities Capital expenditures

Additions to the pool of equipment placed

with or leased 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
Proceeds from stock issued under

employee beneﬁt plans
Other issuances of stock
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 schedule of noncash investing activities
Fair value of assets acquired, net of liabilities assumed
Common stock issued at fair value
Net cash paid

Other supplemental information
Interest paid, net of portion capitalized
Income taxes paid

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

46 Baxter International Inc. 2002 Annual Report

$ 1,033

$ 675

$ 754

439
72

26
189

—
40

(276)
(269)
37
(40)
1,251
(58)
1,193
(734)

(114)

(492)
34
(1,306)
2,412
(633)

(185)
(349)

180
414
(1,169)
670
30
587
582
$ 1,169

$ 652
160
$ 492

$
83
$ 312

427
116

(20)
280

189
7

(114)
(177)
(84)
(118)
1,181
(95)
1,086
(641)

(118)

(805)
35
(1,529)
2,108
(946)

(756)
(341)

192
500
(288)
469
(23)
3
579
$ 582

$ 1,042
237
$ 805

$ 109
$ 243

394
(171)

6
286

—
25

58
(113)
65
(45)
1,259
(83)
1,176
(524)

(101)

(330)
(60)
(1,015)
1,180
(1,953)

879
(84)

233
—
(375)
(120)
(68)
(27)
606
$ 579

$ 620
290
$ 330

$ 110
$ 279

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

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

Amount

2002

2001

2000

609
15
3
—
627

10
—
23
(6)
—
27

Common Stock
Beginning of year
Common stock issued
Common stock issued for acquisitions
Two-for-one stock split
End of year

Common stock in Treasury
Beginning of year
Common stock issued for acquisitions
Purchases of common stock
Common stock issued under employee beneﬁt plans
Two-for-one stock split
End of year

Additional Contributed Capital
Beginning of year
Common stock issued
Common stock issued for acquisitions
Equity units issued
Common stock issued under employee beneﬁt plans
Two-for-one stock split
End of year

Retained Earnings
Beginning of year
Net income
Elimination of reporting lag for 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) income
End of year
Total stockholders’ equity

Comprehensive Income (Loss)
Net income

Cumulative effect of accounting change,

net of tax of $5

Currency translation adjustments, net of

tax expense (beneﬁt) of ($223) in 2002, $58 in 2001
and $82 in 2000

Unrealized net gain (loss) on hedging activities,
net of tax expense (beneﬁt) of ($67) in 2002
and $45 in 2001

Unrealized net gain (loss) on marketable equity
securities, net of tax expense (beneﬁt) of ($5)
in 2002, ($14) in 2001 and $15 in 2000
Additional minimum pension liability, net of

tax beneﬁt of $287

Other comprehensive income (loss)

$ 609
15
3
—
627

(328)
—
(1,169)
171
—
(1,326)

2,815
399
157
(157)
9
—
3,223

1,093
778
—
(346)

164
1,689

(432)
(842)
(1,274)
$ 2,939

$ 778

—

(203)

(114)

(8)

(517)
(842)

298
10
3
298
609

5
(2)
9
(7)
5
10

$ 298
10
3
298
609

(349)
63
(288)
246
—
(328)

2,506
490
171
—
(54)
(298)
2,815

853
612
(23)
(349)

—
1,093

(649)
217
(432)
$3,757

$ 612

155

(20)

—
217

Elimination of reporting lag for international operations,

net of tax beneﬁt of $8

Total comprehensive income

—
$ (64)

(23)
$ 806

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

294
—
4
—
298

4
(1)
6
(4)
—
5

$ 294
—
4
—
298

(269)
39
(375)
256
—
(349)

2,282
—
247
—
(23)
—
2,506

1,415
740
—
(341)

(961)
853

(374)
(275)
(649)
$2,659

$ 740

—

(297)

—

—
(275)

—
$ 465

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1
Summary of Signiﬁcant Accounting Policies

The Company and Financial Statement Presentation
Baxter International Inc. (Baxter or the company) is a global med-
ical products and services company with expertise in medical
devices and supplies, pharmaceuticals and biotechnology that,
through its subsidiaries, assists health-care professionals and
their patients with the treatment of complex medical condi-
tions, including hemophilia, immune deﬁciencies, infectious
diseases, cancer, kidney disease, trauma and other conditions.
The company’s products and services are described in Note 13.

The preparation of the ﬁnancial statements in conformity with
generally accepted accounting principles (GAAP) requires man-
agement to make estimates and assumptions that affect reported
amounts and related disclosures. Actual results could differ
from those estimates.

Basis of Consolidation
The accompanying consolidated ﬁnancial statements include
the accounts of Baxter and its majority-owned subsidiaries, and
any minority-owned subsidiaries that Baxter controls. All sig-
niﬁcant intercompany balances and transactions have been
eliminated in consolidation. Historically, certain operations out-
side the United States were included in the consolidated ﬁnancial
statements on the basis of ﬁscal years ending November 30. In
conjunction with the implementation of new ﬁnancial systems,
this one-month lag was eliminated as of the beginning of ﬁscal
2001, and the December 2000 net loss of $23 million for these
entities was recorded directly to retained earnings. As further
discussed in Notes 5 and 6, the company enters into certain
leasing and securitization arrangements with special-purpose
entities. In accordance with GAAP, these entities are not consol-
idated by the company.

Revenue Recognition
The company’s policy is to recognize revenues from product
sales and services when earned, as deﬁned by GAAP. Speciﬁcally,
revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred (or services have been rendered),
the price is ﬁxed or determinable, and collectibility is reason-
ably assured. For product sales, revenue is not recognized until
title and risk of loss have transferred to the customer. The com-
pany enters into certain arrangements in which it commits to
provide multiple elements to its customers. Revenue related to
an individual element is deferred unless delivery of the element
represents a separate earnings process. Total revenue for these
arrangements is allocated among the elements based on the fair
value of the individual elements, with the fair values deter-
mined based on objective evidence (generally based on sales of
the individual element to other third parties). Provisions for
discounts, rebates to customers, and returns are accrued at the
time the related sales are recorded, and are reﬂected as a reduc-
tion of sales.

48 Baxter International Inc. 2002 Annual Report

Stock Compensation Plans
The company has a number of stock-based employee compensa-
tion plans, including stock option, stock purchase and restricted
stock plans, which are described in Note 8. The company
applies the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, “Accounting for
Stock Issued to Employees,” and related interpretations in
accounting for these plans. In accordance with this intrinsic value
method, no compensation expense is recognized for the com-
pany’s ﬁxed stock option plans and employee stock purchase
plans. The following table illustrates the effect on net income and
earnings per share (EPS) if the company had applied the
fair value recognition provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, “Accounting for Stock-
Based Compensation” (SFAS No. 123), to all stock-based
employee compensation.

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

Net income, as reported
Add: Stock-based employee

compensation expense included
in reported net income, net of tax
Deduct: Total stock-based employee
compensation expense determined
under the fair value method,
net of tax

Pro forma net income
Earnings per basic common share

As reported
Pro forma

Earnings per diluted common share

As reported
Pro forma

2002

2001

2000

$ 778

$ 612

$ 740

(159)
$ 621

(167)
$ 448

(73)
$ 681

$ 1.29
$ 1.04

$ 1.04
$ 0.76

$1.26
$1.16

$ 1.26
$ 1.02

$ 1.00
$ 0.74

$1.24
$1.14

Pro forma compensation expense for stock options and employee
stock purchase subscriptions was calculated using the Black-
Scholes model. The pro forma expense for stock option grants
was calculated with the following weighted-average assumptions
for grants in 2002, 2001 and 2000, respectively: dividend yield
of 2%, 1% and 1.25%; expected life of six years for all periods;
expected volatility of 37%, 36% and 31%; and risk-free interest
rates of 4.1%, 4.9% and 6.1%. The weighted-average fair values
of stock options granted during the year were $15.61, $18.21
and $13.75 in 2002, 2001 and 2000, respectively.

The pro forma expense for employee stock purchase subscriptions
was calculated with the following weighted-average assump-
tions for 2002, 2001 and 2000, respectively: dividend yield of
2%, 1% and 1.4%; expected term of one year for all periods;
expected volatility of 38%, 43% and 33%; and risk-free inter-
est rates of 1.8%, 4.1% and 6.2%. The weighted-average fair
values of the purchase rights granted in 2002, 2001 and 2000
were $12.41, $18.56 and $11.49, respectively.

Foreign Currency Translation
The results of operations for non-U.S. subsidiaries, other than
those located in highly inﬂationary countries or for which the
U.S. dollar is the functional currency, are translated into U.S.
dollars using the average exchange rates during the year, while
assets and liabilities are translated using period-end rates. Result-
ing translation adjustments are recorded as currency translation
adjustments (CTA) within other comprehensive income (OCI).
Where foreign afﬁliates operate in highly inﬂationary economies,
non-monetary amounts are remeasured at historical exchange
rates while monetary assets and liabilities are remeasured at the
current rate with the related adjustments reﬂected in the con-
solidated statements of income.

Allowance for Doubtful Accounts
In the normal course of business, the company provides credit
to customers in the health-care industry, performs credit evalu-
ations of these customers and maintains reserves for potential
credit losses. In determining the amount of the allowance for
doubtful accounts, management considers historical credit losses,
the past due status of receivables, payment history and other
customer-speciﬁc information, and any other relevant factors
or considerations. The past due status of a receivable is based
on its contractual terms. Receivables are written off when man-
agement determines they are uncollectible. Credit losses, when
realized, have been within the range of management’s allowance
for doubtful accounts.

Securitizations of Accounts Receivable
The company accounts for the securitization of accounts receiv-
ables in accordance with SFAS No. 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities.” When the company sells accounts receivable in
connection with these securitizations, a subordinated interest
in the securitized portfolio and servicing responsibilities for the
portfolio are generally retained by the company. The carrying
value of the transferred receivables is allocated between the portion
sold and the portion retained by Baxter based on their relative
fair values. The difference between the net cash proceeds
received and the allocated carrying value of the receivables sold,
which is recognized immediately in the consolidated statement
of operations, is generally not material. The retained interests
are classiﬁed in other assets. The fair values of the retained interests
are estimated based on expected future cash ﬂows, factoring in
expected future losses, and discounted at an appropriate rate of
interest. Assumptions used in estimating future net cash ﬂows
take into consideration both historical experience and current
projections. Servicing assets or liabilities are not recognized because
the company receives adequate compensation to service the
sold receivables.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Product Warranties
The company provides for the estimated costs that may be
incurred under its warranty programs when the cost is both
probable and reasonably estimable, which is at the time the relat-
ed revenue is recognized. The cost is determined based upon
actual company experience for the same or similar products as
well as any other relevant information. The following is a sum-
mary of activity in the product warranty liability.

as of and for the year ended
December 31, 2002 (in millions)

Beginning of year
New warranties and adjustments to existing warranties
Payments in cash or in kind
End of year

$ 45
45
(37)
$ 53

Inventories
as of December 31 (in millions)

Raw materials
Work in process
Finished products
Total inventories

2002

2001

$ 439 $ 353
244
744
$1,341

511
795
$1,745

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 inven-
tory were $118 million and $125 million at December 31, 2002
and 2001, respectively.

Property, Plant and Equipment
as of December 31 (in millions)

Land
Buildings and leasehold improvements
Machinery and equipment
Equipment with customers
Construction in progress
Total property, plant and

equipment, at cost

Accumulated depreciation and

amortization

Property, plant and equipment, net

2002

2001

129 $ 115
1,111
3,214
538
754

1,300
3,671
567
1,012

6,679

5,732

(2,772)

(2,426)
$ 3,907 $ 3,306

Depreciation and amortization are calculated on the straight-
line method over the estimated useful lives of the related assets,
which range from 20 to 50 years for buildings and improvements
and from 3 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 accel-
erated methods of depreciation are used for income tax purposes.
Accumulated amortization for assets under capital leases was
$11 million and $10 million at December 31, 2002 and 2001,
respectively. Depreciation expense was $359 million, $326

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

million and $301 million in 2002, 2001 and 2000, respectively.
Repairs and maintenance expense was $167 million, $167 mil-
lion and $121 million in 2002, 2001 and 2000, respectively.

Acquisitions
Acquisitions are accounted for under the purchase method.
The company applies the provisions of SFAS No. 141, “Busi-
ness Combinations,” in accounting for acquisitions completed
after June 30, 2001. Results of operations of acquired companies
are included in the company’s results of operations as of the
respective acquisition dates. The purchase price of each acqui-
sition is allocated to the net assets acquired based on estimates
of their fair values at the date of the acquisition. The excess of
the purchase price over the fair values of the tangible assets,
identiﬁable intangible assets and liabilities acquired is allocated
to goodwill. The allocation of purchase price in certain cases
may be subject to revision based on the ﬁnal determination of
fair values. Contingent purchase price payments are generally
recorded when the contingencies are resolved, as the outcomes
of the contingencies are not determinable beyond a reasonable
doubt on the acquisition date. The contingent consideration, if
paid, is recorded as an additional element of the cost of the
acquired company. A portion of the purchase price for certain
acquisitions is allocated to in-process research and development
(IPR&D) and immediately expensed.

IPR&D
Amounts allocated to IPR&D are determined using the income
approach, which measures the value of an asset by the present
value of its future economic beneﬁts. Estimated cash ﬂows are
discounted to their present values at rates of return that reﬂect
the risks associated with the particular projects. The status of
development, stage of completion, assumptions, nature and
timing of remaining efforts for completion, risks and uncer-
tainties, and other key factors may vary by individual project.
The valuations incorporate the stage of completion for each
individual project. Projected revenue and cost assumptions are
determined considering the company’s historical experience and
industry trends and averages. No value is assigned to any IPR&D
project unless it is probable of being further developed.

Long-Lived Asset Impairment Reviews
Pursuant to SFAS No. 142, “Goodwill and Other Intangible
Assets” (SFAS No. 142), goodwill related to acquisitions complet-
ed after June 30, 2001 and all goodwill effective January 1, 2002
is not being amortized, but is subject to at least annual impair-
ment reviews, beginning on January 1, 2002. Other intangible
assets and long-lived assets are reviewed for impairment in accor-
dance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” effective January 1, 2002.

In reviewing goodwill for impairment under SFAS No. 142,
potential impairment is identiﬁed by comparing the fair value
of a reporting unit with its carrying amount, and if the fair

50 Baxter International Inc. 2002 Annual Report

value is less than the carrying amount, an impairment loss is
recorded as the excess of the carrying amount of the goodwill
over the implied value. The implied fair value is determined by
allocating the fair value of the entire unit to all of its assets and
liabilities, with any excess of fair value over the amount allocated
representing the implied fair value of that unit’s goodwill. The
company’s reporting units are the same as its reportable operating
segments, Medication Delivery, BioScience and Renal.

The company reviews the carrying amounts of long-lived assets
other than goodwill for potential impairment 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 sustained decline in the market price
of an asset, a signiﬁcant adverse change in the extent or man-
ner in which the asset is used, a signiﬁcant adverse change in
legal factors or the business climate, or recurring or projected
operating losses or cash outﬂows. In evaluating the recoverability
of assets, management compares the carrying amounts of such
assets with the estimated undiscounted future operating cash
ﬂows. In the event impairment exists, an impairment charge
would be recorded as the amount by which the carrying amount
of the long-lived asset exceeds its fair value. In addition, the
remaining amortization period for the impaired asset would be
reassessed and revised if necessary.

Earnings per Share
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 out-
standing during the period. The dilutive effect of outstanding
employee stock options, employee stock purchase plans and the
company’s equity units is reﬂected in the denominator for
diluted EPS by application of the treasury stock method under
SFAS No. 128, “Earnings per Share.” Under this method, the
number of shares of common stock is increased by the excess,
if any, of the number of shares issuable upon exercise of the
employee stock options, purchase of the employee stock pur-
chase subscriptions or settlement of the purchase contracts
included in the equity units, over the number of shares that
could be purchased by Baxter in the market, at the average mar-
ket price during the period, using the proceeds received upon
employees’ exercises or purchases, or upon settlement of the
equity unit purchase contracts. The equity units, which are further
discussed in Note 5, will not have a dilutive effect on earnings
per diluted share except during periods when the average mar-
ket price of a share of Baxter common stock exceeds $35.69.
The dilutive effect of outstanding equity forward agreements is
reﬂected in the denominator for diluted EPS by application
of the reverse treasury stock method. The following is a recon-
ciliation of the shares (denominator) of the basic and diluted
per-share computations:

years ended December 31
(in millions)

Basic
Effect of dilutive securities
Employee stock options
Equity forward agreements
Employee stock purchase plans

Diluted

2002

600

11
6
1
618

2001

590

18
—
1
609

2000

585

11
—
1
597

Comprehensive Income
Comprehensive income encompasses all changes in stockholders’
equity other than those arising from transactions with stock-
holders, and consists of net income, CTA, unrealized gains and
losses on certain hedging activities, unrealized gains and losses
on unrestricted available-for-sale marketable equity securities
and additional minimum pension liabilities. The net-of-tax
components of accumulated OCI (AOCI) were as follows:

as of December 31 (in millions)

2002

2001

2000

CTA
Hedging activities
Marketable equity securities
Additional minimum

pension liability

Total AOCI

$ (722)
(32)
(3)

$(519) $(674)
—
25

82
5

(517)
$(1,274)

—
$(432)

—
$(649)

Derivatives and Hedging Activities
Effective at the beginning of 2001, the company adopted SFAS
No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (SFAS No. 133), and its amendments. In accordance
with the transition provisions of SFAS No. 133, the difference
between the fair values and the book values of all freestanding
derivatives at the adoption date was reported as the cumulative
effect of a change in accounting principle. In accordance with
the standard, the company recorded a cumulative effect reduction
to earnings of $52 million (net of tax beneﬁt of $32 million)
and a cumulative effect increase to OCI of $8 million (net of
tax of $5 million).

All derivatives subject to SFAS No. 133 are recognized on the
consolidated balance sheet at fair value. When the company
enters into a derivative contract, it designates and documents
the derivative as (1) a hedge of a forecasted transaction, includ-
ing a hedge of a foreign currency denominated transaction (a
cash ﬂow hedge); (2) a hedge of the fair value of a recognized
asset or liability (a fair value hedge); (3) a hedge of a net
investment in a foreign operation; or (4) an instrument that is
not formally being designated as a hedge. The company also
uses and designates certain nonderivative ﬁnancial instruments
as hedges of net investments in foreign operations. In certain
circumstances, while a derivative may be used to economically

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

hedge a transaction, asset or liability, the company may not for-
mally designate it as a fair value, cash ﬂow or net investment
hedge. The company does not hold any instruments for trad-
ing purposes.

Changes in the fair value of a derivative that is highly effective
and is designated and qualiﬁes as a cash ﬂow hedge are recorded
in OCI, with such changes in fair value reclassiﬁed to earnings
when the hedged transaction affects earnings. Such hedges are
principally classiﬁed in cost of sales and primarily relate to inter-
company sales denominated in foreign currencies. Changes in
the fair value of a derivative that is highly effective and is des-
ignated and qualiﬁes as a fair value hedge, along with changes
in the fair value of the hedged asset or liability attributable to
the hedged risk, are recorded directly to net interest expense, as
they hedge the interest rate risk associated with certain of the
company’s ﬁxed-rate debt. Changes in the fair value of a deriv-
ative or nonderivative instrument that is highly effective and is
designated and qualiﬁes as a hedge of a net investment in a for-
eign operation are recorded in the CTA account within OCI,
with any hedge ineffectiveness recorded in net interest expense.
Changes in the fair value of undesignated instruments are
reported directly to other income or expense or net interest
expense, depending on the classiﬁcation of the item being eco-
nomically hedged.

If it is determined that a derivative or nonderivative hedging
instrument ceases to be highly effective as a hedge, the company
discontinues hedge accounting prospectively. Gains or losses
relating to terminations of effective cash ﬂow hedges are deferred
and recognized consistent with the income or loss recognition
of the underlying hedged items. If the company removes the
designation for cash ﬂow hedges because the hedged forecasted
transactions are no longer probable of occurring, any gains or
losses relating to such dedesignated hedges are immediately
reclassiﬁed from AOCI to earnings, and are principally classiﬁed
in cost of sales, consistent with the classiﬁcation of the previously
hedged item.

Derivatives are classiﬁed in the consolidated balance sheets in
other assets or other liabilities, as applicable, and are classiﬁed
as short-term or long-term based on the scheduled maturity of
the instrument. Derivatives are classiﬁed in the consolidated
statements of cash ﬂows in the same category as the cash ﬂows
of the hedged items.

Instruments that are indexed to and potentially settled in the
company’s common stock are accounted for in accordance with
Emerging Issues Task Force (EITF) No. 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.” The contracts, which
consist of equity forward agreements and have a fair value of zero

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

at inception, give the company the choice of net-share, net-cash
or physical settlement upon maturity or any earlier settlement
date. In accordance with GAAP, the contracts are not recorded
in the consolidated ﬁnancial statements until they are settled.
The settlements of these contracts (whether by net-share, net-cash
or physical settlement) are classiﬁed within stockholders’ equity.

Cash and Equivalents
Cash and equivalents include cash, certiﬁcates of deposit and
marketable securities with an original maturity of three months
or less.

Shipping and Handling Costs
Shipping and handling costs are classiﬁed in either cost of goods
sold or marketing and administrative expenses based on their
nature. Approximately $222 million, $218 million and $200 mil-
lion of shipping and handling costs were classiﬁed in marketing
and administrative expenses in 2002, 2001 and 2000, respectively.

Income Taxes
Deferred taxes are recognized for the future tax effects of tem-
porary differences between ﬁnancial and income tax reporting
based upon enacted tax laws and rates. Deferred tax assets are
reduced by a valuation allowance unless it is more likely than
not that such assets will be realized.

Reclassiﬁcations
Certain reclassiﬁcations have been made to conform the 2001
and 2000 consolidated ﬁnancial statements and notes to the
2002 presentation.

New Accounting and Disclosure Standards
SFAS No. 149, “Accounting for Certain Financial Instruments
with Characteristics of Liabilities and Equity,” which is expect-
ed to be issued in 2003, will require that certain ﬁnancial
instruments that have characteristics of both liabilities and
equity be classiﬁed as liabilities in the issuing company’s bal-
ance sheet. Many of these instruments were previously classi-
ﬁed as equity. The new rules will be effective immediately for
all contracts created or modiﬁed after the date the pronounce-
ment is issued, and will be otherwise effective for Baxter at the
beginning of the third quarter of 2003. The new rules are to be
applied prospectively with a cumulative-effect adjustment for
contracts that were created before the pronouncement is issued
and that still exist at the beginning of that ﬁrst interim period.
Under the new rules, the balance sheet classiﬁcation of the
company’s equity forward agreements, which are described in
Note 6, will change from equity to liabilities. As disclosed in
Note 6, the company is in the process of exiting these agree-
ments and expects to complete the exit strategy during 2003.
Management will analyze this accounting pronouncement, and
does not anticipate that the standard will have a material impact
on the company’s consolidated ﬁnancial statements.

52 Baxter International Inc. 2002 Annual Report

Financial Accounting Standards Board (FASB) Interpretation
No. 46, “Consolidation of Variable Interest Entities” (Interpre-
tation No. 46), was issued in January 2003. Interpretation No.
46 deﬁnes variable interest entities (VIE) and requires that the
assets, liabilities, noncontrolling interests, and results of activities
of a VIE be consolidated if certain conditions are met. For
VIE’s created on or after January 31, 2003, the guidance will be
applied immediately. For VIE’s created before that date, the
guidance will be applied at the beginning of the third quarter
of 2003. The new rules may be applied prospectively with a
cumulative-effect adjustment as of the beginning of the period
in which it is ﬁrst applied or by restating previously issued
ﬁnancial statements for one or more years with a cumulative-
effect adjustment as of the beginning of the ﬁrst year restated.
Management is in the process of analyzing the potential effect
of this recently issued accounting pronouncement on the com-
pany’s future consolidated ﬁnancial statements, including the
impact on certain of the company’s operating leases, which are
described in Note 5, and the accounts receivable securitization
arrangements, which are described in Note 6.

SFAS No. 148, “Accounting for Stock-Based Compensation –
Transition and Disclosure” (SFAS No. 148), which amends
SFAS No. 123, was issued in December 2002. The new stan-
dard provides alternative methods for transition for a voluntary
change from the intrinsic method of accounting to the fair
value-based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclo-
sure requirements of SFAS No. 123 to require more prominent
and frequent disclosures in ﬁnancial statements about the
effects of stock-based compensation. The transition guidance
and annual disclosure provisions are effective for 2002. The
new interim disclosure provisions are effective beginning in the
first quarter of 2003. The company has implemented the annual
disclosure provisions in these consolidated ﬁnancial statements.
Management does not have immediate plans for the company
to voluntarily elect to adopt the fair value-based method of
accounting for stock-based employee compensation.

FASB Interpretation No. 45, “Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others” (Interpretation No. 45),
was issued in November 2002. The initial recognition and
measurement provisions of this new standard, which require a
guarantor to recognize a liability at inception of a guarantee at
fair value, are effective on a prospective basis to guarantees
issued or modiﬁed on or after January 1, 2003. Management is
in the process of analyzing the recognition and measurement
provisions of Interpretation No. 45, and has not estimated the
potential impact on the company’s future consolidated ﬁnancial
statements, as the impact will depend on the nature and
amount of future transactions. The disclosure provisions, which
increase the required disclosures relating to guarantees, have
been adopted in these consolidated ﬁnancial statements.

EITF No. 00-21, “Revenue Arrangements with Multiple
Deliverables” (EITF No. 00-21), was issued in November 2002.
The EITF No. 00-21 consensus, which is effective for revenue
arrangements entered into on or after July 1, 2003, outlines the
approach to be used to determine when a revenue arrangement
for multiple deliverables should be divided into separate units of
accounting and, if separation is appropriate, how the arrangement
consideration should be allocated to the identiﬁed accounting
units. Management is in the process of analyzing the new rules
and has not determined the potential impact on the company’s
future consolidated ﬁnancial statements, as the impact will
depend on the nature and amount of future transactions.

SFAS No. 146, “Accounting for Costs Associated with Exit or
Disposal Activities” (SFAS No. 146), was issued in June 2002.
SFAS No. 146 is effective for exit or disposal activities initiated
on or after January 1, 2003, and requires that costs associated
with exit or disposal activities be recognized when they are
incurred rather than on the date the company commits to an exit
or disposal plan. SFAS No. 146 also establishes that the liability
should be measured and recorded at fair value. Accordingly, the
new standard changes the amount and timing of expense recog-
nition related to any future exit or disposal activities.

Note 2
Discontinued Operations

Divestiture of Certain Businesses
During the fourth quarter of 2002, the company recorded a
$294 million pre-tax charge ($229 million on an after-tax
basis) principally associated with management’s decision to
divest the majority of the services businesses included in the
Renal segment. The Renal segment’s services portfolio consists
of Renal Therapy Services (RTS), which operates dialysis clinics
in partnership with local physicians in international markets,
RMS Disease Management, Inc., which is a renal-disease man-
agement organization, and RMS Lifeline, Inc., which provides
management services to renal access care centers. The charge
principally pertains to RTS, and the majority of the centers to
be sold are located in Latin America and Europe. Manage-
ment’s decision was based on an evaluation of the company’s
business strategy and the economic conditions in certain geo-
graphic markets. Management decided that the Renal segment’s
long-term sales growth and proﬁtability would be enhanced by
increasing focus and resources on expanding the product port-
folio in peritoneal dialysis, hemodialysis, continuous renal
replacement therapy and renal-related pharmaceuticals. Also
included in the pre-tax charge were $16 million of costs associ-
ated with exiting the Medication Delivery segment’s offsite
pharmacy admixture products and services business.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Included in the total pre-tax charge was $269 million for non-cash
costs, principally to write down certain property and equip-
ment, goodwill and other intangible assets due to impairment.
Also included in the pre-tax charge was $25 million for cash
costs, principally relating to severance and other employee-
related costs associated with the elimination of approximately
75 positions, as well as legal and contractual commitment costs.
Additional severance costs may be incurred in 2003 depending
on the ﬁnalization of the divestiture arrangements. The major-
ity of the cash costs are expected to be paid in 2003, and the
divestiture plan is expected to be completed in 2003.

The company’s consolidated statements of income and cash
ﬂows have been restated to reﬂect the results of operations and
cash ﬂows of the businesses to be divested as discontinued oper-
ations. The consolidated balance sheets have not been restated
as the assets and liabilities of the businesses to be divested are
immaterial to the company’s consolidated balance sheets. Net
revenues relating to the discontinued businesses were $274 mil-
lion, $307 million and $199 million in 2002, 2001 and 2000,
respectively. Losses from these discontinued operations were $26
million, $11 million and $16 million in 2002, 2001 and 2000,
respectively, which were net of income tax beneﬁts of $10 million,
$4 million and $8 million in 2002, 2001 and 2000, respectively.

Spin-Off of Edwards Lifesciences Corporation
On March 31, 2000, Baxter stockholders of record on March
29, 2000 received all of the outstanding stock of Edwards Life-
sciences Corporation (Edwards), the company’s cardiovascular
business, in a tax-free spin-off. The company’s consolidated
ﬁnancial statements and related notes have been restated to
reﬂect the ﬁnancial position, results of operations and cash
ﬂows of Edwards as a discontinued operation. The distribution
of Edwards stock in 2000 totaled $961 million, and was charged
directly to retained earnings.

The cardiovascular business in Japan was not legally transferred
to Edwards in 2000 due to Japanese regulatory requirements
and business culture considerations. The business had been
operated pursuant to a contractual joint venture under which a
Japanese subsidiary of Baxter retained ownership of the business
assets, but a subsidiary of Edwards held a 90% proﬁt interest.
Edwards had an option to purchase the Japanese assets. Included
in current liabilities at December 31, 2001 was $181 million
relating to this contractual joint venture. In October 2002 Baxter
and Edwards consummated an agreement whereby the joint
venture and option were terminated and Edwards purchased
the Japanese assets from Baxter. As part of this transaction, Bax-
ter settled the $181 million liability and Edwards paid Baxter
$202 million. The transaction resulted in net credit of $164
million directly to retained earnings, and a net cash inﬂow of
$15 million, which is subject to change based on an audit of
the business’ net assets. The transaction had no impact on the
company’s results of operations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In 2000, the company recorded income from the discontinued
operation of $14 million, which was net of income tax expense
of $5 million. The company also recorded $12 million (includ-
ing tax of $6 million), or $0.02 per diluted common share, of
net costs directly associated with effecting the business distri-
bution. Net sales of the discontinued operation were $252 million
for the three-month period ended March 31, 2000.

Note 3
Acquisitions, Intangible Assets and
Research & Development Costs

Signiﬁcant Acquisitions
The following is a summary of the company’s signiﬁcant acqui-
sitions during the three years ended December 31, 2002, along
with the allocation of the purchase price to intangible assets.

Acquisition Purchase

Intangible assets

(in millions)

date

price

IPR&D

Goodwill Other

ESI

Fusion

ASTA

Cook

Sera-Tec

NAV

December
2002
May
2002
October
2001
August
2001
February
2001
June
2000

$308

$ 56

$ 55

$78

161

455

220

127

328

250

—

250

131

138

152

246

—

In late December 2002, the company acquired the majority of the
assets of ESI Lederle (ESI), a division of Wyeth, for approximate-
ly $308 million. ESI is a leading manufacturer and distributor
of injectable drugs used in the U.S. hospital market, and it
offers a complete range of sterile injectable manufacturing
capabilities, including ampules and vials. ESI primarily manu-
factures injectable generic drugs, which leverages Baxter’s
injectable expertise, channel strength, manufacturing processes,
customer relationships, and research and development. The other
intangible assets consisted primarily of developed technology of
$76 million, which is being amortized on a straight-line basis
over an estimated useful life of 15 years. In addition to the
IPR&D and intangible assets, $107 million of property, plant
and equipment and $33 million of inventories and other assets
were acquired, and $21 million of liabilities, which consisted
principally of accounts payable and accrued liabilities, were
assumed. The goodwill is expected to be fully deductible for tax
purposes. The purchase price is subject to adjustment based on
an audit of the acquired assets and assumed liabilities. With the
exception of the IPR&D charge, which was recorded at the cor-
porate level, the results of operations and assets and liabilities,

including goodwill, of ESI are included in the Medication
Delivery segment. The IPR&D charge pertained principally to
generic anesthesia and critical care drugs. Material net cash
inﬂows were forecasted in the valuation to commence in 2004.
A discount rate of 16% was used in the valuation. Assumed
additional research and development (R&D) expenditures prior
to the date of the initial product introductions totaled approx-
imately $17 million.

In May 2002, the company acquired Fusion Medical Tech-
nologies, Inc. (Fusion) for a purchase price of $161 million.
The acquisition of Fusion, a business that develops and com-
mercializes proprietary products used to control bleeding during
surgery, supports the company’s strategic initiative to expand
and enhance its portfolio of innovative therapeutic solutions
for biosurgery and tissue regeneration. Fusion’s expertise in col-
lagen- and gelatin-based products complements Baxter’s ﬁbrin-
based technologies. With the combination, the company can
now offer surgeons a broader array of solutions to seal tissue,
enhance wound healing and manage hemostasis, including active
bleeding. The purchase price was paid in 2,806,660 shares of
Baxter common stock. The other intangible assets consisted of
developed technology, which is being amortized on a straight-
line basis over an estimated useful life of 20 years. In addition
to the IPR&D, developed technology and goodwill, $14 mil-
lion of other assets, which consisted of cash and investments,
accounts receivable, inventories, and property and equipment,
were acquired, and $37 million of liabilities, which consisted
principally of accounts payable, accrued liabilities and deferred
taxes, were assumed. The goodwill is not deductible for tax pur-
poses. With the exception of the IPR&D charge, which was
recorded at the corporate level, the results of operations, and
assets and liabilities, including goodwill, of Fusion are included
in the BioScience segment. With respect to the IPR&D charge,
material net cash inﬂows were forecasted in the valuation to
commence between 2003 and 2004. A discount rate of 28%
was used in the valuation. Assumed additional R&D expendi-
tures prior to the date of the initial product introduction totaled
$3 million. Subsequent to the acquisition date, the project has
been proceeding substantially in accordance with the original pro-
jections. Approximately $2 million of R&D costs relating to this
project were expensed in 2002 subsequent to the acquisition date.

In October 2001, the company acquired a subsidiary of Degussa
AG, ASTA Medica Onkologie GmbH & CoKG (ASTA), which
develops, produces and markets oncology products worldwide,
for $455 million. This acquisition provides the company with
a stronger presence in the oncology market as well as a signiﬁ-
cant drug development pipeline. The other intangible assets
consisted of developed technology and are being amortized on
a straight-line basis over an estimated useful life of 15 years. In

54 Baxter International Inc. 2002 Annual Report

addition to the intangible assets and IPR&D, $22 million of
accounts receivable, $25 million of inventories, and $50 million
of property, plant and equipment and other assets were acquired,
and $72 million of liabilities were assumed. A substantial portion
of the goodwill is expected to be deductible for tax purposes.
With the exception of the IPR&D charge, which was recorded
at the corporate level, the results of operations and assets and
liabilities, including goodwill, of ASTA are included in the
Medication Delivery segment. The IPR&D charge pertained to
several oncology therapeutics projects. Material net cash
inﬂows were forecasted in the valuation to commence between
2004 and 2009. Discount rates used in the valuations of the
projects, which included tubulin inhibitor, mafosfamide, glu-
fosfamide and other oncology-related projects, ranged from
20% to 30%. Assumed additional R&D expenditures prior to
the dates of product introductions totaled over $100 million.
The percentage completion rate for signiﬁcant projects ranged
in the valuation from 40% to 90%, with the weighted-average
completion rate approximately 50%. Two of the projects includ-
ed in the IPR&D charge, mafosfamide and glufosfamide, were
terminated during the fourth quarter of 2002 in conjunction
with the company’s overall assessment and prioritization of its
R&D programs, as further discussed below. The in-process
value assigned at the 2001 acquisition date to these subsequently
terminated projects was $53 million. Subsequent to the October
2001 acquisition date, the other projects have been proceeding
substantially in accordance with the original projections.
Approximately $13 million and $3 million of R&D costs relating
to these projects were expensed in 2002 and 2001, respectively,
subsequent to the acquisition date.

In August 2001, the company acquired Cook Pharmaceutical
Solutions (Cook), formerly a unit of Cook Group Incorporated,
which provides contract ﬁlling of syringes and vials. This acqui-
sition supports the company’s strategic initiative to become a
full-line provider of drug delivery solutions. The purchase price
of $220 million was paid in 2,111,047 shares of Baxter common
stock and $111 million in cash. The other intangible assets
consisted of customer relationships and are being amortized on
a straight-line basis over an estimated useful life of 10 years. In
addition to the intangible assets, $72 million of property, plant
and equipment and other assets were acquired. The goodwill is
expected to be fully deductible for tax purposes. The results of
operations and assets and liabilities, including goodwill, of
Cook are included in the Medication Delivery segment.

Sera-Tec Biologicals, L.P. (Sera-Tec) owned and operated 80
plasma centers in 28 states, and a central testing laboratory, and
is included in the BioScience segment. The purchase price of
Sera-Tec of $127 million was paid in 2,894,710 shares of Baxter
common stock.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

North American Vaccine, Inc. (NAV) was engaged in the research,
development, production and sales of vaccines for the prevention
of human infectious diseases, and is included in the BioScience
segment. The purchase price of NAV of $328 million was prin-
cipally paid in 7,540,000 shares of Baxter common stock. The
IPR&D charge pertained to several vaccines projects. Material
net cash inﬂows were forecasted in the valuation to commence
between 2002 and 2005. A discount rate of 20% was used for
all projects, which included Streptococcal B, Pneumococcal,
Meningococcal B/C/Y and other vaccines. Assumed additional
R&D expenditures prior to the dates of product introductions
totaled approximately $85 million. The percentage completion
rate for signiﬁcant projects ranged in the valuation from 65%
to over 90%, with the weighted-average completion rate
approximately 70%. During 2002, and partially in conjunction
with the below-mentioned overall assessment and prioritization
of its R&D programs, several of the acquired projects were termi-
nated. The in-process value assigned at the June 2000 acquisition
date to these subsequently terminated projects was $216 million.
While these acquired projects were terminated, a consider-
able portion of the acquired technology is being utilized in
new R&D projects initiated subsequent to the June 2000
acquisition date. Approximately $6 million, $14 million and
$8 million of R&D costs relating to the acquired projects were
expensed in 2002, 2001 and 2000, respectively, subsequent to
the acquisition date.

IPR&D and Other Special Charges
The $189 million pre-tax charge for IPR&D and other special
charges in 2002 consisted of $163 million of IPR&D charges
relating to acquisitions and a $26 million charge relating to the
prioritization of certain of the company’s R&D programs. In
addition to the IPR&D charges relating to ESI and Fusion, the
total included a $52 million charge relating to the November
2002 acquisition of Epic Therapeutics, Inc. (Epic) and other
insigniﬁcant IPR&D charges. Epic, which is included in the
Medication Delivery segment, was acquired for $59 million,
and is a drug delivery company specializing in the formulation
of drugs for injection or inhalation. Epic’s IPR&D charge per-
tained principally to controlled-release protein therapeutics
using the proprietary PROMAXX microsphere technology.
Material net cash inﬂows were forecasted in the valuation to
commence between 2003 and 2005. A discount rate of 20%
was used in the valuation. Assumed additional R&D expendi-
tures prior to the date of the initial product introduction
totaled approximately $16 million. Subsequent to the Novem-
ber 2002 acquisition date, the projects have been proceeding
substantially in accordance with the original projections. Less
than $1 million of R&D costs relating to these projects were
expensed in 2002 subsequent to the acquisition date.

With respect to the October 2001 acquisition of certain assets
relating to the proprietary recombinant erythropoietin thera-
peutic for treating anemia in dialysis patients from Elanex
Pharma Group (Elanex) for $38 million, the company could
make additional purchase price payments of up to $40 million,
contingent on the receipt of speciﬁed regulatory approvals of
the product under development, and payments of up to $180
million, contingent on the achievement of speciﬁed sales levels
in the future relating to the product under development ($60
million, $60 million and $60 million upon the ﬁrst year annual
sales reach $1 billion, $2 billion and $3 billion, respectively).
The technology acquired from Elanex is under development
and sales relating to this acquisition, which are included in the
Renal segment, were insigniﬁcant in 2002 and 2001.

With respect to the acquisition in 1998 of Somatogen, Inc.
(Somatogen), a developer of recombinant hemoglobin-based
technology, for $206 million, former Somatogen shareholders
could be paid contingent deferred cash payments of up to approx-
imately $42 million, based on a percentage of sales of future
products through the year 2007. The technology acquired from
Somatogen is under development and there are no saleable
products at December 31, 2002. Somatogen is included in the
BioScience segment.

Pending Acquisition
In December 2002, the company signed a deﬁnitive agreement
to acquire certain assets from Alpha Therapeutic Corporation.
The assets to be acquired include Aralast, a plasma-derived
Alpha-1 Antitrypsin (A1P1) product, 42 plasma collection cen-
ters in the United States, and a central testing laboratory. A1P1
will expand the BioScience segment’s product portfolio of bio-
pharmaceuticals, as well as broaden its therapeutic focus in the
pulmonology area. The transaction will also further enhance
the economics of the segment’s plasma business by increasing
the number of products Baxter obtains from a liter of plasma.
Closing of the transaction is subject to regulatory approvals and
is expected to occur during 2003.

Pro Forma Information
The following unaudited pro forma information presents a
summary of the company’s consolidated results of operations as
if signiﬁcant acquisitions during 2002 and 2001 had taken
place as of the beginning of the current and preceding ﬁscal
year, giving effect to purchase accounting adjustments but
excluding the charges for IPR&D and other special charges.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The charge of $26 million to prioritize the company’s invest-
ments in certain of the company’s R&D programs across the
three operating segments was a result of management’s com-
prehensive assessment of the company’s R&D pipeline with the
goal of having a focused and balanced strategic portfolio, which
maximizes the company’s resources and generates the most signif-
icant return on the company’s investment. The charge included
$14 million of cash costs, primarily relating to employee sever-
ance, and $12 million of non-cash costs to write down certain
property, plant and equipment and other assets due to impair-
ment. Approximately 160 R&D positions were eliminated, and
$2 million of cash costs were paid during the fourth quarter of
2002. The remaining cash costs are expected to be paid in 2003.

The $280 million pre-tax charge for IPR&D and other special
charges recorded in 2001 consisted of the $250 million ASTA
IPR&D charge and acquisition costs associated with several
acquisitions in the three segments.

The $286 million pre-tax charge for IPR&D and other special
charges recorded in 2000 consisted of the $250 million NAV
IPR&D charge, a total of $15 million in IPR&D charges per-
taining to three other acquisitions, as well as $21 million of
acquisition costs related to an acquisition in the Medication
Delivery segment.

With respect to the IPR&D charges, the products currently
under development are at various stages of development, and
substantial further research and development, pre-clinical testing
and clinical trials will be required to determine their technical
feasibility and commercial viability. There can be no assurance
such efforts will be successful. Delays in the development,
introduction or marketing of the products under development
could result either in such products being marketed at a time
when their cost and performance characteristics would not be
competitive in the marketplace or in a shortening of their com-
mercial lives. If the products are not completed on time, the
expected return on the company’s investments could be signif-
icantly and unfavorably impacted.

Contingent Purchase Price Payments
With respect to the January 2002 acquisition of the majority of
the assets of Autros Healthcare Solutions Inc., a developer of
automated patient information and medication management
systems, for $24 million, the company could make additional
purchase price payments of up to $30 million, primarily based
on the sales and proﬁts generated from existing and future
products through the year 2005. Sales relating to this acquisi-
tion, which are included in the Medication Delivery segment,
were insigniﬁcant in 2002.

56 Baxter International Inc. 2002 Annual Report

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2002

2001

$8,330

$7,781

as of December 31, 2002
(in millions, except
amortization period data)

Accumulated
amortization

Gross

Net

Weighted-
average
amortization
period (years)

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

$1,077 $ 688
$ 822 $ 625
$ 0.94
$ 1.24

These pro forma results of operations have been presented for
comparative purposes only and do not purport to be indicative
of the results of operations which actually would have resulted
had the acquisitions occurred on the date indicated, or which
may result in the future. The pro forma earnings above relating
to acquisitions completed after June 30, 2001 do not include
amortization of goodwill.

Goodwill
The carrying amount of goodwill at December 31, 2002 was
$797 million, $551 million and $146 million for the Medication
Delivery, BioScience and Renal segments, respectively. The
carrying amount of goodwill at December 31, 2001 was $643
million, $482 million and $224 million for the Medication
Delivery, BioScience and Renal segments, respectively. The
change in the carrying value of the company’s goodwill during
the year was principally related to the acquisitions discussed
above, the above-mentioned impairment charge associated
with the decision to divest certain businesses, as well as the
impact of changes in currency exchange rates on foreign enti-
ties’ goodwill balances. The goodwill impairment loss relating
to the discontinued operations was $84 million and pertained
entirely to the Renal segment. The company recorded this and
the other asset impairment charges relating to the businesses to
be divested based on management’s estimate of the net cash
proceeds that will be received upon sale of the businesses.
Management developed these estimates based on prices of
comparable businesses and other relevant information. Based
on management’s SFAS No. 142 review, other than the charge
associated with the discontinued businesses, there has been no
impairment of goodwill during the year.

Other Intangible Assets
Intangible assets other than goodwill are separated into two cat-
egories. Intangible assets with ﬁnite useful lives are amortized
on a straight-line basis over their estimated useful lives. Intangible
assets with indeﬁnite useful lives are not amortized, are subject
to periodic impairment tests, and totaled $7 million at both
December 31, 2002 and 2001. The following is a summary of
the company’s intangible assets subject to amortization.

Developed technology,

including patents

$693

$234

$459

Manufacturing,

distribution and
other contracts

Other
Total amortized
intangible assets

30
48

9
9

21
39

$771

$252

$519

7
18

The amortization expense for these intangible assets was $41
million, $29 million and $40 million for 2002, 2001 and
2000, respectively. The anticipated annual amortization expense
for these intangible assets is $48 million, $48 million, $45 mil-
lion, $43 million and $38 million in 2003, 2004, 2005, 2006
and 2007, respectively. Intangible assets other than goodwill
totaled $349 million at December 31, 2001, and consisted of
gross assets of $564 million net of accumulated amortization of
$215 million.

Earnings and Per Share Earnings for 2001 and 2000 Exclud-
ing Amortization
The following is earnings and per share earnings information
for 2001 and 2000 on an adjusted basis, assuming, consistent
with 2002, goodwill and indeﬁnite-lived assets are not amortized.

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

Reported income from continuing
operations before cumulative effect
of accounting change

Goodwill and indeﬁnite-lived

assets amortization

Adjusted income from continuing

operations before cumulative effect
of accounting change

Reported net income
Goodwill and indeﬁnite-lived

assets amortization
Adjusted net income
Reported earnings per basic

common share

Goodwill and indeﬁnite-lived

assets amortization

Adjusted earnings per basic

common share

Reported earnings per diluted

common share

Goodwill and indeﬁnite-lived

assets amortization

Adjusted earnings per diluted

common share

2001

2000

$ 675

$ 754

$ 712

$ 779

$ 612

$ 740

37
$ 649

25
$ 765

$1.04

$1.26

0.06

0.04

$1.10

$1.30

$1.00

$1.24

0.06

0.04

$1.06

$1.28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4
Charge Relating to A, AF and AX Series Dialyzers

Following reports in October 2001 of patient deaths in Croatia,
Baxter initiated a global recall of its A, AF and AX series Renal
segment dialyzers. Testing led the company to conclude that a
processing ﬂuid used during the manufacturing of a limited
number of dialyzers produced in the company’s Ronneby, Swe-
den facility may have played a role in the deaths reported in
Croatia and other countries. Baxter decided to permanently
cease manufacturing the A, AF and AX series dialyzers. The
fluid is not used in the manufacturing process for other dialyzers
that Baxter manufactures or distributes. The company ceased
production of the discontinued dialyzers and closed its Ronne-
by facility. The Miami Lakes, Florida facility, which provided
materials used in the discontinued dialyzers, has also been
closed. Refer to Note 12 for a discussion of legal proceedings
and investigations relating to this matter. The company has
been fully cooperating with governmental authorities.

In the fourth quarter of 2001, the company recorded a pre-tax
charge of $189 million ($156 million on an after-tax basis) to
cover the costs of discontinuing this product line and other
related costs. Included in the total pre-tax charge was $116 mil-
lion for non-cash costs, principally for the write-down of goodwill
and other intangible assets, inventory and property, plant and
equipment. Also included in the charge was $73 million for
cash costs, principally pertaining to legal costs, recall costs, con-
tractual commitments, and severance and other employee-related
costs associated with the elimination of approximately 360
positions, the majority of which were located in the manufac-
turing facilities. Approximately $13 million of the cash costs
were paid during the fourth quarter of 2001, and the remaining
balance in the reserve was $60 million at December 31, 2001.
The revenues and proﬁts relating to these products were not
material to the consolidated ﬁnancial statements.

The following summarizes the company’s utilization of the
reserve for cash costs during 2002.

(in millions)

Employee-related costs
Legal costs
Recall and

contractual costs

Total

Reserve at
December 31,
2001

Additions Utilization

Reserve at
December 31,
2002

$ 9
36

15
$60

$—
41

—
$41

$ (6)
(44)

(13)
$(63)

$ 3

$38

Based on a review of additional information, management
revised its initial estimates of the probable and estimable cash
payments and related insurance recoveries relating to the legal
contingencies associated with this matter. In conjunction with
this, an additional $41 million reserve for legal costs was

58 Baxter International Inc. 2002 Annual Report

recorded in 2002. At the same time, a $41 million insurance
receivable was recognized, and therefore there was no net
impact on the company’s results of operations for the period.
Certain legal payments and related insurance recoveries are
expected to occur in 2003 and 2004.

Note 5
Long-Term Debt, Credit Facilities and Commitments

Debt Outstanding

as of December 31 (in millions)

Commercial paper
Short-term notes
7.625% notes due 2002
Variable-rate loan due 2004
Variable-rate loan due 2005
5.75% notes due 2006
7.125% notes due 2007
1.02% loan due 2007
5.25% notes due 2007
7.25% notes due 2008
9.5% notes due 2008
3.6% notes due 2008
1.25% convertible debentures

due 2021

Effective
interest rate1

2002

2001

1.8% $ 12 $ 230
273
—
0.7%
47
—
4.3%
209
566
4.1%
—
132
0.6%
594
699
4.5%
55
55
7.1%
—
116
1.0%
—
503
5.2%
29
29
7.4%
76
6.0%
84
—
3.8% 1,250

6.625% debentures due 2028
Other
Total debt and lease obligations
Current portion
Long-term portion
1 Includes the effect of related interest rate swaps, as applicable.

1.3%
2.8%

800
172
88
4,506
(108)

800
152
73
2,538
(52)
$4,398 $2,486

Equity Units
In December 2002 the company issued 25 million 7% equity
units in an underwritten public offering (listed on the New
York Stock Exchange under the symbol “BAX Pr”) and received
net proceeds of $1.213 billion. Each equity unit contains $50
principal amount of senior notes that will mature in February
2008 and a purchase contract obligating the holder to purchase
and the company to sell a variable number of newly issued
shares of Baxter common stock in February 2006. Upon settle-
ment of the purchase contracts the company will receive proceeds
of $1.25 billion and will deliver between 35.0 million and 43.4
million shares based upon the then-current price of Baxter’s
common stock (if the price is equal to or less than $28.78,
1.7373 shares per unit will be delivered; if the price is between
$28.78 and $35.69, shares equal to $50 divided by the then-
current price will be delivered; if the price is equal to or greater
than $35.69, 1.4011 shares per unit will be delivered). Baxter will
make quarterly contract adjustment payments to the equity unit
holders at a rate of 3.4% per year until the purchase contracts are
settled. The present value of these payments of $127 million was

charged to additional contributed capital and is included in
other liabilities. Payments to the holders will be allocated
between this liability and interest expense based on a constant
rate calculation over the life of the instruments. Equity unit
issuance costs totalling $30 million were allocated to the pur-
chase contracts and charged to additional contributed capital.

The aggregate maturity value of the senior notes, which will
mature in February 2008, is $1.25 billion. The notes are ini-
tially pledged by the holders to secure their obligations under
the purchase contracts. The holders may separate the notes and
contracts by pledging U.S. Treasury securities as collateral. Baxter
will make quarterly interest payments to the holders of the
notes initially at an annual rate of 3.6%. On or after Novem-
ber 2005, the notes are to be remarketed and the interest rate
will be re-set. If the senior notes are not remarketed by Febru-
ary 16, 2006, the holders will have the right to put the notes to
Baxter at $50 per senior note plus accrued and unpaid interest,
but only after the holders have satisﬁed their obligations under
the purchase contracts.

Other Debt Issuances
In April 2002, the company issued $500 million of term debt,
which matures in May 2007, and bears a 5.25% coupon rate. The
net proceeds were used for working capital, to repay certain
existing debt, for capital expenditures and for general corpo-
rate purposes.

In May 2001, the company issued $800 million of convertible
debentures. The debentures bear an initial 1.25% coupon,
mature in 20 years, are callable on or after June 5, 2006 at a
price equal to 100% of the principal amount plus accrued
interest up to the redemption date, allow the holders to require
the company to repurchase the debt on speciﬁed dates at a price
equal to 100% of the principal amount plus accrued interest up
to the repurchase date, and are convertible into Baxter common
stock at a conversion price of $65.18 per share if the closing
price of Baxter common stock exceeds $71.70 for a speciﬁed peri-
od of time. As of December 31, 2002, the holders can require
the company to repurchase the debt in May of 2003, 2006, 2011
and 2016. The initial interest rate will be reset on speciﬁed
future dates, subject to a maximum of 2.9%. The proceeds from
the convertible debt issuance were used to reﬁnance certain of the
company’s short-term debt. The company also issued other
debt during 2001, principally to fund its investing activities.

In order to better match the currency denomination of its assets
and liabilities, the company rebalanced certain of its debt during
2000. The company acquired approximately $878 million of
its U.S. Dollar denominated debt securities during 2000 and
increased its Japanese Yen and Euro denominated debt. The net
costs associated with the early termination of the U.S. Dollar
denominated debt were recorded in other expense as they were
not material.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Future Minimum Lease Payments and Debt Maturities

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

Operating
leases1

2003
2004
2005
2006
2007
Thereafter
Total obligations and

commitments

Amounts representing interest,

discounts and premiums

Total long-term debt and present

$115
89
66
64
72
64

$470

Aggregate
debt maturities
and capital
leases

$ 108
656 2
153
1,932 3
1,3182
360

(21)

value of lease obligations
1 Excludes discontinued operations.
2 Includes $160 million of convertible debt and $12 million of commercial paper in
2004 and $640 million of convertible debt in 2007, supported by long-term credit
facilities with funding expiration dates in 2004 and 2007.

$4,506

3 Includes $1.25 billion 3.6% notes due 2008 as holders of notes have potential

put rights in 2006, as discussed above.

Credit Facilities
The company maintains two revolving credit facilities, which
totaled $1.6 billion at December 31, 2002, and have funding
expiration dates in 2004 and 2007. The facilities enable the com-
pany to borrow funds in U.S. Dollars, Euros or Swiss Francs on
an unsecured basis at variable interest rates and contain various
covenants, including a maximum debt-to-capital ratio and a
minimum interest coverage ratio. There were no borrowings
outstanding under the company’s primary credit facilities at
December 31, 2002 or 2001. Baxter also maintains other short-
term credit arrangements, which totaled $722 million and
$337 million at December 31, 2002 and 2001, respectively.
Approximately $112 million and $146 million of borrowings
were outstanding under these facilities at December 31, 2002
and 2001, respectively.

Commercial paper, short-term notes and convertible debt, togeth-
er totaling $812 million and $1,303 million at December 31,
2002 and 2001, respectively, have been classiﬁed with long-term
debt as they are supported by the long-term credit facilities, and
management intends to reﬁnance this debt on a long-term basis.

Leases
The company leases certain facilities and equipment under cap-
ital and operating leases expiring at various dates. The leases
generally provide for the company to pay taxes, maintenance,
insurance and certain other operating costs of the leased prop-
erty. Most of the operating leases contain renewal options. Rent
expense under operating leases was $138 million, $107 million
and $96 million in 2002, 2001 and 2000, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The company has entered into off-balance sheet ﬁnancing arrange-
ments where economical and consistent with the company’s
business strategy, principally relating to an existing ofﬁce build-
ing in California and plasma collection centers to be constructed
in various locations throughout the United States. Two of the
lease agreements are with special-purpose entities which, in
accordance with GAAP, are not consolidated by the company. As
discussed in Note 1, management is in the process of analyzing
FASB Interpretation No. 46 to determine whether the compa-
ny may be required to consolidate these entities effective at the
beginning of the third quarter of 2003. The maximum amount
committed by the lessors under these transactions is $277 million.
Of this total, the unfunded commitment available from the
lessors was $70 million at December 31, 2002. The leases gen-
erally have an initial term of ﬁve years, with renewal options.
Rent obligations will commence for certain of the leases upon
the completion of construction of the assets in the future,
which is expected to occur on various dates between January
2003 and December 2006. The minimum lease payments,
which are included in the table above, are determined based on
the funded amounts and will ﬂuctuate based on actual interest
rates. The company expects to receive $33 million of minimum
lease payments from two subleases, one of which was executed
with a third party in which the company holds a minority equi-
ty interest. These sublease receipts, which are included in the
table above, are currently estimated to be $4 million in 2003,
$10 million in 2004, $9 million in 2005 and 2006 and $1 mil-
lion in 2007. With respect to its leases, the company has the
right to renegotiate renewal terms, exercise a purchase option
with respect to the leased property or arrange for the sale of the
leased property. Under each lease, in the event the property is
sold on behalf of the lessor and the sales proceeds are less than
the lessor’s investment in the property, the company is responsible
for the shortfall, up to an aggregate maximum recourse amount
under all of the leases of $220 million. The potential recourse
amounts are not included in the minimum lease payments
above as management believes the fair values of the properties
equal or exceed the lessors’ investments in the leased properties
at December 31, 2002. One of the agreements requires that the
company collateralize the outstanding lease balance in Decem-
ber 2007. The potential cash collateral obligation, which is not
included in the minimum lease payments above, totals less than
$20 million. The company is required to maintain compliance
with covenants under certain of the leases, including a mini-
mum interest coverage ratio. The company was in compliance
with all covenants at December 31, 2002.

Contingent and Other Commitments
In order to further align management and shareholder interests,
in 1999 the company sold approximately 6.1 million shares of
the company’s common stock to 142 of Baxter’s senior man-
agers for $198 million in cash. The participants used ﬁve-year

60 Baxter International Inc. 2002 Annual Report

full-recourse market-rate personal bank loans to purchase the
stock at the May 3, 1999 closing price (adjusted for the stock split)
of $31.81. Baxter has guaranteed repayment to the banks in the
event a participant in the plan defaults on his or her obligations.
The guaranteed amount totaled $219 million at December 31,
2002. The plan also includes certain risk-sharing provisions
whereby, after May 3, 2002, the company shares 50% in any
loss incurred by the participants relating to a stock price decline.
Any such loss reimbursements would represent taxable income
to the participants. The maximum pre-tax loss under this risk-
sharing provision, assuming the company’s stock price declines
to zero, is $90 million. The company may take actions relating to
participants and their assets to obtain full reimbursement for any
amounts the company pays to the banks pursuant to the loan
guarantee, in excess of the obligation under the risk-sharing provi-
sion. No liability has been recorded relating to these contingencies.

In the normal course of business, Baxter enters into certain
joint development and commercialization arrangements with
third parties, often with investees of the company. The arrange-
ments are varied but generally provide that Baxter will receive
certain rights to manufacture, market or distribute a speciﬁed
technology or product under development by the third party,
in exchange for payments by Baxter. At December 31, 2002,
the unfunded milestone payments under these arrangements
totaled less than $150 million, and the majority of them were
contingent upon the third parties’ achievement of contractually
speciﬁed milestones.

As part of its ﬁnancing program, the company had commitments
to extend credit, including commitments to two investees. The
company’s total credit commitment was $180 million and $68
million at December 31, 2002 and 2001, respectively, of which
$81 million and $30 million was drawn and outstanding at
December 31, 2002 and 2001, respectively. Included in the
total commitment amount at December 31, 2002 was a com-
mitment to extend a $50 million ﬁve-year loan to Cerus Cor-
poration (Cerus). Baxter owns approximately 2% of the common
stock of Cerus. The loan commitment, which was completely
funded in early 2003, bears a 12% interest rate, with no interest
or principal payments due until 2008. The loan is secured with
ﬁrst-priority liens on Cerus’ accounts receivable arising from
the future sale of certain of Cerus’ products. Also included in
the total commitment amount at both December 31, 2002 and
December 31, 2001 was a commitment to Acambis, Inc.
(Acambis) to provide ﬁnancing of $40 million, of which
approximately $21 million was drawn and outstanding at both
December 31, 2002 and 2001. Baxter owns approximately
17% of the common stock of Acambis. The ﬁnancing arrange-
ment includes an initial term of ﬁve years, and renewal options.

Refer to Note 12 for a discussion of the company’s legal con-
tingencies.

Note 6
Financial Instruments and Risk Management

Receivables
Customer Credit
In the normal course of business, the company provides credit
to customers in the health-care industry, performs credit evalu-
ations 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 $62 million and $57 million at
December 31, 2002 and 2001, respectively.

Securitizations
The company has entered into agreements with various ﬁnancial
institutions whereby it periodically securitizes an undivided
interest in certain pools of trade accounts receivable (including
lease receivables). Pursuant to its primary securitization agree-
ment, a subsidiary of the company has irrevocably sold accounts
receivable to a special-purpose bankruptcy-remote entity that
ﬁnances these purchases by issuing beneﬁcial interests in the
receivables to third-party investors. Subject to certain condi-
tions, the subsidiary may sell additional eligible receivables
from time to time in the future. In accordance with GAAP, the
special-purpose bankruptcy-remote entity is not consolidated
by the company. Under the company’s other securitization
facilities, the company may transfer, on an ongoing basis, undi-
vided ownership interests in eligible accounts receivable directly
to certain third-party investors. Certain of the arrangements
include limited recourse provisions, which are not material to
the consolidated ﬁnancial statements. Neither the buyers of the
receivables nor the investors in these transactions have recourse
to assets other than the transferred receivables. The company
continues to service the receivables under all of the arrange-
ments, and retains a subordinated residual interest in the
receivables under certain of the arrangements. The amount of
the retained interests and the costs of certain of the securitiza-
tion arrangements vary with the company’s credit rating. Under
one of the agreements, the company is required to maintain
compliance with various covenants, including a maximum
debt-to-capital ratio and a minimum interest coverage ratio.
The company was in compliance with all covenants at December
31, 2002. Another arrangement requires that the company post
modest cash collateral in the event of a speciﬁed unfavorable
change in credit rating. The potential cash collateral, which was not
required as of December 31, 2002, totals less than $20 million.

In 2002, 2001 and 2000 the company generated net operating
cash inﬂows of $57 million, $118 million and $195 million,
respectively, relating to such sales of receivables. A summary of
the activity is as follows.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Sold receivables at beginning

of year

Proceeds from sales of receivables
Cash collections (remitted to the

owners of the receivables)
Effect of currency exchange-

rate changes

Sold receivables at end of year

2002

2001

2000

$ 683 $ 590 $ 400
1,506
2,340

2,152

(2,095)

(2,222)

(1,311)

(19)

(5)
$ 721 $ 683 $ 590

(25)

The company recognized net gains relating to the sales of receiv-
ables of $7 million, $12 million and $2 million in 2002, 2001
and 2000, respectively. Credit losses, net of recoveries, relating
to the retained interests were not material to the consolidated
ﬁnancial statements.

The subordinate interests retained in the transferred receivables
are carried at amounts that approximate fair value and totaled
$78 million at December 31, 2002. The key economic assump-
tions used in estimating the fair value of the retained interests
are expected annual credit losses and the rate utilized to dis-
count the residual cash ﬂows. An immediate 10% and 20%
adverse change in these assumptions would reduce the fair
value of the retained interests by $1 million and $2 million,
respectively. These sensitivity analyses are hypothetical and
should be used with caution. Changes in fair value based on a
10% or 20% variation in assumptions generally cannot be
extrapolated because the relationship of the change in each
assumption to the change in fair value may not be linear.

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 coun-
terparties, and has arranged collateralization and master-netting
agreements to minimize the risk of loss.

Foreign Currency and Interest Rate Risk Management
The company operates on a global basis, and is exposed to the
risk that its earnings, cash ﬂows and stockholders’ equity could
be adversely impacted by ﬂuctuations in currency exchange
rates and interest rates. The company’s hedging policy attempts
to manage these risks to an acceptable level based on manage-
ment’s judgment of the appropriate trade-off between risk,
opportunity and costs.

The company is primarily exposed to currency exchange-rate
risk with respect to ﬁrm commitments, forecasted transactions
and net assets denominated in Japanese Yen, Euro, British Pound
and Swiss Franc. The company manages its foreign currency

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

exposures on a consolidated basis, which allows the company to
net exposures and take advantage of any natural offsets. In
addition, the company utilizes derivative and nonderivative
ﬁnancial instruments to further reduce the net exposure to cur-
rency ﬂuctuations. Gains and losses on the hedging instruments
are intended to offset losses and gains on the hedged transac-
tions with the goal of reducing the earnings and stockholders’
equity volatility resulting from fluctuations in currency
exchange rates.

The company is also exposed to the risk that its earnings and
cash ﬂows could be adversely impacted by ﬂuctuations in inter-
est rates. The company’s policy is to manage interest costs using
a mix of ﬁxed and ﬂoating rate debt that management believes
is appropriate. To manage this mix in a cost efﬁcient manner,
the company periodically enters into interest rate swaps, in
which the company agrees to exchange, at speciﬁed intervals,
the difference between ﬁxed and ﬂoating interest amounts cal-
culated by reference to an agreed-upon notional amount.

In adopting SFAS No. 133 in 2001, management reassessed its
hedging strategies, and, in some cases, increased the company’s
use of derivative instruments or changed the type of derivative
instrument used to manage currency exchange-rate and interest
rate risk, in part because the new accounting standard allows
for increased opportunities and different approaches for reduc-
ing earnings and stockholders’ equity volatility resulting from
ﬂuctuations in currency exchange rates and interest rates.

Cash Flow Hedges
The company uses forward and option contracts to hedge the
risk to earnings associated with ﬂuctuations in currency
exchange rates relating to the company’s ﬁrm commitments
and forecasted transactions expected to be denominated in for-
eign currencies. The company uses forward-starting interest rate
swaps and treasury rate locks to hedge the risk to earnings asso-
ciated with ﬂuctuations in interest rates relating to anticipated
issuances of term debt. Certain other ﬁrm commitments and
forecasted transactions are also periodically hedged with forward
and option contracts.

The following table summarizes activity (net-of-tax) in 2002 in
AOCI related to the company’s cash ﬂow hedges.

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

AOCI balance at beginning of year
Cumulative effect of accounting change
Net gain (loss) in fair value of derivatives
Net gain reclassiﬁed to earnings
AOCI (loss) balance at end of year

2002

2001

$ 82
—
(10)
(104)
$ (32)

$ —
8
126
(52)
$ 82

The net amounts recorded during 2002 and 2001 relating to
hedge ineffectiveness and the component of the derivative
instruments’ gain or loss excluded from the assessment of hedge
effectiveness were immaterial to the consolidated ﬁnancial
statements. During 2002 and 2001, certain foreign currency
hedges were dedesignated and discontinued principally due to
changes in the company’s anticipated net exposures. This was
partially as a result of recent business acquisitions, whereby the
company gained natural offsets to previously existing currency
exposures, as well as planned changes to intercompany product
ﬂows. The net-of-tax gains reclassiﬁed to earnings relating to
these discontinued hedges, which are included in the table
above, were $24 million and $21 million in 2002 and 2001,
respectively. As of December 31, 2002, $6 million of deferred
net after-tax gains on derivative instruments accumulated in
AOCI are expected to be reclassiﬁed to earnings during the
next twelve months, coinciding with when the hedged items
are expected to impact earnings. The maximum term over which
the company has hedged exposures to the variability of cash
flows, excluding interest payments on third-party debt, is 4 years.

Fair Value Hedges
The company uses interest rate swaps to convert a portion of its
ﬁxed-rate debt into variable-rate debt. These instruments serve
to hedge the company’s earnings from ﬂuctuations in interest
rates. No portion of the change in fair value of the company’s
fair value hedges was ineffective or excluded from the assess-
ment of hedge effectiveness during 2002 or 2001.

Hedges of Net Investments in Foreign Operations
The company periodically uses cross-currency interest rate
swaps and foreign currency denominated debt to hedge its
stockholders’ equity balance from the effects of ﬂuctuations in
currency exchange rates. The company measures effectiveness on
the swaps based upon changes in spot currency exchange rates.
Approximately $370 million of net after-tax losses and $95 million
of net after-tax gains related to the derivative and nonderivative
instruments were included in the company’s CTA account for
the years ended December 31, 2002 and 2001, respectively.

Other Foreign Currency Hedges
The company uses forward contracts to hedge earnings from
the effects of ﬂuctuations in currency exchange rates relating to
certain of the company’s intercompany and third-party receiv-
ables and payables denominated in a foreign currency. These
derivative instruments are not formally designated as hedges,
and the change in fair value of the instruments, which sub-
stantially offsets the change in book value of the hedged items,
is recorded directly to earnings.

62 Baxter International Inc. 2002 Annual Report

Equity Forward Agreements
In order to partially offset the potentially dilutive effect of
employee stock options, the company has periodically entered
into forward agreements with independent third parties related
to the company’s common stock. The forward agreements,
which have a fair value of zero at inception, require the company
to purchase its common stock from the counterparties on spec-
iﬁed future dates and at speciﬁed prices. The company may, at
its option, terminate and settle these agreements at any time
before maturity. The agreements include certain Baxter stock
price thresholds, below which the counterparty has the right to
terminate the agreements. If the thresholds were met in the
future, the number of shares that could potentially be issued by
the company under all of the agreements is subject to contrac-
tual maximums, and the maximum at December 31, 2002 was
115 million shares. The contracts give the company the choice
of net-share, net-cash or physical settlement upon maturity or
upon any earlier settlement date. In accordance with GAAP,
these contracts are not recorded in the ﬁnancial statements
until they are settled. The settlements of these contracts (whether
by net-share, net-cash or physical settlement) are classiﬁed
within stockholders’ equity.

At December 31, 2002, the company had outstanding forward
agreements related to 15 million shares, which all mature in
2003, and have exercise prices ranging from $33 to $52 per
share, with a weighted-average exercise price of $49 per share
(the company’s common stock closed at $28 on December 31,
2002). At December 31, 2001, agreements related to 31 million
shares were outstanding at exercise prices ranging from $33 to
$55 per share, with a weighted-average exercise price of $49 per
share. In 2002, management decided to exit substantially all of
the forward agreements and the company completed a signiﬁcant
amount of the terminations during 2002. During 2002, the com-
pany physically settled forward agreements related to 22 million
shares. Management expects to complete the exit strategy during
2003. Consistent with its strategy for funding the company’s
other obligations, management is funding the exit of the forward
agreements through cash ﬂows from operations, by issuing addi-
tional debt, by entering into other ﬁnancing arrangements, or by
issuing common stock. As noted above, a portion of the proceeds
from the December 2002 issuance of the equity units was used
to settle certain of the forward agreements. The settlement of the
outstanding forward agreements has not had and is not expected
to have a material impact on the company’s earnings per diluted
common share.

The fair values of the equity forward agreements at December
31, 2002 and 2001 are presented in the table below. The fair
value is the same for all settlement methods. With respect to
the agreements outstanding at December 31, 2002, for each

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

one dollar decrease in the price of a share of Baxter common
stock (the stock price was $28 at December 31, 2002), the fair
value of these agreements would be reduced by $15 million.

Book Values and Fair Values of Financial Instruments

as of December 31
(in millions)

Assets
Long-term insurance

receivables

Investments in afﬁliates
Foreign currency hedges
Interest rate hedges
Equity forward agreements

Liabilities
Short-term debt
Current maturities of
long-term debt and
lease obligations

Short-term borrowings
classiﬁed as long term

Other long-term debt
and lease obligations
Foreign currency hedges
Interest rate hedges
Net investment hedges
Equity forward agreements
Nexell put rights liability
Long-term litigation

liabilities

Book values
2001

2002

Approximate
fair values

2002

2001

$ 126 $ 93
173
181
14
—

107
91
47
—

87
$ 119 $
208
149
181
91
47
14
— 167

112

149

112

149

108

812 1,303

809 1,303

3,586 1,183
18
—
1
—
57

73
24
498
—
—

3,769
73
24
498
302
—

968
18
—
1
—
57

147

140

142

131

The fair values of certain of the company’s cost method invest-
ments in afﬁliates are not readily determinable as the securities
are not traded in a market. For those investments, fair value is
assumed to approximate carrying value. With respect to the com-
pany’s unrestricted available-for-sale marketable securities, the
total net unrealized losses at December 31, 2002 totaled less than
$5 million. With respect to the Nexell put rights, in November
2002 the company made a payment that completely extin-
guished its liability.

Although the company’s litigation remains unresolved by ﬁnal
orders or settlement agreements in some cases, the estimated
fair values of insurance receivables and long-term litigation lia-
bilities were computed by discounting the expected cash ﬂows
based on currently available information. The approximate fair
values of other assets and liabilities are based on quoted market
prices, where available. The carrying values of all other ﬁnancial
instruments approximate their fair values due to the short-term
maturities of these assets and liabilities.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7
Accounts Payable and Accrued Liabilities

as of December 31 (in millions)

Accounts payable, principally trade
Employee compensation and withholdings
Litigation
Pension and other deferred beneﬁts
Property, payroll and other taxes
Common stock dividends payable
Net investment hedges
Product warranties
Foreign currency hedges
Edwards joint venture liability
Nexell put rights
Other
Accounts payable and accrued liabilities

2002

2001

$ 829 $ 708
233
147
49
99
349
1
45
8
181
57
555
$2,432

254
85
53
103
346
498
53
33
—
—
789
$3,043

Refer to Note 2 for further information regarding the reduction
of the Edwards joint venture liability. Refer to Note 6 regarding
the company’s extinguishment of its liability associated with
the Nexell put rights, and for information on the company’s net
investment hedges.

Note 8
Common and Preferred Stock

Stock Split
On February 27, 2001, Baxter’s board of directors approved a
two-for-one stock split of the company’s common shares. This
approval was subject to shareholder approval of an increase in the
number of authorized shares of common stock, which was received
on May 1, 2001. On May 30, 2001, shareholders of record on
May 9, 2001 received one additional share of Baxter common
stock for each share held on May 9, 2001. All share and per
share data, and option and per option data, in the consolidated
financial statements and notes, except the consolidated state-
ments of stockholders’ equity and comprehensive income, have
been adjusted and restated to retroactively reﬂect the stock split.

Stock Compensation Plans
Fixed Stock Option Plans
Stock options have been granted at various dates. Most grants have
a 10-year term and have an exercise price at least equal to 100%
of market value on the date of grant. Vesting terms vary, with the
majority of outstanding options vesting 100% in three years.
As of December 31, 2002, 9,291,223 authorized shares remain
available for future awards under the company’s ﬁxed stock
option plans.

64 Baxter International Inc. 2002 Annual Report

Stock Options Outstanding
The following is a summary of stock options outstanding at
December 31, 2002.

(option shares in thousands)

Options outstanding

Options exercisable

Weighted-
average
Range of
remaining
contractual
exercise
prices Outstanding life (years)

$10-27
28-38
39-42
43-49
50-56
$10-56

14,779
13,932
12,610
14,793
13,716
69,830

4.9
7.1
7.8
8.2
9.1
7.4

Weighted-
average
exercise
price

$23.03
31.22
41.27
45.56
52.08
$38.44

Weighted-
average
exercise
price

Exercisable

10,225 $21.38
31.56
9,734
41.29
4,000
46.67
479
—
—
24,438 $29.19

As of December 31, 2001 and 2000, there were 19,884,000
and 14,651,000 options exercisable, respectively, at weighted-
average exercise prices of $26.66 and $20.33, respectively.

Stock Option Activity

(option shares in thousands)

Weighted-
average
exercise
price

$26.10
37.66
19.73
28.91
—

30.11
46.54
21.65
35.56

36.59
45.87
25.46
43.96

37,618
19,040
(5,706)
(3,842)
1,892

49,002
23,862
(5,225)
(1,933)

65,706
11,832
(4,112)
(3,596)

Options outstanding at
December 31, 1999

Granted
Exercised
Forfeited
Equitable adjustment

Options outstanding at
December 31, 2000

Granted
Exercised
Forfeited

Options outstanding at
December 31, 2001

Granted
Exercised
Forfeited
Options outstanding at
December 31, 2002

69,830

$38.44

Employee Stock Purchase Plans
The company has employee stock purchase plans whereby it is
authorized to issue shares of common stock to its employees,
nearly all of whom are eligible to participate. As of December
31, 2002, 13,731,538 authorized shares of common stock are
available for purchase under the employee stock purchase
plans. The purchase price is the lower of 85% of the closing
market price on the date of subscription or 85% of the closing
market price on the purchase dates, as deﬁned by the plans. The
total subscription amount for each participant cannot exceed
25% of current annual pay. Under the plans, the company sold

1,552,797, 1,423,806 and 2,774,044 shares to employees in
2002, 2001 and 2000, respectively.

Equitable Adjustments
As a result of the spin-off of Edwards in March 2000, equitable
adjustments were made to the number of shares and exercise
price of outstanding employee stock options and employee
stock subscriptions. These adjustments did not impact the
company’s results of operations. Employees of Edwards were
required to exercise any vested options within 90 days from the
date of spin-off, which occurred on March 31, 2000. All
unvested options were canceled 90 days after the date of spin-off.

Restricted Stock Plans
Effective in 2001, the restricted stock component of the man-
agement long-term incentive plan was eliminated and the plan
consists solely of ﬁxed stock options, the terms and conditions
of which are similar to the company’s other stock option plans.
The number of stock options granted pursuant to the revised
plan is based on the participant’s stock option target, the par-
ticipant’s individual performance, as well as the performance of
Baxter common stock relative to a comparator index. The com-
pany also has other incentive compensation plans whereby grants
of restricted stock are made to key employees and non-employee
directors. Effective in 2001, the restricted stock component of
the non-employee director compensation plan was eliminated
and the plan at December 31, 2002 consists solely of stock
options, the terms and conditions of which are not substantially
different from those under the management long-term incen-
tive plan. During 2002, 2001 and 2000, 25,171, 11,960 and
499,020 shares, respectively, of restricted stock were granted at
weighted-average grant-date fair values of $44.96, $49.39 and
$32.88 per share, respectively. At December 31, 2002, 44,671
shares of stock were subject to restrictions, the majority of
which lapse in 2003, 2005 and 2010. The majority of the
restricted stock granted in 2000 was forfeited pursuant to the
long-term incentive plan transition discussed above, and none
is outstanding at December 31, 2002.

Shared Investment Plan
Refer to Note 5 for a discussion of the Shared Investment Plan
and related contingencies.

Stock Repurchase Program
As authorized by the board of directors, from time to time the
company repurchases its stock on the open market to optimize
its capital structure depending upon its operational cash ﬂows,
net debt level and current market conditions. As further dis-
cussed in Note 6, the company also periodically repurchases its
stock from counterparty ﬁnancial institutions in conjunction
with the settlement of its equity forward agreements. Effective
December 1, 2002, the company will no longer treat settlements
of equity forward agreements as repurchases under the board-
authorized open market repurchase program, as such settlements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

are not open market transactions. As of December 31, 2002,
$243 million was remaining under the board of directors’ Octo-
ber 2002 authorization. Total stock repurchases were $1,169
million, $288 million and $375 million in 2002, 2001 and
2000, respectively.

Issuances of Stock and Equity Units
In December 2002, the company issued 14,950,000 shares of
common stock pursuant to an underwritten offering and
received net proceeds of $414 million. Concurrent with this
issuance, the company issued 25 million 7% equity units. Refer
to Note 5 for further discussion of this issuance, as well as the
May 2001 issuance of convertible debt. In December 2001, the
company issued 9,656,237 shares of common stock in a private
placement and received net proceeds of $500 million. The net
proceeds from these issuances are principally being used to
fund acquisitions, retire a portion of the company’s debt and,
in 2002, settle certain equity forward agreements.

Authorized Shares
In May 2002, shareholders of record on March 8, 2002
approved an amendment to the company’s Restated Certiﬁcate
of Incorporation to increase the number of authorized shares of
common stock to two billion shares from one billion shares.
The additional shares enhance the company’s ﬂexibility in con-
nection with possible future actions, such as stock splits, stock
dividends, acquisitions of property and securities of other com-
panies, ﬁnancings and other corporate purposes.

Common Stock Dividends
In November 2002, the board of directors declared an annual
dividend on the company’s common stock of $0.582 per share.
The dividend, which was payable on January 6, 2003 to stock-
holders of record as of December 13, 2002, is a continuation
of the current annual rate.

Other
The board of directors is authorized to issue up to 100 million
shares of no par value preferred stock in series with varying
terms as it determines. In March 1999, common stockholders
received a dividend of one preferred stock purchase right (col-
lectively, the Rights) for each share of common stock. As a
result of the two-for-one split of the company’s common stock
in May 2001, each outstanding share of common stock is now
accompanied by one-half of one Right. The Rights may become
exercisable at a speciﬁed time after (1) a person or group
acquires 15 percent or more of the company’s common stock
or (2) a tender or exchange offer for 15 percent or more of the
company’s common stock. Once exercisable, the holder of each
Right is entitled to purchase, upon payment of the exercise
price, shares of the company’s common stock having a market
value equal to two times the exercise price of the Rights. The
Rights have a current exercise price of $275. The Rights expire
on March 23, 2009, unless earlier redeemed by the company
under certain circumstances at a price of $0.01 per Right.

Assets held by the trusts of the plans consist primarily of equity
securities. At December 31, 2002, the accumulated beneﬁt
obligation (ABO) is in excess of plan assets for certain of the
company’s pension plans. The projected beneﬁt obligation,
ABO, and fair value of plan assets for these plans were $1.95
billion, $1.80 billion and $1.19 billion, respectively, at Decem-
ber 31, 2002, and $262 million, $230 million and $83 million,
respectively, at December 31, 2001. Under SFAS No. 87,
“Employers’ Accounting for Pensions,” if the ABO relating to a
pension plan exceeds the fair value of the plan’s assets, the com-
pany’s established liability for the plan must be at least equal to
the unfunded ABO. As a result of recent unfavorable asset
returns and a decline in interest rates, at December 31, 2002 the
company recorded a net-of-tax reduction of $517 million to
AOCI, which is a component of stockholders’ equity, in order to
establish an additional minimum liability. The establishment of
the liability had no impact on the company’s results of operations.

Net Periodic Beneﬁt Cost (Income)
years ended December 31
(in millions)

Pension beneﬁts
Service cost
Interest cost
Expected return on plan assets
Amortization of net loss (gain)
Amortization of prior service
cost and transition obligation

Net periodic pension

beneﬁt income

Other beneﬁts
Service cost
Interest cost
Recognized actuarial loss (gain)
Net periodic other beneﬁt cost

2002

2001

2000

$ 50
125
(193)
1

$ 40
115
(177)
(5)

$ 41
113
(158)
(1)

$ (16)

$ (24)

$ —

$ 5
24
2
$ 31

3
16
(4)
$ 15

$ 3
14
(7)
$ 10

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9
Retirement and Other Beneﬁt Programs

The company sponsors several qualiﬁed and nonqualiﬁed pen-
sion plans for its employees. The company also sponsors certain
unfunded contributory health-care and life insurance beneﬁts
for substantially all domestic retired employees. The company
uses a September 30 measurement date for substantially all of
its pension plans.

Reconciliation of Plans’ Beneﬁt Obligations, Assets and
Funded Status
as of and for the years
ended December 31 Pension beneﬁts
2001
(in millions)

2002

Other beneﬁts
2002

2001

Beneﬁt obligations
Beginning of year
Service cost
Interest cost
Participant

contributions

Actuarial loss
Beneﬁt payments
Currency exchange-
rate changes and
other

End of year

$1,692
50
125

$1,555
40
115

$ 304
5
24

$ 219
3
16

3
253
(81)

3
55
(79)

4
85
(15)

3
74
(11)

33
2,075

3
1,692

—
407

—
304

Fair value of plan assets
Beginning of year
Actual return on

plan assets

Employer contributions
Participant contributions
Beneﬁt payments
Currency exchange-rate

changes and other

End of year

1,530

1,807

(204)
21
3
(81)

(351)
147
3
(79)

6
1,275

3
1,530

—

—
11
4
(15)

—
—

—

—
8
3
(11)

—
—

Funded status
Funded status at
December 31
Unrecognized net
losses (gains)

Net amount
recognized

Amounts recognized
in the consolidated
balance sheets
Prepaid beneﬁt cost
Accrued beneﬁt liability
Additional minimum

(800)

(162)

(407)

(304)

1,000

340

110

(26)

$ 200

$ 178

$(297)

$(278)

$ 369
(169)

$ 320
(142)

$ — $ —
(278)
(297)

liability

(804)

—

AOCI (a component

of stockholders’ equity)

804
Net amount recognized $ 200

—
$ 178

—
$(297)

—
$(278)

66 Baxter International Inc. 2002 Annual Report

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10
Interest and Other Expense (Income)

Interest Expense, Net
years ended December 31 (in millions)

2002

2001

2000

Assumptions Used in Determining Beneﬁt Obligations

Pension beneﬁts
2001
2002

Other beneﬁts
2001

2002

Discount rate
U.S. and

Puerto Rico plans
International plans

(average)
Expected return
on plan assets
U.S. and

Puerto Rico plans
International plans

(average)

Rate of compensation

increase
U.S. and

Puerto Rico plans
International plans

(average)

Annual rate of increase
in the per-capita cost
Rate decreased to

by the year ended

6.75% 7.50% 6.75% 7.50%

5.42% 5.68%

n/a

10.00% 11.00%

7.33% 7.76%

4.50% 4.50%

3.15% 3.64%

n/a

n/a
n/a
n/a

n/a 10.20% 11.39%
5.00% 5.00%
n/a
2007
n/a

2007

Interest expense, net

Interest costs
Interest costs capitalized
Interest expense
Interest income

Total interest expense, net
Continuing operations
Discontinued operations

Other Expense (Income)
years ended December 31 (in millions)

Equity in losses of afﬁliates
and minority interests
Asset dispositions and

Foreign currency
Loss on early extinguishment

of debt

Other
Total other expense (income)

n/a

impairments, net

$101
(30)
71
(19)
$ 52
$ 51
$ 1

$130
(22)
108
(39)
$ 69
$ 68
$ 1

$146
(15)
131
(39)
$ 92
$ 84
$ 8

2002

2001

2000

$19

$ 14

$ 9

68
(6)

—
11
$92

(16)
(12)

—
1
$(13)

6
(57)

15
7
$(20)

Effect of a One-Percent Change in
Assumed Health-Care Cost Trend Rate
One-percent
increase

years ended December 31
(in millions)

One-percent
decrease

2002

2001

2002

2001

Effect on total of service

and interest cost
components

Effect on postretirement

beneﬁt obligation

$ 5

$46

$ 2

$23

$ 4

$ 3

$38

$23

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.

Most U.S. employees are eligible to participate in a qualiﬁed
deﬁned contribution plan. Company matching contributions
relating to continuing operations were $22 million, $18 million
and $15 million in 2002, 2001 and 2000, respectively.

Included in asset dispositions and impairments, net in 2002 was
a $70 million impairment charge for two investments with
declines in value deemed to be other than temporary, with the
investments written down to their market values. All available
information is evaluated in management’s analyses of whether
any declines in the fair values of individual securities are con-
sidered other than temporary. With respect to these impairment
charges, signiﬁcant unfavorable events occurred during 2002,
causing management to conclude the declines in value were other
than temporary. Most signiﬁcantly, one of the investees announced
during the quarter its decision to immediately commence a
wind-down of operations principally due to its unsuccessful
efforts to raise capital or to effect a business combination with
another company, and the other investee received information
from regulatory entities regarding the absence of material progress
regarding one of its products under development. The company
does not have signiﬁcant unrealized losses relating to investments
held at December 31, 2002. Also included in asset dispositions
and impairments, net, were write-offs of certain ﬁxed assets and
gains on the sale of certain land.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Included in asset dispositions and impairments, net, in 2001
was a gain of $105 million from the disposal of an investment
in the common stock of Cerus by contribution to the compa-
ny’s pension trust. The cost basis used in the determination of
the gain was average cost. Partially offsetting this gain in 2001
were charges for asset impairments, which primarily consisted
of charges for investments with declines in value deemed to be
other than temporary, with the investments written down to
their market values.

Included in foreign currency income in 2000 were gains of $66
million associated with the termination of cross-currency swap
agreements. The contracts were terminated in conjunction
with the company’s rebalancing of its debt portfolio and in
anticipation of the adoption of SFAS No. 133.

Note 11
Taxes

Income Before Income Tax Expense by Category
years ended December 31 (in millions)

2002

2001

Deferred Tax Assets and Liabilities
as of December 31 (in millions)

2002

2001

2000

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
Net deferred tax asset (liability)

$ 443
107
138

$ 257
101
139

$ 374
102
146

122
(67)
743

102
(58)
541

92
(50)
664

79
38
79
196
$ 547

456
38
57
551
$ (10)

410
85
38
533
$ 131

Income Tax Expense Rate Reconciliation
2002
years ended December 31 (in millions)

2001

2000

U.S.
International
Income from continuing

operations before income taxes
and cumulative effect of
accounting change

Income Tax Expense
years ended December 31 (in millions)

Current
U.S.

Federal
State and local

International

Current income tax expense
Deferred
U.S.

Federal
State and local

International

Deferred income tax expense

(beneﬁt)

Income tax expense

$ 502
895

$330
649

2000

$378
592

Income tax expense at

statutory rate

Operations subject to

tax incentives

$1,397

$979

$970

2002

2001

2000

State and local taxes
Foreign tax expense (income)
IPR&D expense
Other factors
Income tax expense

$ 489

$ 343

$ 340

(161)
21
(3)
36
(18)
$ 364

(157)
31
38
62
(13)
$ 304

(147)
10
29
—
(16)
$ 216

$102
—
195
297

$(13)
76
125
188

$ 153
48
185
386

33
39
(5)

72
(18)
62

(98)
(21)
(51)

67
$364

116
$304

(170)
$ 216

The company has received a tax-exemption grant from Puerto
Rico, which provides that its manufacturing operations will be
partially exempt from local taxes until the year 2013. Appro-
priate taxes have been provided for these operations assuming
repatriation of all available earnings. In addition, the company
has other manufacturing operations outside the United States,
which beneﬁt from reductions in local tax rates under tax
incentives that will continue at least until 2006.

U.S. federal income taxes, net of available foreign tax credits,
on unremitted earnings deemed permanently reinvested would
be $725 million as of December 31, 2002.

In connection with the spin-off of its cardiovascular business,
Baxter obtained a ruling from the Internal Revenue Service to
the effect that the distribution should qualify as a tax-free spin-
off in the United States. In many countries throughout the
world, Baxter has not sought similar rulings from the local tax
authorities and has taken the position that the spin-off was a
tax-free event to Baxter. In the event that one or more countries’

The income tax expense for continuing operations was calcu-
lated as if Baxter were a stand-alone entity (without income
from the discontinued operations).

68 Baxter International Inc. 2002 Annual Report

taxing authorities successfully challenge this position, Baxter
would be liable for any resulting liability. Baxter believes that it
has established adequate reserves to cover the expected tax lia-
bilities. There can be no assurance, however, that Baxter will not
incur losses in excess of such reserves.

U.S. federal income tax returns ﬁled by Baxter through Decem-
ber 31, 1997, have been examined and closed by the Internal
Revenue Service. The company has ongoing audits in U.S. and
international jurisdictions, including Belgium, France, Japan,
India, Mexico and Singapore. In the opinion of management,
the company has made adequate tax provisions for all years
subject to examination.

Note 12
Legal Proceedings

Baxter International Inc. and certain of its subsidiaries are
named as defendants in a number of lawsuits, claims and pro-
ceedings, including product liability claims involving products
now or formerly manufactured or sold by the company or by
companies that were acquired by the company. These cases and
claims raise difﬁcult and complex factual and legal issues and
are subject to many uncertainties and complexities, including,
but not limited to, the facts and circumstances of each particular
case and claim, the jurisdiction in which each suit is brought,
and differences in applicable law. Baxter has established reserves
in accordance with GAAP for certain of the matters discussed
below. For these matters, there is a possibility that resolution of
the matters could result in an additional loss in excess of
presently established reserves. Also, there is a possibility that
resolution of certain of the company’s legal contingencies for
which there is no reserve could result in a loss. Management is
not able to estimate the amount of such loss or additional loss
(or range of loss or additional loss). However, management
believes that, while such a future charge could have a material
adverse impact on the company’s net income and net cash ﬂows
in the period in which it is recorded or paid, no such charge
would have a material adverse effect on Baxter’s consolidated
ﬁnancial position.

Based on recent developments and a review of additional infor-
mation, the liabilities and related insurance receivables pertaining
to the company’s mammary and plasma-based therapies litigation
described below, were adjusted at various points during 2002 and
2001 based primarily on more favorable insurance recoveries.
The pre-tax impact was recorded as a reduction of marketing

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

and administrative expenses in the consolidated statements of
income, decreasing the expenses as a percentage of sales by 0.7%
in 2002 and 0.3% in 2001.

Mammary Implant Litigation
The company, together with certain of its subsidiaries, is a
defendant in various courts in a number of lawsuits brought by
individuals, all seeking damages for injuries of various types
allegedly caused by silicone mammary implants formerly man-
ufactured by the Heyer-Schulte division (Heyer-Schulte) of
American Hospital Supply Corporation (AHSC). AHSC, which
was acquired by the company in 1985, divested its Heyer-
Schulte division in 1984.

Settlement of a class action on behalf of all women with silicone
mammary implants was approved by the U.S. District Court
(U.S.D.C.) for the Northern District of Alabama in December
1995. The monetary provisions of the settlement provide com-
pensation for all present and future plaintiffs and claimants
through a series of speciﬁc funds and a disease-compensation
program involving certain speciﬁed medical conditions. In
addition to the class action, there are a number of individual
suits currently pending against the company, primarily consisting
of plaintiffs who have opted-out of the class action.

Baxter believes that a substantial portion of its liability and
defense costs for mammary implant litigation will be covered
by insurance, subject to self-insurance retentions, exclusions,
conditions, coverage gaps, policy limits and insurer solvency.

Plasma-Based Therapies Litigation
Baxter is a defendant in a number of claims and lawsuits
brought by individuals who have hemophilia, all seeking damages
for injuries allegedly caused by antihemophilic factor concen-
trates VIII or IX derived from human blood plasma (factor
concentrates) processed by the company from the late 1970s to
the mid-1980s. The typical case or claim alleges that the indi-
vidual was infected with the HIV virus by factor concentrates
which contained the HIV virus. None of these cases involves
factor concentrates currently processed by the company.

In addition, Immuno International AG (Immuno), a company
acquired by Baxter in 1997, has unsettled claims for damages
for injuries allegedly caused by its plasma-based therapies. A
portion of the liability and defense costs related to these claims
will be covered by insurance, subject to exclusions, conditions,
policy limits and other factors. Pursuant to the stock purchase
agreement between the company and Immuno as revised in
April 1999, 26 million Swiss Francs of the purchase price is
being withheld to cover these contingent liabilities.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Baxter is also a defendant in a number of claims and lawsuits,
including one certiﬁed class action in the U.S.D.C. for the
Central District of California, brought by individuals who infused
the company’s Gammagard IVIG (intravenous immunoglobu-
lin), all of whom are seeking damages for Hepatitis C infections
allegedly caused by infusing Gammagard IVIG. In September
2000, the U.S.D.C. for the Central District of California
approved a settlement of the class action that would provide
ﬁnancial compensation for U.S. individuals who used Gamma-
gard IVIG between January 1993 and February 1994.

Baxter believes that a substantial portion of the liability and
defense costs related to its plasma-based therapies litigation
will be covered by insurance, subject to self-insurance reten-
tions, exclusions, conditions, coverage gaps, policy limits and
insurer solvency.

Other
In August 2002, six purported class action lawsuits were ﬁled
in the U.S.D.C. for the Northern District of Illinois naming
Baxter and its Chief Executive Ofﬁcer and Chief Financial
Ofﬁcer as defendants. These lawsuits, which have been consol-
idated and seek recovery of unspeciﬁed damages, allege that the
defendants violated the federal securities laws by making mis-
leading statements that allegedly caused Baxter common stock
to trade at inﬂated levels. In December 2002, plaintiffs ﬁled
their consolidated amended class action complaint, which
named nine additional Baxter ofﬁcers as defendants. On January
24, 2003 all defendants moved for dismissal of the consolidated
amended complaint. In October 2002, Baxter and members of
its board of directors were named as defendants in a lawsuit
ﬁled in the U.S.D.C. for the Northern District of Illinois by an
alleged participant in the Baxter Incentive Investment Plan (the
Plan), purportedly on behalf of the Plan and a class of Plan par-
ticipants who purchased shares of Baxter common stock. This
lawsuit is based on allegations similar to those made in the
securities lawsuits described above and has been consolidated
with the other actions described above.

As of December 31, 2002, Baxter and certain of its subsidiaries
were defendants in six civil lawsuits seeking damages on behalf
of persons who allegedly died or were injured as a result of
exposure to Baxter’s Althane series dialyzers. The U.S. Government
is investigating the matter and Baxter has received a subpoena

to provide documents. A government criminal investigation
concerning the patient deaths is pending in Spain. Other lawsuits
and claims may be ﬁled in the United States and elsewhere.

As of December 31, 2002, Baxter and certain of its subsidiaries
were named as defendants, along with others, in lawsuits pending
in federal and state court brought on behalf of various classes of
purchasers of Medicare and Medicaid eligible drugs alleged to
have been injured as a result of pricing practices for such drugs,
the prices of which are alleged to be artiﬁcially inﬂated. In addi-
tion, the Attorney General of Nevada and the Attorney General
of Montana have ﬁled separate civil suits against a subsidiary of
Baxter alleging that prices for Medicare and Medicaid eligible
drugs were artiﬁcially inﬂated in violation of various state laws.
Various state and federal agencies are conducting civil investi-
gations into the marketing and pricing practices of Baxter and
others with respect to Medicare and Medicaid reimbursement.

As of December 31, 2002, Baxter and certain of its subsidiaries
have been served as defendants, along with others, in lawsuits
ﬁled in various state and U.S. federal courts, some of which are
purported class actions, on behalf of claimants alleged to have
contracted autism or other attention deﬁcit disorders as a result
of exposure to vaccines for childhood diseases containing
Thimerosal. Additional Thimerosal cases may be ﬁled in the
future against Baxter and other companies that marketed
Thimerosal-containing products.

Allegiance Corporation (Allegiance) was spun off from the
company in a tax-free distribution to shareholders on Septem-
ber 30, 1996. As of September 30, 1996, Allegiance assumed
the defense of litigation involving claims related to its busi-
nesses, including certain claims of alleged personal injuries as a
result of exposure to natural rubber latex gloves. Although Alle-
giance has not been named in most of this litigation, it will be
defending and indemnifying Baxter pursuant to certain con-
tractual obligations for all expenses and potential liabilities
associated with claims pertaining to latex gloves.

In addition to the cases discussed above, Baxter is a defendant
in a number of other claims, investigations and lawsuits,
including certain environmental proceedings. Based on the
advice of counsel, management does not believe that, individ-
ually or in the aggregate, these other claims, investigations and
lawsuits will have a material adverse effect on the company’s
consolidated results of operations, cash ﬂows or ﬁnancial position.

70 Baxter International Inc. 2002 Annual Report

Note 13
Segment Information

Baxter operates in three segments, each of which is a strategic
business that is managed separately because each business devel-
ops, manufactures and sells distinct products and services. The seg-
ments are as follows: Medication Delivery, medication delivery
products and therapies, including intravenous infusion pumps
and solutions, anesthesia-delivery devices and pharmaceutical
agents, and oncology therapies; BioScience, biopharmaceutical
and blood-collection, separation and storage products and
technologies; and Renal, products and services to treat end-stage
kidney disease. As discussed in Note 2, the company spun off
Edwards on March 31, 2000. Financial information for Edwards
is reﬂected in the consolidated ﬁnancial statements as a discon-
tinued operation.

Management utilizes more than one measurement and multiple
views of data to measure segment performance and to allocate
resources to the segments. However, the dominant measure-
ments are consistent with the company’s consolidated ﬁnancial
statements and, accordingly, are reported on the same basis
herein. Management evaluates the performance of its segments
and allocates resources to them primarily based on pre-tax income
along with cash ﬂows and overall economic returns. Interseg-
ment sales are generally accounted for at amounts comparable
to sales to unafﬁliated customers, and are eliminated in consol-
idation. The accounting policies of the segments are substantially
the same as those described in the summary of signiﬁcant
accounting policies in Note 1.

Certain items are maintained at the company’s corporate head-
quarters (Corporate) and are not allocated to the segments.
They primarily include most of the company’s debt and cash
and equivalents and related net interest expense, corporate
headquarters costs, certain non-strategic investments and related
income and expense, certain nonrecurring gains and losses,
deferred income taxes, certain foreign currency ﬂuctuations,
the majority of foreign currency and interest rate hedging activ-
ities, and certain litigation liabilities and related insurance
receivables. With respect to depreciation and amortization, and
expenditures for long-lived assets, the difference between the
segment totals and the consolidated totals principally related to
assets maintained at Corporate.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Segment Information
The following segment information is as of and for the years
ended December 31.

Medication
Delivery

BioScience

Renal

Other

Total

(in millions)

2002
Net sales
Depreciation

and amortization
Pre-tax income (loss)
Assets
Expenditures for
long-lived assets

2001
Net sales
Depreciation and
amortization

Pre-tax income (loss)
Assets
Expenditures for
long-lived assets

2000
Net sales
Depreciation and
amortization

Pre-tax income (loss)
Assets
Expenditures for
long-lived assets

$3,317

$3,096 $1,697 $ — $ 8,110

168
595
3,646

128
659
4,407

75
342
1,299

439
68
(199)
1,397
3,126 12,478

227

382

135

104

848

$2,905

$2,786

$1,665

$ — $ 7,356

158
475
3,076

148
552
3,559

91
304
1,701

30
(352)
2,007

427
979
10,343

218

282

102

157

759

$2,703

$2,353

$1,641

$ — $ 6,697

146
436
2,453

125
533
2,935

86
324
1,591

37
(323)
1,754

394
970
8,733

180

248

108

625

Pre-Tax Income Reconciliation
years ended December 31 (in millions)

2002

2001

2000

Total pre-tax income

from segments

Unallocated amounts
IPR&D and other
special charges

Charge relating to A, AF and

AX series dialyzers
Interest expense, net
Certain currency exchange
rate ﬂuctuations and
hedging activities
Asset dispositions and
impairments, net
Other Corporate items
Consolidated income from

continuing operations before
income taxes and cumulative
effect of accounting change

$1,596 $1,331

$1,293

(189)

(280)

(286)

— (189)
(68)
(51)

—
(84)

113

(47)
(4)

36
36

—
32

$1,397 $ 979 $ 970

Signiﬁcant Relationship

Sales by various Baxter businesses to members of a large hospi-
tal buying group, Premier Purchasing Partners L.P. (Premier),
pursuant to various contracts with Premier, represented
approximately 8.9%, 10.1% and 10.0% of the company’s con-
solidated net sales from continuing operations in 2002, 2001
and 2000, respectively. The company has a number of contracts
with Premier that expire on various dates in 2003 and 2004.
Sales to members of Premier could be impacted if any of the
company’s contracts with Premier are not renewed in part or in
their entirety. However, Baxter’s contracts with Premier are
independently negotiated, members of the Premier group are
free to purchase from the suppliers of their choice, and a loss of
any contract would not necessarily mean the loss of all sales
under that contract to all members of the group.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Assets Reconciliation
as of December 31 (in millions)

Total segment assets
Unallocated assets

2002

2001

2000

$ 9,352 $ 8,336

$6,979

Cash and equivalents
Deferred income taxes
Insurance receivables
Property and equipment, net
Other Corporate assets
Consolidated total assets

1,169
607
169
288
893

582
227
165
255
778
$12,478 $10,343

579
308
277
217
373
$8,733

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
Other countries
Consolidated net sales

Long-lived assets
United States
Austria
Other countries
Consolidated long-lived assets

2002

2001

2000

$3,974 $3,721
427
3,208
$8,110 $7,356

388
3,748

$3,120
485
3,092
$6,697

$2,041 $1,769
344
1,193
$3,907 $3,306

433
1,433

$1,543
294
970
$2,807

Signiﬁcant Product Sales
The following is a summary of net sales as a percentage of con-
solidated net sales for the company’s principal products.

years ended December 31

2002

2001

2000

12.3% 11.0%
9.3%
Recombinant products
Plasma-based products 1
12.4% 13.9% 12.0%
15.6% 16.7% 18.3%
Peritoneal dialysis therapies
Intravenous therapies 2
12.1% 12.6% 13.6%
1 Includes plasma-derived hemophilia (FVII, FVIII, FIX and FEIBA), albumin, bio-
surgery and other plasma-based products. Excludes anti-body therapies.
2 Principally includes intravenous solutions and nutritional products.

72 Baxter International Inc. 2002 Annual Report

Note 14
Quarterly Financial Results and Market for the Company’s Stock (Unaudited)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

2002
Net sales
Gross proﬁt
Income from continuing operations 1
Net income 1
Per common share
Income from continuing operations 1
Basic
Diluted
Net income 1
Basic
Diluted

Dividends declared
Market price

High
Low

2001
Net sales
Gross proﬁt
Income (loss) from continuing operations
before cumulative effect of accounting
change 2
Net income (loss) 2
Per common share

Income (loss) from continuing operations

before cumulative effect of
accounting change 2
Basic
Diluted
Net income (loss) 2
Basic
Diluted

Dividends declared
Market price

High
Low

First
quarter

$1,875
880
253
253

0.42
0.41

0.42
0.41
—

59.60
51.43

$1,689
768

218
162

0.37
0.36

0.27
0.27
—

47.60
40.75

Second
quarter

$1,945
914
204
200

0.34
0.33

0.33
0.32
—

59.48
44.09

$1,796
821

255
253

0.44
0.43

0.43
0.42
—

54.00
43.95

Third
quarter

$2,029
940
317
316

0.52
0.51

0.52
0.51
—

43.41
30.55

$1,809
847

274
272

0.46
0.45

0.46
0.45
—

55.05
47.50

Fourth
quarter

$2,261
1,058
259
9

0.43
0.42

0.01
0.02
0.582

32.09
24.22

Total
year

$8,110
3,792
1,033
778

1.72
1.67

1.29
1.26
0.582

59.60
24.22

$2,062
976

$7,356
3,412

(72)
(75)

675
612

(0.12)
(0.12)

(0.13)
(0.13)
0.582

55.50
45.95

1.15
1.11

1.04
1.00
0.582

55.50
40.75

1 The second quarter of 2002 includes a $70 million pre-tax impairment charge for investments whose decline in value was deemed other than temporary, and a $51
million pre-tax IPR&D charge relating to the acquisition of Fusion. The fourth quarter of 2002 includes a $112 million pre-tax IPR&D charge principally relating
to the acquisitions of ESI and Epic, and a $26 million charge relating to the prioritization of the company’s R&D activities.

2 The second quarter of 2001 includes a pre-tax gain of $105 million from the disposal of a common stock investment, which was substantially offset by impairment
charges for other assets and investments whose decline in value was deemed to be other than temporary. The fourth quarter of 2001 includes a $280 million pre-
tax charge for IPR&D and a $189 million pre-tax charge relating to the company’s A, AF and AX series dialyzers.

Baxter common stock is listed on the New York, Chicago, Paciﬁc, London and SWX Swiss stock exchanges. The New York Stock
Exchange is the principal market on which the company's common stock is traded. At January 30, 2003, there were approximately
62,900 holders of record of the company's common stock. The equity units discussed in Note 5 are also listed on the New York
Stock Exchange.

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

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

Thomas H. Glanzmann1
Senior Vice President and
President – BioScience

1 Also an executive ofﬁcer of

Baxter Healthcare Corporation

2 Also an executive ofﬁcer of

Baxter World Trade Corporation

As of February 25, 2003

DIRECTORS AND EXECUTIVE OFFICERS

BAXTER HEALTHCARE

BAXTER WORLD TRADE

CORPORATION

Executive Ofﬁcers
BAXTER INTERNATIONAL INC.

Brian P. Anderson1,2
Senior Vice President and
Chief Financial Ofﬁcer

J. Robert Hurley 1
Corporate Vice President
Integration and Alliance
Management

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

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

J. Michael Gatling
Corporate Vice President
Global Manufacturing
Operations

Alan L. Heller 2
Senior Vice President and
President–Renal

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

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

Gregory P. Young
Corporate Vice President and
President – Transfusion
Therapies

Karen J. May
Corporate Vice President
Human Resources

Steven J. Meyer1,2
Treasurer

John C. Moon
Coporate Vice President
Chief Information Ofﬁcer

John L. Quick
Corporate Vice President
Quality/Regulatory

Jan Stern Reed1,2
Corporate Secretary and
Associate General Counsel

Norbert G. Riedel
Corporate Vice President
Chief Scientiﬁc Ofﬁcer

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

Michael J. Tucker
Senior Vice President

Board of Directors

Walter E. Boomer
Chairman 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 and Clinics

Susan Crown
Vice President
Henry Crown and Company

Gail D. Fosler
Senior Vice President and
Chief Economist
The Conference Board

James R. Gavin III, M.D., Ph.D.
President
Morehouse School of Medicine

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

Joseph B. Martin, M.D., Ph.D.
Dean of the Faculty of Medicine
Harvard Medical School

Thomas T. Stallkamp
Vice Chairman and
Chief Executive Ofﬁcer
MSX International

Monroe E. Trout, M.D.
Chairman Emeritus
Cytyc Corporation

Fred L. Turner
Senior Chairman
McDonald’s Corporation

Honorary Director

William B. Graham
Chairman Emeritus
of the Board
Baxter International Inc.

74 Baxter International Inc. 2002 Annual Report

Corporate Headquarters
Baxter International Inc.
One Baxter Parkway
Deerﬁeld, IL 60015-4633
Telephone: (847) 948-2000
Internet: www.baxter.com

Stock Exchange Listings
Common Stock Ticker Symbol: BAX
Baxter common stock is listed on the New York, Chicago, Paciﬁc,
London and SWX Swiss stock exchanges. The New York Stock
Exchange is the principal market on which the company’s common
stock is traded.

7% Equity Unit Ticker Symbol: BAX Pr
Baxter 7% Equity Units are listed on the New York Stock Exchange.

Annual Meeting
The 2003 Annual Meeting of Stockholders will be held on
Tuesday, May 6, at 10:30 a.m. at the Drury Lane Theatre in
Oakbrook Terrace, Illinois.

Stock Transfer Agent
Correspondence concerning Baxter International common stock
holdings, lost or missing certiﬁcates or dividend checks, duplicate
mailings or changes of address should be directed to:

Baxter Common Stock
Equiserve
P.O. Box 43069
Providence, RI 02940-3069
Telephone: (781) 575-2723
Hearing Impaired Telephone: (800) 952-9245
Internet: www.equiserve.com

Baxter 7% Equity Units
Bank One Corporate Trust Services
Telephone: (312) 407-1871

Correspondence concerning Baxter International Inc. Contingent
Payment Rights related to the 1998 acquisition of Somatogen,
Inc. should be directed to:

U.S. Bank Trust National Association
Telephone: (651) 244-8677

Dividend Reinvestment
The company offers an automatic dividend-reinvestment pro-
gram to all holders of Baxter International Inc. common stock.
A detailed brochure is available upon request from:

Equiserve
P.O. Box 43081
Providence, RI 02940-3081
Telephone: (781) 575-2723
Internet: www.equiserve.com

Independent Public Accountants
PricewaterhouseCoopers LLP
Chicago, IL